If it’s not built, they can’t come

Hallelujah! Hallelujah! Hallelujah!
Hallelujah! Hallelujah!
For the Lord God Omnipotent reigneth.
Hallelujah! Hallelujah! Hallelujah! Hallelujah!
– Hallelujah Chorus Hymn, Handel’s Messiah

The excitement about the changes to Section 116, as disclosed in Minister Flaherty’s budget, is justified. But it must be understood that the vast majority of Canadian entrepreneurs raise their first round (or second or third) from domestic investors, prior to succeeding south of the border.

If an entrepreneur tried to raise a Series A round in Seattle versus a Series C round, the historical paperwork of Section 116 existed in either case. So we must assume that the fact that U.S. VC investors appear to almost (but not) exclusively invest in later rounds — when they do invest in Canadian tech names — has nothing to do with Section 116…and everything to do with the state of the investment opportunity at that point in time.

Let’s look back over the past 15 months at some of the Canadian deals that involved U.S.-based venture capital funds. This list isn’t the entire waterfront, but the point is clear:

Capital Reserve Canada
Edmonton, Alberta
$10 million First Round
Auctus Private Equity Management, Inc., Boston
September 2009

I Love Rewards
Toronto, Ontario
$8.7 million Second Round
GrandBanks Capital, Boston
JLA Ventures, Toronto
OVCF, Toronto
May 2009

$4.75 million First Round
JLA Ventures, Toronto
Laurence Capital, Waterloo
November 2007

Indicee Inc.
Vancouver, B.C.
$6 million First Round
Yaletown, Vancouver
Granite Ventutes, San Francisco
June 2009

Microbridge
Montreal, PQ
Undisclosed $ 5th round
Coller Capital, New York
FTQ and Multiple Capital of Montreal
February 2009

$1 million First Round
Multiple Capital, Montreal
March 2001

OneChip Photonics
Ottawa, Ontario
$19.5 million Third Round
GrowthWorks, Toronto
BDC, Ottawa
Morgenthaler Ventures, Menlo Park
DCM, Menlo Park
March 2009

Second Round
Morgenthaler Ventures, Menlo Park
DCM, Menlo Park
December 2007

QuickPlay Media
Toronto, Ontario
US$12 million 5th Round
General Catalyst Partners, Cambridge, MA
JLA Ventures, Toronto
Ventures West, Toronto
June 2009

Undisclosed $ First Round
JLA Ventures, Toronto
May 2005

Varicent Software
Toronto, Ontario
$35 million Third Round
FTV Capital, San Francisco
EdgeStone, Toronto
RBC Venture Partners, Toronto
October 2009

$4 million First Round
EdgeStone, Toronto
December 2006

Zeugma Systems Inc.
Richmond , BC
$9 million Fifth Round
Granite Ventures, San Francisco
GrowthWorks, Vancouver
GTD Capital, Texas
Ventures West, Vancouver
Vertex Venture Capital, Israel
March 2009

Undisclosed $ First Round
Yaletown, Vancouver
Ventures West, Vancouver
September 2004

For the changes to Section 116 to actually have an impact, Canada still needs a vibrant domestic Seed, Angel and Early Stage Venture Capital ecosystem. That’s what the CVCA’s 5 point Commercialization Support Program is all about.

If it’s not built, U.S. investors can’t come.

MRM