The Obama-Trudeau Friendship, US VCs And The Canadian Model

Last week, for the first time since the seventies, the leaders of the US and Canada had a state dinner  and, according to official media, besides friendly vibes and broad understanding across many topics, they "announced their governments will work together to (...) promote innovation". What does that mean for US VCs?

As it happens, beyond the government-level collaboration, Canada already offers a little known but compelling investment opportunity for US venture capital investors, who lately have been complaining that valuations on their side of the border are excessive.

According to the statistics put together by the prestigious Palo Alto lawfirm Wilson Sonsini, the median for Silicon Valley Series B pre-money valuations has more than doubled in two years from $18M in 2011 to $40M in Q4 2015. Partly as a result, some US venture capital investors are looking at other regions than Silicon Valley for deals. US VCs are familiar with different US startup models - including the Israeli model and other overseas permutations of HQ and R&D - which I covered in an earlier post.

Today, I am positing that there is such as thing as a nascent "Canadian Model".

A Canadian Model? Yes.

Canada is not technically "overseas": its land border with the US is actually the longest in the world! More importantly, while it is part of NAFTA, shares the same language (presque) and time zones, it has some advantages over the US. Here are just a few:

1. It is ranked as the best country for business in the G20, according to Forbes and Bloomberg. The main Canada hubs are just a few hours' flight from San Francisco's international airport: Vancouver is closer to San Francisco than Denver, Ontario closer than Boston or New York.
2. It offers the lowest business cost in the G7 for R&D intensive sectors (source: KPMG). And national and local programs provide R&D refunds that further stretch the venture capital dollars.
3. Canada's population is among the most highly educated in the OECD, with half of its workforce having a tertiary-level education. In particular, its engineering talent pool hasn't experienced the inflationary dearth observed by Silicon Valley recruiters.

Additionally, it boasts a very vibrant and committed Silicon Valley diaspora called The C100 (which includes the CEOs of companies such as Evernote, Joyus and AVG, to name a few).

In the Canadian Model, both the headquarters and the R&D stay in Canada. Some leading funds in Silicon Valley, San Francisco and Seattle are now actively investing in Canadian ventures. Unicorns Hootsuite, Shopify (IPO) and Wattpad have received funding from the likes of Felicis Ventures, Bessemer Venture Partners, Accel Partners and Blumberg Capital. The Canadian Model appeals to traditional VCs, corporate venture capital, angels as well as new venture investors. And Y Combinator, the accelerator of Dropbox and Airbnb fame, requires all international portfolio companies to become Delaware corporations -- except if they are from Canada.

But how active is the Canadian venture ecosystem? 2015 was a banner year for Canadian startups with 44 exits representing C$4.26 billion. Quoted in the Canadian press, Mike Woollatt, the President of the Canadian Venture Capital Association, said: 

“ The world needs to pay attention to Canada. If you’re not paying attention, you’re missing out.”

US investors who want to learn more about investing in Canadian startups and the Canadian Model can view the informational event "Why and How Top US VCs Invest in Canadian Startups" held in Palo Alto with panelists from Intel Capital, OMERS Ventures, Ignition Partners, Blumberg Capital and Azure Capital Partners. You'll see that the US-Canada friendship started well before Obama and Trudeau.

Video:

DISCLOSURE: I have been working with Canadian tech startups for several years, both directly and as the Silicon Valley adviser for the Canadian Technology Accelerator.

Feel free to comment below- and to reach out if I can be of help.