Wednesday, September 12, 2007

How much funding for Canadian startups?

How much money have investors poured into Canadian startup companies so far in 2007? You may think you've read that number recently, but you haven't. The actual answer is "nobody knows." Of course, no one likes that response, so they go count the things they can count and then pretend they know the answer. It's like the old joke about the guy looking for his car keys under the street light -- "this isn't where I lost them, but the light's so much better here."

Whenever you read about the aggregate level of venture capital investment, the main source of that information is news releases and other voluntary disclosures, either from the company receiving the funds or their investors. There are also securities commission filings for some investments -- some funds have to put their financial information on SEDAR and, in Ontario, many deals will will be listed in the OSC Bulletin. But most investors are not required to make any public disclosure. They often choose to do so because it would be good for the company and its image as a growing business with dependable financial backing.

In Waterloo, I work with companies every week that have closed rounds of funding that were never publicly disclosed. One of them just raised about $2 million, but you haven't read about it and it's unlikely that you ever will. Several have raised between $0.5-2 million, but those numbers won't appear in any reports you'll see.

Several months ago, Industry Canada told me they were dissatisfied with the existing estimates of venture capital deals and were going to try to come up with their own reports. So far, they're still just publishing the same numbers you'll see elsewhere. Maybe they've found that it's not easy to measure these kind of investments. I wouldn't be surprised if most -- maybe all -- of the eight-figure deals get disclosed somewhere, but there are many six- and seven-figure deals that are just between the company and their investors, and whomever they happen to tell.

In the summer I read somewhere that only one deal had been done in Waterloo Region over the first half of the year. I had no trouble coming up with six that had been publicly disclosed, and know of others worth millions of dollars that weren't. If the reported numbers are that far off for Waterloo, how inaccurate must they be for all of Canada?

And then there are companies that receive offers but turn them down. I don't mean they choose another offer instead, they just decide not to take funding. Sometimes they come to regret it, but often they're happy to grow their business without additional equity investments. You can't count that in your investment totals, but it's something that needs to be taken into account when discussing the number of companies being funded.

So, when I say that the actual answer is "nobody knows" the follow-up question would be: is that "nobody knows precisely, but we have a pretty good estimate" or is it "we really don't know, other than it's at least $X." I'm sure many people will say that it's the former, but having seen how badly the numbers have been underestimated in my area, I'm not confident that it is.