What is top of mind for Canadian VCs in 2020?

Posted by Brightspark on Mar 04, 2020

As the Canadian VC industry and its operating companies continue to mature to an unprecedented level, we are always keeping an eye on some of the trends and realities of the market. As always, the VC industry is a bet on quality and value creation. Below are some of the trends that we are keeping a close eye on:

Trend 1: Bigger early-stage rounds

There is definitely a global trend towards larger investment rounds. This is especially true for companies raising money in the earlier stages: Series A, and slightly before.

Why? Because it’s more expensive than ever for startups to outperform competing companies and to hire talent in a competitive market. There is an overall drive for founders to capitalize on opportunities in new markets - and it comes at a price.

The cheque size increase is a bit more dramatic in the US (below):

Seed is the New A, A is the New B (Graph from TechCrunch)
Source: TechCrunch

Whereas in Canada, investment rounds in Brighspark’s “sweet spot” of Pre-Series A (or late seed) are often in the range of $5m. The latest CVCA report illustrates some of this story - while the number of early-stage deals has decreased over time, the relative cheque size increases:

Graph of VC Stage Breakdown from 2015-YTD Q3 2019
Source: CVCA Venture Capital Canadian Market Overview - YTD Q32019


Brightspark is prepared for these larger early-stage rounds. With our new VC Fund investing alongside our special purpose funds, we are well-positioned to lead pre-Series A rounds with investment sizes over two million dollars. Investing at this stage allows us to work closely with portfolio companies as they grow, while still getting good investment economics despite the inflation of Series A terms.

Trend 2: Preparing for a downturn

We remain cautious about a recession. It appears, with the market gyrations with the virus and oil issues that a downturn is inevitable. We cannot be sure how severe the downturn will be or how long it will last, but we continue to advise our companies and investors on how to prepare. Fundamentals remain strong and we believe our industry remains a solid asset class. Over our history of nearly 20 years, we have witnessed a few slowdowns – the “big one” was the first Internet market meltdown in 2001, followed by the 2008 financial crisis, and a few other highs and lows on this rollercoaster ride.

Our lessons learned for companies:

  • Raise a bit more money than you would have otherwise. Instead of just thinking about the capital needed to accomplish a specific milestone, raise enough for the company to survive if needed. 
  • Ask yourself how your customers really think about your product: is it a must-have, or nice-to-have? The latter is most likely to get cut first in the case of a downturn. 
  • Make sure your team has a contingency plan: should you have to lower prices, give your product away for free, slow down sales or change your marketing strategy - it’s all on the table. 
  • Think about how quickly you can adapt - how ready are you to lower your expenses, look at debt, or change your international strategy? The nimble companies that can adapt quickly will be the ones most likely to survive. 
  • The good news here is that historically, for Brightspark and many other VC investors, some of our most successful exits have been from companies that survived a downturn.
Source: Sequoia Capital on startups and the economic downturn

And when it comes to tech investors:

  • Think about how the companies you invested in might be affected in the event of a downturn - it might not be as bad as you think! This is especially true in markets where customer spending will not significantly slow down as a result of a downturn: for example mobile, agri-tech and others. As more people potentially work from home, technology will need to evolve and be robust.
  • If the company will need more financing, make sure that you have pref shares with anti-dilution price protection.
  • Look for opportunistic investment opportunities: Historically, downtimes have been a good opportunity for investors to double down on winning private companies, and get into the best startups at a low price. In our experience, when things start improving, the survivors tend to well-outperform the market.
  • Investing is about discipline. Remember the fundamentals: diversify, double down on your winners and most importantly - don't panic.

Trend 3: Industry-agnostic

We are constantly meeting young companies with great potential across the board. These are companies with solid IP (often backed with leading-edge artificial intelligence), highly talented management teams, and massive markets.

Interestingly, we are not seeing any single concentration of such companies in any specific sector, but rather opportunities spread across the tech industry (sometimes reasonably thinly). Tech has shifted from being a standalone industry to disrupting all other industries, making them ''tech-enabled''. This is why our investments are not focused on any specific niche but rather across the tech spectrum – we continue to dig deep into investments in enterprise, AI, mobile, hardware, agri-tech, healthcare, consumer, mobile, SaaS, EdTech, and IoT.

We believe that, by investing in tech with massive upside opportunities rather than in a specific vertical, we continue to see the best opportunities in Canada.

We continue to pace ourselves – we are looking for quality and not quantity and believe that our investors are looking for a well-balanced portfolio of the best in Canadian tech across multiple markets.

Trend 4: Growing smart before growing fast 

A few unicorns with fragile financials saw their valuation collapse like a house of cards in 2019 (think WeWork and Blue Apron amongst others) - which pushed the venture capital market to place a more meaningful emphasis on unit economics and profitability. In 2020, we expect investors to further shy away from the “grow at all costs” mentality and refuse to fuel top-line metrics at the expense of chronically unhealthy unit economics. In our portfolio, we are seeing investors and entrepreneurs focus more aggressively on breaking-even and being cash flow positive.

While some investors maintain a strong appetite for cash-intensive growth and market grab models, the era of companies with absolutely no plan to profitability is over.

Trend 5: Disruption > evolution

Brightspark has always leveraged its ability to identify emerging technologies, as well as teams capable of building a market leader. With this in mind, we have generated returns that are in the upper top quartile in Canada. Another factor has also contributed to those results: investing in companies that disrupt markets.

At Brightspark, we believe startups with disruptive business models using technology to address an unmet need (often by taking a non-traditional approach to solving a customer problem) will eventually end up being a dominant market player. The key is to focus and attract the dissatisfied customers of market incumbents or instead create niche markets to serve.

Startups that are focusing on markets rather than trying to steal away the mature customer base of established companies will be able to test their products or services in markets that have been neglected by mainstream market offerings. With this flexibility, disruptive companies eventually find the right combination of market and business model, and as they innovate, they ultimately disrupt the business of larger companies.


Looking forward

As we enter 2020, we are excited to be functioning “full throttle” with both of our investment models. We look forward to introducing our network of investors to some of the most exciting and interesting companies in Canada.

Investors
; if you want to invest with us, head to How It Works

Companies
; if you’re building something disruptive, head to For Companies

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