With money comes momentum

December 17, 2013

With money comes momentum 
Wellington Financial 
12 Dec 2013 
Mark McQueen 

The news is finally out about the latest Shopify financing round, and it speaks to the reality that with money comes momentum. Momentum for the company. Momentum for the ecosystem. 

As much as the recent industry buzz has been about names such as Desire2Learn and Kik Interactive, in part because they’ve raised capital from foreign sources, you have to wonder how many other Canadian tech firms would be "rocking-and-rolling" right now if there was a larger pool of domestic venture capital to draw upon. Today's Shopify news is another reminder how lucky it is to be a VC fund sitting on institutional capital in Canada right now. 

OMERS CEO Michael Nobrega deserves huge credit for stepping out when he did and creating a dedicated arm to deploy early stage capital (see prior post "VC firms set course for a long winter" Nov. 9-10). Some of his national pension plan colleagues thought he was off his rocker, but he saw an opportunity for direct investing in the asset class. His colleague Jacques Demers, and later John Ruffolo, then set out to turn Mr. Nobrega's vision of "lifecycle investing" into reality. In part due to timing, brand, and the seeming endless supply of capital in behind the group, OMERS Ventures has the good fortune of being one of the few Canuck doors to knock on. As a result, the opportunities are like drinking water from a firehose, and the firm is responding in kind. 

Clearly, Shopify is a very late stage deal. I'd heard a few weeks ago that they were doing a round at $500 million pre-money, and I'm glad that I didn't blog that — the figure was too low! Bringing in Insight Venture Partners is a hallmark event, and the firm is very experienced in Canada; with some good outcomes, too, over the past 10 years. 

In reality, Shopify didn't need domestic capital to reach the reported billion dollar valuation (H/T Globe), as there were plenty of foreign firms lined up at the door. But that's very rare (see prior post "If it's not built, they can't come" March 6-10). Firms such as FixMo and Achievers, for example, received capital locally long before they were discovered by Silicon Valley VCs. You have to ask yourself, how many other Shopify's are out there, and who has been missed? 

What kind of momentum would the tech ecosystem be experiencing right now if the other Tobias Lütke’s had more than a handful of Canadian VC doors to knock on? There's no doubt that venture capital is impactful to the economy and the company that attracts it. A recent government follow-on study found that VC-backed Canadian companies had:

  • higher levels of research and development (R&D) intensity – VC-backed firms had higher R&D expenditures relative to revenues when compared to all other firms that conduct R&D;
  • higher average wages – particularly higher average wages for VC-backed firms in the ICT sector, but also higher average wages for all VC-backed firms; and
  • higher survival rates over periods of one to five years – by the fifth year, VC-backed firms had survival rates higher than all firms in the professional, scientific, and technical group, higher than all small and medium enterprises earning over $30,000, and higher than all manufacturing firms.
  • stronger revenue growth, sales growth, employee growth, and asset growth – cumulatively over periods of one, three and five years, respectively.
  • higher cumulative wage growth – over time this wage growth is higher among VC-backed firms, suggesting that these firms do more high value-added employment than non-VC-backed firms.
  • higher R&D expenditure growth – VC-backed firms performed better although only the one-year growth rate was statistically significant.

All of which supports the Federal government's Venture Capital Action Plan. The fabulous news out of Ottawa this morning about Shopify is an example of money driving momentum. What entrepreneurs need to see is the final stage of VCAP getting across the finish line. More capital would drive more start-ups, commercialization, jobs, innovation and economic growth. 

And give the other Tobias Lütke's out there a chance to see just how big they can grow their dreams.