While the US hasn’t been able to get its act together around a startup visa, its northern neighbor Canada launched a startup visa program earlier this year to attract foreign entrepreneurs. With billboards in Silicon Valley calling upon US entrepreneurs to pivot north, the program attracted a good amount of attention initially and was lauded as an initiative that would attract talented foreign entrepreneurs.
While getting their act together to launch a visa program is commendable, the data reveals that the Canadian startup visa, while great for PR, won’t ultimately have much impact. Here’s why.
If you peel back the Canadian visa requirements, there is one stipulation among the four listed requirements which states that a startup get a financial commitment from one of 23 specified Canadian venture capital firms or angel groups. The sanctioned investors range from BDC Venture Capital to Rho Canada Ventures to Relay Ventures (full list below).
And while this appears to be an eminently reasonable, the reality is that this requirement neuters the impact that the Canadian startup visa might have on the country’s entrepreneurial ecosystem as we detail below.
First, the good news.
The chart below highlights deal flow and funding levels by the 23 sanctioned firms over the past 10 quarters. Deal activity has jumped 45% on a year-over-year (YoY) basis and YoY funding has climbed 21%. Clearly, the 23 investors are getting more active. This is a good thing.
And now some more good news…
In addition, the proportion of new or first-time investments by the 23 sanctioned investors into Canadian companies has also been increasing over time which suggests these firms are increasingly looking at dealflow closer to home. This portends good things for entrepreneurs looking to set up homebase in Canada. Just 20% of first-time deals by approved investors went to companies headquartered outside of Canada in Q2 2013. (We have excluded follow-on investments into existing companies for this analysis as money deployed into new portfolio companies is what will be most relevant for the startup visa program).
So what’s the problem?
While these 23 Canadian investors are getting more active overall (doing more deals) and more of their first-time deals are fundings to Canadian companies, the problem is that the absolute level of early-stage first-time deals done by the sanctioned Canadian investors is immaterial if Canada really wants to turbocharge entrepreneurial activity. And this isn’t an issue just with these 23 investors. Canada’s early-stage investment scene remains generally fairly anemic.
In Q2 2013, there were 20 early-stage deals done by these 23 investors as shown above. And over the last 10 quarters, there were an average of 21 early-stage, first-time investments into companies by the approved investors. On average, over 7 of those deals per quarter were outside of Canada. If we assume that the Canadian startup visa’s goal is not to shift funding from Canadian entrepreneurs to foreign entrepreneurs and that there are a good number of quality Canadian entrepreneurs who are fundable, that would suggest 7 “spots” available to foreign entrepreneurs. For the sake of argument, let’s assume 100% went to startup visa candidates which would mean 28 new companies per year would be founded in Canada as a result of the Canadian startup visa.
As a point of comparison, New York which is the 2nd largest venture market for tech investments in the US had 245 seed investments last year (doesn’t include Series A) and the Bay Area / Silicon Valley had 394 seed investments last year (also doesn’t incude Series A deals). Including Series A transactions would bring just NY and Silicon Valley to 800+ deals per year. So we’re talking about 28 potential Canadian startup visa grantees versus over 800 such deals in just two US venture markets.
Sure, one might say that at least Canada has done something and that every little bit helps. There is no denying this. But the hard and unfortunate reality based on the data is that the small number of Canadian startup visas that will ultimately be granted will have an infinitesimal impact on Canada’s startup ecosystem.
The full list of approved investors for the Canadian startup visa program are given below:
- BDC Venture Capital
- Blackberry Partners Fund II LP (doing business as Relay Ventures Fund II)
- Celtic House Venture Partners
- DRI Capital Inc.
- Golden Opportunities Fund Inc.
- iNovia Capital Inc.
- New Brunswick Innovation Foundation Inc. / Fondation de l’innovation du Nouveau-Brunswick Inc.
- Northwater Intellectual Property Fund
- OMERS Ventures Management Inc.
- Pangaea Ventures Fund III, LP
- PRIVEQ Capital Funds
- Quorum Group
- Rho Canada Ventures
- Summerhill Venture Partners Management Inc.
- Tandem Expansion Management Inc.
- Vanedge Capital Limited Partnership
- Version One Ventures
- Wellington Financial LP
- Westcap Mgt. Ltd.
- Yaletown Venture Partners Inc.
- Angel One Network Inc.
- First Angel Network Association
- Golden Triangle Angel Network