Canadian VC deal sizes continue to lag those in other countries. Canadian venture capitalists invested $3.2 billion CDN in 530 deals for an average deal size of $4.9 million US in 2016. Meanwhile, American VCs invested $69.1 billion in 8,136 deals for an average deal size of $8.5 million. Not only do deal sizes lag those in the US but the returns of Canadian VCs also lag American VC returns.
Canadian VCs made a strategic decision to invest the way they did, as they could just as easily have chosen to invest an average of $10 million in 260 companies. This begs the question; does the smaller deal size result in smaller returns?
To shed light on the subject, we looked at the investments of over 350 public technology companies, 90 Unicorns, and 147 other US companies that obtained VC financing in July 2017 and compared that to 131 Canadian companies backed by venture capital. We looked specifically at capital funding per employee and growth rates as measured by revenue for public companies and by employee growth for private companies. The results of our research suggest two closely related trends:
- The more funding a company has, the faster it grows.
- The faster a company grows, the more funding it can get.
This is why the rich get richer in the VC world. California-based companies that get higher levels of per-employee funding grow faster than companies in the rest of the US. As a result, these companies tend to grow quickly and turn into Unicorns, creating a dynamic where California boasts a disproportionate share of total VC funding.
With funding levels well below that of their US-based competitors and other jurisdictions, Canadian companies tend to get left behind. Consequently, our companies do not grow as fast, do not attract later-stage capital, and are typically sold before they can be turned into world-class companies.
We believe that Canadian VCs are inadvertently limiting their own returns. They are making strategic decisions to finance companies later, less frequently, and with less money than companies in the US, thus potentially generating low returns that may be largely driven by their own practices.