Investors bullish on Ottawa tech scene

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Adam Feibel
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Allan Wille’s company is coming off yet another banner year. The way it’s looking, that’s not about to change in 2016.

Venture capital firms have "refocused" on Ottawa's tech industry, says Debbie Weinstein of LaBarge Weinstein LLP.

Fresh off a $6.2-million series-A financing round in February, his Ottawa-based business dashboard software provider Klipfolio increased its customer base by 60 per cent from last year to 4,000 clients. The company expects to roughly double its growth in the new year.

Mr. Wille says Klipfolio is accelerating toward the monthly recurring revenue territory of between $400,000 and $500,000 that will likely lead to series-B financing within the next 12 to 18 months, although the amount or strategy have not been finalized.

“We’re starting to see a really nice volume of critical mass,” he says.

Klipfolio’s recent breakout is one of several similar stories across Ottawa’s bubbling software sector. Investors are more bullish on the city’s tech community than they have been in years, and several experts are predicting that a continued rise in venture capital infusions in 2016 could result in a long-awaited IPO boom near the end of the decade as a number of companies chase a coveted Shopify trajectory over the next few years.

By the end of 2015’s third quarter, Canada-wide venture capital financing had reached $1.1 billion, already surpassing the total from all of 2014. Locally, this is a new development – it was only in 2013 that Ottawa noted thereturn of the venture capitalist, when observers’ outlooks became a lot brighter than they once were.

Local companies brought in upwards of $100 million in VC financing in 2015, with some of the biggest rounds by Corsa Technology ($16.5 million), GaN Systems (US$20 million) and You.i TV ($15 million).

Ottawa should continue to see a “good pace” of financing, especially for early-stage firms – this year saw a lot more momentum in terms of angel investing – with more venture capital funds moving into the city for the first time, Debbie Weinstein of LaBarge Weinstein LLP predicts.

“Suddenly, venture capital has refocused on Ottawa,” she says.

Ron Warburton, managing partner at BDC’s IT Venture Fund, says that’s a trend that appears to be continuing into 2016.

“I think we’re going to see some more B rounds,” says Mr. Warburton, whose fund manages $300 million in 43 investments across Canada, several of them based in the National Capital Region. “But at the same time, there’s going to be a continuation of more seed rounds, more A rounds, and now as these companies mature, more B rounds.”

Mr. Warburton says there has been a significant increase in Canadian venture capital money available to invest. At the same time, more U.S. funds are recognizing Canada’s strengths.

Companies that will be especially worth watching are those in the enterprise software-as-a-service marketplace, he says. Funds are seeing lots of potential in Ottawa software startups such as The Better Software Company, Kivuto, Klipfolio and PageCloud.

But while local firms are flush with investment, observers say the city is still at least a few years away from a highly anticipated influx of initial public offerings.  

Earlier last year, Toronto-based firm Kensington Capital Partners declaredOttawa ripe for IPOs in 2015. But as in previous years, only one prediction actually panned out.

Several years of growth among some of Ottawa’s hottest tech startups, however, have hinted at a possible tipping point at which several tech firms would make initial public offerings close together. The sector doesn’t look to have reached that point yet, but experts predict it might get there soon.

The tech startup community in Ottawa has several soon-to-be heavy hitters in its roster, but none as big as Shopify was at the time of its IPO this past May, says Ms. Weinstein.

“There’s no unicorn,” she says, though a couple are “definitely” on a trajectory to grow from $25-million or $50-million valuations to between $200 million and $300 million over the next one to three years, she adds. At least a couple are already on the edge of an IPO, says Bruce Lazenby, chief executive of Invest Ottawa.

Still, experts who spoke to OBJ stopped short of naming exactly what those select companies that are closing in on the public market might be.

Conventional wisdom suggests that a company should reach a bare minimum valuation of $10 million before filing for an IPO, but these days companies are looking for much, much higher numbers before they go public, says Mr. Lazenby.

That’s partially because there is more private equity available, so they don’t need to rush toward an IPO, he says. They can wait, like Shopify did, until they’re a multibillion-dollar company before emerging on the public market. (Shopify’s deliberation paid off in a $131-million opening, Ottawa’s most successful since Mitel in 2010.)

Mr. Wille says an IPO is “definitely” something about which Klipfolio has thought seriously.

“We’re on the same path,” he says. “If we could accelerate, … get to a place where we have hundreds of thousands of customers like other (software-as-a-service) players, I think we could totally be on track to do an IPO,” although he adds that’s still a couple years away.

If and when they do go public, Canadian tech firms appear to be having a generally better outlook on the stock exchange than in years past. A recent report in the Globe and Mail suggests Canadian tech valuations are rising from their historically discounted share prices compared with their U.S. counterparts, listing recent IPOs by Shopify in 2015 and Kinaxis in 2014 as examples of companies that have traded unprecedentedly well.

You.i TV is another Ottawa company that has been on many people’s watch list of late. Last year, the user experience software designer – responsible for online TV streaming apps commissioned by Shomi, Corus Entertainment, Sony’s Crackle and more – hosted Ottawa’s third-largest financing round of the year.

That allowed the company to close contracts with two major tier-one clients from the United States, which will be announced as early as January. Chief executive Jason Flick sees the firm doubling its staff and revenue again in 2016, for the eighth year in a row.

After at least one more venture capital round – which will seek “multiples” of the company’s September haul, about 16 months or longer from now – Mr. Flick says he too sees an IPO as an eventual possibility. With the You.i TV logo on splash screens for Disney, Nickelodeon and YTV apps, the company has quickly been gaining brand recognition.

“We are going to build a bit of a consumer brand, which does lead toward being much more viable than others for an IPO,” Mr. Flick says. “But there are a lot of variables in that. I’m certainly not going to do it too soon.”

He says a handful of other Ottawa companies just need $5 million to $15 million invested before they become the next billion-dollar company. Mr. Lazenby notes that venture capital firms such as Celtic House and Mistral have made recent investments in local firms and are both looking favourably at other opportunities in the city to complete their next financial round.

“Investors follow investors,” he says. “And once a company opens their eyes to a city, they have a tendency to look around and see what else is there.”

Startups also tend to be receiving more follow-ons for their deals, says Thomas Forr, who led a 2015 overview report on Canada’s tech sector as national research co-ordinator for commercial real estate firm JLL.

“You’re starting to see investors going into second, third and fourth rounds of venture capital, and I would expect that’s going to continue across the markets in Canada,” Mr. Forr says.

But although the venture capital space has continued to heat up, investors might not remain quite as bullish as they have been for long.

Some observers told the Globe and Mail in October theyexpect a pullback in the new year as cash inflow is quickly raising valuations and venture capital firms “are starting to proceed with caution.” Mr. Wille predicts the smaller seed rounds will likely stay at the same level, but the slightly larger companies will have a more difficult time getting series-A or series-B levels of investment. Investors are looking twice before putting their cash somewhere new.

Some young firms might be able to fall back on help closer to home. Mr. Lazenby says there has been significant reinvestment of both cash and wisdom into new companies by CEOs who have recently grown their own firms to a liquidity event. Tobias Lütke of Shopify, for example, has backed the web design software builder PageCloud, one of Ottawa’smost talked-about companies these days.

“There’s a lot of new and smart money being put back into the ecosystem,” says Mr. Wille, echoing Mr. Lazenby’s assessment.

For now, most of Ottawa’s buzz-worthy tech companies are expected to continue consistent growth levels. They will likely also feed off each other’s energy in order to work toward banner years ahead, propelled by an increasingly centralized talent force that’s gathered in the close quarters of the downtown core, particularly in theburgeoning ByWard Market startup space. Observers predict these firms will eventually exit either through acquisitions or public debuts.

“I think it’s going to be a great year for a lot of these companies to continue to grow, so that we can get a whack of potential IPOs in 2017, 2018 to 2019,” says Mr. Warburton.

“I think we’re setting ourselves up wonderfully for the end of this decade.”

Venture capital funding in 2015

Feb. 9 – Gymtrack, $2.5 million, led by White Star Capital and Real Ventures, with additional support from 500 Startups and BDC Capital.

Feb. 25 – Klipfolio, $6.2 million, led by OMERS Ventures, joined by existing investors BDC Capital, Mistral Venture Partners, FundFire, BOLDstart Ventures, Acadia Woods Partners and Converge Venture Partners.

March 17 – PageCloud, $2.2 million, from MaRS Investment Accelerator Fund, Export Development Canada, Tobias Lütke of Shopify, Sarah Imbach formerly of LinkedIn, and more than a dozen others.

March 18 – Interset, $10 million, led by Toba Capital and joined by fellow California investors Informatica and Anthem Venture Partners and Montreal’s Telesystem.

March 20 – Corsa Technology, $16.5 million, led by Toronto’s Roadmap Capital and joined by existing investors Celtic House Venture Partners, BDC Capital and a strategic tech company.

April 7 – Solantro Semiconductor, $11 million, led by existing investors Black Coral Capital, Presidio Ventures, Clean Energy Venture Group, BDC Capital and Export Development Canada, plus a new investor, Inerjys.

May 7 – GaN Systems, US$20 million, led by Montreal’s Cycle Capital Management and joined by BDC Capital, Beijing-based Tsing Capital and existing investors Chrysalix Energy Venture Capital from Vancouver and Boston’s RockPort Capital.

Aug. 11 – CENX, $12.5 million, from existing investors Highland Capital Partners, Mesirow Financial Private Equity, Verizon Ventures, Ericsson, DCM Ventures and Cross Creek Advisors, plus new investment from BDC Capital, Mistral Venture Partners and VMware.

Sept. 14 – You.i TV, $15 million, led by Los Angeles-based Kayne Partners, the growth private equity group of Kayne Anderson Capital Advisors L.P.

Nov. 10 – The Better Software Company, $1.35 million, led by ff Venture Capital along with Mistral Venture Partners and other hometown angel investors.

Tech IPOs from Ottawa companies in the last 10 years:

2015: Shopify (TSX: SH; NYSE: SHOP), $131 million

2014: Kinaxis (TSX: KXS), $100.6 million

2013: Halogen Software (TSX: HGN; NASDAQ: HGENF), $55 million

2013: Magor (TSX-V: MCC), $5.9 million

2010: Mitel Networks (TSX: MNW; NASDAQ: MITL),  $147.4 million

2007: DragonWave (TSX: DWI; NASDAQ: DRWI), $32 million

2007: Bridgewater Systems, $35 million

2006: RAMTelecom, $2.5 million

2006: Corel, US$69 million

 

Organizations: BDC, GaN Systems, IT Venture Fund Mitel Venture Partners The Better Software Company TSX Kensington Capital Partners Globe and Mail Celtic House Corus Entertainment Export Development Canada Nickelodeon Acadia Woods Partners MaRS Investment Accelerator Fund Clean Energy Venture Group Chrysalix Energy Venture Capital Highland Capital Partners Mesirow Financial Cross Creek Advisors VMware Kayne Partners Kayne Anderson Capital Advisors L.P. NYSE DragonWave Bridgewater Systems

Geographic location: Ottawa, California, Canada United States National Capital Region Montreal White Star Capital Toba Capital Toronto Vancouver Boston RockPort Capital

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