June Newsletter

Well folks, two weeks ago it was snowing and -2 degrees and on Saturday, we had humidex readings of +40.  I guess we have officially moved to a three-season year!

VC activity in Canada is booming but M&A activity continues to lag.  Not sure what everyone is waiting for. Higher oil prices?  Higher interest rates? A slow down in the housing market? Sanity in the US presidential elections?

In this month’s Q-News, first quarter Canadian VC activity skyrockets, US VC declines, big $$ continue to flow into VC funds on both sides of the border; mid-market M&A continues to be challenged & a number of really interesting articles.

Summer’s here, enjoy!

Canadian VC activity continues to increase with most dollars invested since Q3 2001

As reported by Thomson Reuters, Canadian venture capital activity experienced a significant uptick in the first quarter of 2016 with 152 deals reported for a value of $869 million. This represents a 61% increase over the comparable period in 2015 in dollar terms but a 4% decline in the number of transactions. The $869 invested represents the best quarter in dollar investments since Q3 2001. As is generally the case in Canada, a small number of large transactions have a huge impact on reported volumes.  In the first quarter this was again the case where $446.7 million or fully 51% of the capital invested went to only 8 companies with the three largest investments being $87.8M for Zymeworks, a Vancouver-based biotherapeutics company, $80M for Montreal-based Triotech Amusement, an entertainment devices company and $75.8M for Montreal-based Blockstream, a cryptocurrencies company.

Source: Thomson Reuters Canadian Venture Capital Review First Quarter 2016
The Thomson Reuters report also lists the most active Canadian and US private independent fund investors in Canadian companies for the past six months.  The top 14 Canadian funders completed a total of 97 transactions with proceeds of $135.6 million for an average of $1.4 million whereas the top 14 US investors completed 28 transactions for $103.4 in investment value and an average of $3.7 million.  This is simply further evidence of the importance of US VC participation in Series B and later rounds for Canadian companies.

In addition, Canadian VC funds attracted $929 million in new cash commitments in the quarter which represented a staggering 77% of the total $1.2 billion raised in all of 2015.

US VC activity in Q1 2016:  Dollars invested and numbers of deals decline as activity moves to Seed and Early stage investments.

AS reported by PWC MoneyTree, US first-quarter VC investment saw a significant year-over-year decline with the number of deals reported falling to 969 versus 1,085 in Q1/2015 and amounts invested falling to US$12.1 billion versus comparable 2015 period of US$13.7 billion.   Also of note is the fact that both Seed and Early stage investing increased Y-O-Y while   Expansion stage and  Later stage investments experienced a decline.

Despite the slowdown in investment activity, the US VC community as a whole had its best quarter in 10 years raising US$12 billion for 57 funds.  This commitment represents a 59% increase over the first quarter of 2015 and is the largest amount raised since the second quarter of 2006 when 79 funds raised US$14.3 billion.

Interesting Times Ahead

The next 12 months should be very interesting as we expect to see our long awaited culling of the Unicorn herd.  The public markets have shown very little appetite for high priced tech IPOs and given the stock performance of newly listed companies over the past year, it’s a small wonder.

The Dealogic chart illustrates the sad state of IPO activity.  Barrett Daniels wrote an interesting article for Mattermark entitled “The Good, The Bad, The Ugly and Then Some – The 2016 IPO Market” which provides some interesting commentary on when he thinks we will see a rebound in IPOs.  We’ve included the article in this month’s Articles of Interest.
With limited access to public markets, valuations too high to be attractive acquisition candidates and a shift in VC sentiment towards portfolio company cost reduction and profits, the remaining seven months of 2016 should see continued cost-cutting and corporate downsizing.  It will be interesting to see if the shift to earlier stage investing seen in the first quarter continues throughout the year.  Certainly, the large amount of new capital raised by VC  funds in Canada and the US and a step back from piling money into Unicorns bodes well for earlier stage companies looking for much-needed growth capital.

Here in Canada, it’s going to be very interesting to see what is in store for highly publicized HootSuite, Vision Critical, BuildDirect, and Desire2Learn.  And speaking of Desire2Learn, when was the last time anyone heard any news of interest out of that company?  Sort of makes my spidey senses start to tingle.  Even our favorite Canadian Unicorn, Shopify is trading pretty close to its opening price a year ago.  Priced for the IPO at $17, opened at $28 on its first day of trading and closed at $29.29 on May 31st.

North American Mid-Market M&A Declines in Q1 while Global Technology M&A continues strong

There was an interesting article published on the Mergers & Acquisitions website entitled “Mid-Market M&A Tumbled in First Quarter to Lowest Point Since 2009”.  The article highlights the fact that only 330 middle-market M&A transactions took place in the first quarter of 2016 representing the lowest deal volume since the first quarter of 2009 when 236 transactions were reported.  The total deal value came in at US$59.4 million which was the lowest reported since the first quarter of 2012.  The myriad of factors that appear to be dragging the market include: uncertainty surrounding the US election, tightening credit, public market uncertainty, ongoing concern with the price of oil, and the strong US dollars impact on exports

Technology M&A Trends in 1Q16

As reported by Ernst & Young, global technology M&A transactions increased 2% YOY and 8% sequentially in the first quarter to 1,002 deals but aggregate disclosed transaction value declined by 14% YOY to US$66.7 billion and sequentially by 65%. The graph below is a graphical representation of the number and deal value of M&A transactions that were reported in the first quarter.

In terms of volume, we see that the cloud/SaaS sector had the greatest number of deals, followed by smart mobility and advertising and marketing technologies. Value-wise, healthcare IT (HIT) saw the largest average deal size with five deals valued at around $1 billion. Connected cars are also gaining traction among automotive industry heavyweights with 16 deals in 1Q/16 compared with only 6 a year earlier. Data collected by EY indicates that the overall deal value grew in Big Data, Payments and Financial Technologies, Health Care IT and Advertising and Marketing while value decreased in Cloud/SaaS, Smart Mobility, Security, IoT, Gaming and Connected Cars.

Source: E&Y Global Technology M7A report: 1Q16 Final Look

Google Acquires Toronto-based Synergyse

Alphabet’s Google announced the acquisition of Toronto-based Synergyse, a company launched in 2003, specializing in Google Apps interactive training for education, business, and government. TechCrunch reports that Google intends to integrate Synergyse’s technology into its own products later this year. Terms of the deal were not disclosed.

According to CB Insights, the acquisition appears to be Google’s 12thin Canada since 2001 and their first since January 2015. Although it appears, ~80% (153 of 199 since 2001) of Google’s acquisitions are domestic, ~26% of their international acquisitions (12 of 46 since 2001) are from Canada, which leads the way internationally. This news, coupled with Google’s recent expansion of their Kitchener Waterloo office, display a strong trend towards increased Canadian investment by the technology giant.  This leads us to believe that Google’s widening footprint in Canada could lead to more investment and acquisitions to come.

To read more about this transaction click here.

A roundup of Interesting articles from the past couple of weeks:

Plenty of discussion on the horrid state of the IPO market, declining valuations, the increasing importance of hedge funds and mutual funds in the private markets and a very thoughtful article on Big Data’s role in differentiating the winners and losers in the self-driving car market.  Enjoy!

Steve Blank on the Tech Bubble: “VCs Won’t Admit They’re in a Ponzi Scheme”:  Steve Blank argues the fundamental purpose of venture capital has changed, inasmuch as VCs used to care more about sales and profit. From their perspective, “there was an unspoken but pretty solid rule: We needed five consecutive quarters of profitability and increasing revenues to go public,” he explains. “The role of venture capital was to teach you how to turn your idea into a profitable company. The role of venture capital now is the greater fool theory.”

The Good, The Bad, The Ugly And Then Some – The 2016 IPO Market:  Barrett Daniels, CEO of Nextstep Advisory provides his thoughts on why you shouldn’t be looking for a rebound in the 2016 IPO market and details why he is optimistic for a 2017 and 2018 rebound.

The Elephant in the Room: Hedge Funds and Mutual Funds: Swildens and Collins have penned an interesting article on some of the reasons for the participation of mutual funds and hedge funds in private-market investments and surveyed a number of the funds on their current and future investment plans.  The authors write that more than sixty managers have participated in or have led mega-rounds and now play a significant role alongside the VCs.

The Path to Exit: Angel investor Jeffery Carter opines on what he sees as the negative long-term impact of the length of time billion dollar companies are staying private.

2016 Will be Rough for Startups.  Here’s Why that’s a Good Thing:  Adeo Ressi believes that we are in for a period of more reasonable and sustainable startup valuations where the playing field will become more level for investors following a period where founders had the upper hand and leverage on valuations.  My sense is that valuations for early-stage companies will be lower than what we have experienced during the past three years but I can’t entirely agree with his view of founder leverage.  It takes two to tango and VCs have always found ways to try and de-risk their downside.  As high valuation companies come to market or are acquired it’s going to become pretty apparent that liquidation preferences were substantial and the real losers will be the early investors and employees holding options.

Who Will Win in Self Driving Cars?: Peter Reinhardt from Segment penned a very interesting article on safety being the key differentiator in the coming self-driving car and the key to safety will be the aggregation of massive amounts of data.  I found it to be a very compelling read.