Seeking series B

Seeking series B

If we want to build long-lasting companies in Canada, we need more later-stage funding

You are a Canadian entrepreneur, with a software solution you’ve tested to the point that you’ve won over your vital first Canadian customers. You are working hard with your team to take the lessons learned from those clients, refine your product and business case, scale up to new customers and generate income.

You’ve worked hard to reach this point. You made it through the early start-up stage by bootstrapping with assistance from friends and family. Next, you found some seed capital and then you completed your “Series A” round, where return-seeking investors provided funding for you to establish your product and market fit. To fuel your growth, you are ready for a “Series B” round, probably involving institutional investors.

I have good news. In terms of the availability of Canadian-based risk capital, as statistics from the Canadian Venture Capital & Private Equity Association show, we’re in a much stronger position than right after the nuclear winter that followed the 2001 dot-com crash. Today, the domestic venture capital that you need is likely within reach. The number of players in the Canadian VC space, with an interest across the various levels of start-up development, is growing. Since about 2011, Canada’s investment community has seen the rise of accelerators, “Super Angel” investors, micro VCs, additional federal and provincial VC funding vehicles and so on, plus OMERS Ventures, where I work.

If I could change one thing to improve the overall outlook for this hypothetical Canadian entrepreneur, it would be to draw the interest of more Canadian VC funding toward the critical Series B stage. This is where entrepreneurs who are ready to take an existing product to the next level need funders who can deliver multimillion dollar cheques – at least $10-million, in most cases.

In OMERS Ventures’ case, we’ve participated in recent Series B or later rounds for Hootsuite, Shopify, Desire2Learn, Wattpad and BuildDirect, all great Canadian success stories. From an investor’s view, Series B is key because that’s where you find big returns on dollars invested. At the venture capital arm of the OMERS pension plan, investing in start-ups at all levels of development fits well with our broader enterprise strategy and our goal of delivering strong and sustainable pensions to OMERS members.

Series B is interesting for another reason. It’s the stage where a start-up’s access to some substantial measure of patient domestic capital becomes vital. Why? Because if a start-up ends up relying solely on foreign VC funding, what often results is the early sale of the company and an exit by the entrepreneur – before the start-up hits that rapid-growth stage. (This isn’t a uniquely Canadian problem, by the way.)

I hasten to add that OMERS Ventures is a proud co-investor alongside various top American VC funds. However, in my experience, if Canadian start-ups are not backed by patient Canadian funding at this crucial point in their development, we can expect more early sales – it’s an uncomfortable truth. And that shrinks the pool of Canadian start-ups that are able to grow to the point of reaching their initial public offering (IPO) and launch into the stock market.

Why are IPOs important? In addition to generating returns for early stage investors, every successful Canadian IPO will mean more risk capital for the next generation of entrepreneurs. This can foster a stable Canadian IPO market that, over time, can help spawn new Canadian tech champions similar in size and impact to Nortel and RIM.

I am a realist, and I know these IPOs will not happen by accident. With additional homegrown Canadian investors taking up positions in the overall VC ecosystem, particularly at the B stage, the ecosystem as a whole should become much more sustainable – not to mention supportive of entrepreneurs, their innovative ideas, products and future IPOs.

- John Ruffolo