Growing number of investors are cutting cheques to Ottawa companies. But is it sustainable?
Sean Brownlee may work in Montreal, but he has an up-close view of Ottawa’s tech scene.
(Photo illustration by Tanya Connolly-Holmes)
As a general partner at Rho Canada Ventures, he visits the nation’s capital every few weeks to check in with local startups. And the scene, he says, is changing.
“This is the most exciting time I’ve ever seen,” says Mr. Brownlee, on the subject of access to funding in Ottawa. “It’s never been more vibrant than it is today in terms of having multiple sources of capital.”
His outlook is a dramatic departure from years of negligible venture capital activity in Ottawa, a period when access to funding was one of the most commonly heard complaints from entrepreneurs.
But with Rho’s $100-million fund that closed in May, Mr. Brownlee has already helped broker five seed-stage investments with unidentified Ottawa-based companies.
“I can look at eight to 12 companies in a four-hour sitting,” Mr. Brownlee says of his visits to Ottawa. “That’s phenomenal for a guy like me … I must say, I want to keep it my little secret.”
Rho is but one of several investment firms that’s recently closed a fund and is taking a close look at tech firms in the nation’s capital. While some say the city needs more standout stars to attract investors’ attention – as well as regulatory changes to encourage more early-stage investments – 2013 nevertheless could be the year when the funding taps are finally reopened.
The Business Development Bank of Canada recently closed a $150-million fund specifically for IT companies, called the BDC IT Venture Fund. Run by five partners including Ron Warburton in Ottawa, the fund’s closing came right before the federal government reiterated its $100-million commitment to BDC in its 2012 budget – originally announced in 2009 as part of $450 million in funding.
In Ottawa, the IT fund brokered a deal with local online security firm Privacy Analytics for an undisclosed sum – one of 11 deals it has done across Canada this year.
“I think it’s quietly beginning to happen here in Ottawa,” says Mr. Warburton about venture capital activity. “There’s something bubbling.”
In November, local company Diablo Technologies received $28 million in a financing round from various funds including BDC and Celtic House Venture Partners, an Ottawa-based venture fund. It’s one of the biggest local financing announcements in recent memory.
“I can tell you we are very active in Ottawa,” says David Adderley, a partner at Celtic House. “We are looking at a number of projects in the fields of media, communications and technology. Over the next few years in Ottawa, we expect to make some investments.”
Mr. Adderley says it’s no secret that venture capital has been decimated in Canada, with the industry having essentially gone through a five-to-one consolidation. Activity has stabilized, he says, but it hasn’t skyrocketed.
“There are some shoots of green leaves coming up, but it’s by no means a solved problem,” he says, adding that Ottawa needs to breed successes that grab investors’ attention.
In a word: Shopify.
“One great company is good,” says Bruce Raganold, director of business development at Welch LLP. “But you need to be able to show the world the ecosystem that is working here. If there were five or six Shopifys brewing, we’d be seen as the e-commerce hot spot.”
It might also help to update Ottawa’s image as a telecom-centred region, especially with the downfall of giants such as Nortel Networks, Mr. Raganold says, although he notes that many strong telecom firms still exist locally.
BDC’s Mr. Warburton agrees that Ottawa needs to be known for specific areas of strength, and increasingly he believes that strength is enterprise software. The No. 1 example used to be Cognos, but now Halogen Software, Kinaxis and Shopify are all examples of success stories in that space.
“I think (that expertise) has been overlooked,” he says. “Quietly, people are beginning to see that in Ottawa.”
The problem should not only be the venture capitalists’ to solve, says Simon Gwatkin, vice-president of strategic marketing at Terry Matthews’ Wesley Clover incubator in Kanata.
He says Mr. Matthews has been advocating that Ontario adopt British Columbia’s investment tax credit program. In B.C., if an investor puts a maximum of $200,000 into a company, they receive $20,000 of it back on their taxes.
It would incentivize investment to startups, Mr. Gwatkin says, and give those early-stage companies access to high net worth individuals who could help them become successful.
Mr. Gwatkin says he believes similar legislation will be passed in Ontario in the next budget.
The federal government has the topic on its agenda, too – its 2012 budget came with a pledge of $400 million to support private-sector investment in startups.
But there’s also been an increase in enthusiasm on the ground, Mr. Gwatkin says. Tech Tuesdays, Wesley Clover’s monthly networking event, has grown to more than 200 attendees per session, each looking for advice, guidance or to share ideas.
“I think the tides are turning,” he says. “I think a lot is going to change in 2013 … I think it’s going to be very good for the city.”
SIDEBAR: VENTURE CAPITAL ACTIVITY IN OTTAWA
Q1 2011: 12 deals worth $61.4 million
Q2 2011: 6 deals worth $12.04 million
Q3 2011: 9 deals worth $32.29 million
Q42011: 8 deals worth $33.15 million
Q1 2012: 10 deals worth $27.56 million
Q2 2012: 11 deals worth $59.5 million
Q3 2012: 4 deals worth $26.04 million
Source: Thomson Reuters and Canada’s Venture Capital & Private Equity Association
Venture capital invested across Canada totaled $1.5 billion in 2011, up 34 per cent from the previous year.
Disbursement levels were the highest since 2008, though they remained shy of the $2.1 billion invested in 2007.
Dollars invested went to 444 domestic firms in 2011, up 24 per cent year-over-year.
The IT sector saw the lion’s share of funding, with $692 million invested in 2011 – up 41 per cent from 2010.
Life sciences received $343 million, up 15 per cent year-over-year.
Clean tech received $243 million, up 43 per cent year-over-year.
Source: Statistical report published in Feb. 2012 by Thomson Reuters and Canada’s Venture Capital & Private Equity Association
A SAMPLING OF FUNDS INVESTING IN OTTAWA FIRMS:
BDC IT Venture Fund (Canada): $150M closed Nov. 2011
Celtic House (Ottawa): $105M closed May 2012
iNovia Capital (Montreal): $110M closed Dec. 2011
MaRs Cleantech Fund (Toronto): $30M closed March 2012
Mistral Venture Fund (Ottawa): $35M not yet closed
Rho Canada Ventures (Montreal): $100M closed May 2012