In this post, I want to delve deeper into this question to better understand why Canadian exits are so largely in the $ 50-100 million range compared to other major ecosystems.
Is funding insufficient in Canada?
When my team began studying this issue, our knee-jerk reaction was to assume that the funding provided to companies to get their valuations above the $ 50 million to $ 100 million range was inadequate. While this seems plausible, the data reveal a different reality.
In the table below, we track the amount of capital, on average, invested per exit in certain valuation ranges. If funding was lacking in Canada, we would have expected Canadian companies exiting above $ 100 million to have received less capital on average than companies in other major ecosystems.
Amounts invested per exit by country
Given these results, we can conclude that Canadian firms that achieve high exit value have received as much or more capital than similar firms in other large ecosystems, with the exception of those in the United States.
Interestingly, Israeli start-ups that exited in the $ 100 million to $ 250 million range raised the most capital on average, but those that exited above $ 250 million were among the companies that raised the least capital.
We do not want to overstate the importance of these results. Indeed, they do not provide any indication of the levels of financing for failed companies, nor do they provide any insight into whether Canada is providing these companies with sufficient flexibility to find product-market fit.
However, we are not convinced that lack of financing alone explains Canada's relative inefficiency in creating large exits. Rather, there is a clear and significant financing gap relative to the United States, particularly for larger exits.
The Myth of the Startup Exodus
One explanation that often comes up is the unproven claim that a disproportionate number of successful Canadian-founded startups move their headquarters to the United States, skewing Canada's overall success rate in generating larger exits.
Examples include Slack, which had an initial public shareholder database offering in 2019 and now has a market cap of about $ 17 billion , and Sonder, which achieved unicorn status the same year. Both companies were founded in Canada but have moved their headquarters to Silicon Valley.
The startup exodus is a difficult fact to prove or disprove, because none of the databases we explored account for company headquarters moves. For example, most databases simply list Slack as a U.S.-based company , without mentioning that it was founded in Canada.
We can approach this question from another angle. At BDC Capital, we have a mandate to invest in Canadian companies. In most cases, this means that the company must be based in Canada, subject to certain exceptions. We can assume that companies that have been part of BDC Capital's portfolio were once based in Canada, even if they have since moved.
BDC Capital has invested in over 500 start-ups over the past 20 years. Our portfolio covers a broad range of sectors and we invest at various stages of development.
In our portfolio over the past 20 years, we found only 15 companies that indicated that their headquarters are now in the United States, a modest 3% of the total. The next question is whether this small cohort has performed significantly better than the much larger cohort of companies that have remained in Canada. Here is a table that summarizes the performance of this cohort:
Summary statistics on BDC-backed start-ups that have moved their headquarters to the United States
The distribution of returns presented above is not atypical of a typical venture capital portfolio. While two of these companies represent particularly successful investments, with returns in excess of 5.0 times our invested capital, the majority of these companies have not generated positive returns.
In other words, while a few companies now established in the United States have been very successful, the vast majority have not been as successful, and this small cohort has shown no signs of significantly outperforming our portfolio as a whole. As a result, we find it difficult to conclude that Canada is experiencing a start-up exodus.
Canada: A big country, but a small market
There is another explanation to consider. The structure of the Canadian market could be holding back the growth of Canadian companies. After all, Canada is a big country, but a small market. Our GDP is smaller than that of the state of Texas (Chart 3).
Top 10 National GDPs and Selected US State GDPs, 2018, in Trillions of US Dollars
Moreover, the Canadian market is complex. The country has two official languages, ten provinces with their own regulatory frameworks, and it takes up to six hours by plane to travel from one tech hub (Vancouver) to another (Montreal). By comparison, Texas has four major tech hubs within a few hours' drive of each other, a single language, and a single regulatory framework.
International expansion is key to increasing valuations in Canada
In 2015, Atomico, a European venture capital fund, published an excellent analysis of 182 internet companies worth more than $ 1 billion . The goal was to uncover the trends that allowed these unicorns to achieve global scale.
Two of Atomico's findings are still particularly interesting for the Canadian venture capital ecosystem.
According to the first finding (Figure 4), unicorns launched in a country with a population of less than 50 million people took, on average, 50% less time to expand internationally than companies founded in a huge country like the United States, China or India (1.4 years versus 3.3 years).
According to the second (Chart 5), the 17 unicorns founded in a country with a population of less than 50 million people were all present internationally, compared to just over 50% for companies founded in the largest countries.
In other words, Canadian venture-backed companies are much more likely to internationalize than American companies. Thanks to the availability of talent, proximity to the American market, government policies and several other factors, we firmly believe that Canada is an excellent place to start a business.
However, for the ecosystem to evolve further, Canadian startups need to think about their global reach from day one, rather than seeking to dominate domestically first. This conclusion is supported by previous BDC studies that show that high-growth Canadian companies , across all sectors, have a higher propensity to export.
