Though the stock market’s rough start to 2016 has put a damper on venture capital and private equity funding, for investors looking for innovative companies, Canadian tech startups are increasingly attractive targets.
A quick look at any Canadian newspaper would show you the dire headlines. In recent months the Canadian dollar lost some forty percent of its value, falling to a painful thirteen-year low. Yet the news that’s making Canadians cringe is a hidden blessing for many Canadian startups, especially within the tech sector.
Though the stock market’s rough start to 2016 has put a damper on venture capital and private equity funding across North America, there is still capital that needs to be deployed. For investors looking for innovative companies, Canadian tech startups are increasingly attractive targets.
With the fall of the Canadian dollar, our local tech hubs have seen rising interest from foreign funding sources, especially the U.S. When investing in or buying Canadian companies with Canadian dollars, the current exchange rate gives foreign investors significantly more bang for their buck.
Given challenges in standing out in a crowded marketplace, this advantage provides the opportunity many young Canadian firms need to attract attention and make their mark. U.S. funders who have not yet invested in many Canadian firms also seem encouraged to take a second look at what their northern neighbours have to offer. The result is a great situation for all parties, with venture capital firms able to invest more widely with hope of greater returns, while growing Canadian tech startups have access to much-needed capital.
The increase in U.S. investment is especially relevant giving recent concerns about the lack of domestically funded seed capital available to many entrepreneurs prior to seeking Series A funding. While there has been discussion in the community about the number of Canadian firms that end up with majority foreign ownership because of the lack of funds available for early stage growth, there’s no denying that the influx of U.S. investors is a significant boon to the health and growth of the Canadian tech ecosystem.
Many Canadian startups, too, specifically pursue U.S. investment from early stages, citing better access to growth capital to support aggressive targets and higher eventual valuations.
With easy access to the far larger American market, many Canadian startups expand into the U.S. even in their first year of operation. In my experience, this often results in 60 percent or more of a Canadian tech startup’s customer base being located in the U.S. Now the low dollar is providing additional benefits: with a significant portion of a company’s clients paying in American dollars, Canadian companies are profiting on the foreign exchange.
The flipside of this particular coin is that while much corporate revenue is in U.S. dollars, most corporate expenses are in Canadian funds paid to Canadian suppliers. With lower overhead and higher revenues, Canadian startups are gaining a key advantage over their American competitors. While companies can’t rely on the exchange rate as a growth strategy, it’s currently giving a great boost to growing companies’ bottom line.
While some industries have been considerably impacted by the falling Canadian dollar, the tech industry continues to hum along. We’ve especially seen continued activity within the Canadian software, FinTech, biotech and health tech sectors.
As the Canadian economy shifts from its previous focus on the energy sector and natural resources, it looks as though the tech sector may rise to greater national prominence. This is especially relevant as technology components are now becoming integral to a wide range of other industries, such as the automotive industry. The increasing rise of Internet of Things products and their supporting structures is also creating significant opportunities for future growth.
Given the continued bad news about our national resources and the change in direction that has come from Canada’s new federal leadership, it looks as though the tech scene may well be integral to Canada’s economic recovery.
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Sunil is an Audit Partner in KPMG’s Enterprise and TMT practice with over 20 years of experience. His clients include private companies that are private equity or venture backed, entrepreneur owned or local subsidiaries of larger private foreign corporations. These include high growth technology and professional services based companies. He is also a member of the KPMG Enterprise Global Innovative Startups Network. In this role, he coordinates with KPMG offices around the world and brings back best practice to the Canadian practice for KPMG’s global initiatives as it relates to working with the innovation ecosystem, including entrepreneurs, fast growing private equity and venture backed companies.