2016 ConferenCe edition - CVCA · 2016 Conference Edition • Prive at Capital 5 ceo’s message...

3 2016 Conference Edition • Private Capital

2016 ConferenCe edition

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Need orientation to Alberta’s Innovation System?

Rockmount Financial Corporation has participated in the Value-Added and Technology Commercialization TaskForce; the creation of Alberta Enterprise Corporation; the rollout of the Alberta Connects support services for startups; the Premier’sEconomic Strategy Council; and, the evolution of the Alberta Innovates research support cluster. We have worked with the Innovate Calgary incubation process; the Angel Network,including Alberta Deal Generator; The Results-Based Budgeting Challenge Panel; the National Exempt Market Association; the junior publicly traded securities markets including the Capital Pool Company Program on the TSX Venture Exchange; and, the whole alphabet soup myriad of government grants and other incentives.

The key ministry is the Alberta Department of Economic Development and Trade. The system is being re-focused and re-energized in recognition of a new commitment to broadening Alberta’s economic base. Budget 2016 cuts

the small business income tax rate from three to two per cent. It also includes a $250 million package to further support job creators. Over two years, this will provide: $165 million for two new tax credits that encourage investors to support small and medium-sized companies and encourage business capital investment; $25 million in new funding to be invested through the Alberta Enterprise Corporation to spur innovation, growth and employment in areas such as clean technology; $35 million to attract and support new businesses and pursue regional economic development initiatives; $25 million for new apprenticeship and training opportunities.

Rockmount offers broad support to deal fl ow in this context. Beyond Alberta, we are active in the Calgary/Toronto (Bay Street) and Calgary/San Francisco (Silicon Valley) channels. We are committed to Alberta’s participation in the coming exponential growth of technology.

Rockmount Ad.indd 1 2016-05-13 11:13 AM

Cover story10 Shopify:

365 DayS after the ipo In an exclusive interview, Russ Jones, Shopify’s CFO, says last year’s IPO is just the beginning

departments5 Ceo’s message

6 CvCa board of direCtors and management

artiCles8 2016 Q1 Canadian

venture CaPital and Private eQuity aCtivity

14 teCh suPPort How the Digital Age presents huge investment opportunities—for those willing to embrace them

18 buyer beware Never underestimate the importance of cybersecurity during due diligence

20 CvCa toronto 2016 ConferenCe agenda

22 inveSting With heart Why doing good is good business

25 2016 CvCa & MCLagan initiative Participate in the Compensation and Pay Practice Survey

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Contributors

Imran Ahmad, Eugene Chan, John Cho,

Ben Gibbons, Information Venture Partners,

Jake Irwin, Peter Misek, Senia Rapisarda,

Whitney Rockley, Jonathan D. See,

Kirk Simpson, Omar Soliman, Adam Spence,

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All rights reserved. The contents of this publication may not be reproduced by any means, in whole or in part, without the prior written consent of CVCA. Direct requests for reprint permission should be made to the CEO of the Canadian Venture Capital & Private Equity Association.

Statements of fact and opinion are the responsibility of the authors alone and do not imply an opinion on the part of the officers or members of the Canadian Venture Capital & Private Equity Association.

Printed in Canada by RR Donnelley. Please recycle where facilities exist.

31 the view from here Best practices for thriving in Canada’s current and future VC environment

32 globally minded Venture capital as the building block of Canada’s innovation

34 roads to riChes A look at alternative financing

36 gaining the edge Advances in data & analytics elevate the science of the deal

38 a ProteCtive stanCe The benefits of Representations & Warranties Insurance

40 the right stuff Why Canada’s private capital community is well positioned

42 homegrown suCCess What it’s going to take to fuel the next generation of tech growth

finteCh speCial26 the finteCh Conundrum

Leveraging future opportunities to ensure iterative success

28 finteCh by the numbers A picture of the industry

30 the next big thing Why financial tech is becoming Canada’s most talked-about industry

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ceo’s message

The CVCA has a diverse membership that includes Canadian venture capital and private equity firms, as well as international investors, debt and equity providers, institutional funds, government entities, angel and family offices, and industry service providers. Join today and gain access to information and networks that will help your organization grow and prosper.

Apply today: visit www.cvca.ca for more informationcvca.ca

InfoBaseFree, unlimited access to the most comprehensive database on Canadian private capital investments, exits and fundraising activity.

eventsConnect with industry professionals — participate in, or host networking and professional development events with full support from the CVCA.

ProfIleBe featured in Private Capital magazine, on the CVCA news site, or speak at CVCA events.

MeMBer advantage PrograMAccess exclusive coverage and savings across a broad range of business services.

200

30% 27%23% 40% 27% 15% 12% 6%

partner & managing partnerdirector, managing director, senior managing director principal & senior principal

president/ceo

more than

corporatemembers

1000individualm e m b e r s

two thirds of members aresenior level business decision makersfrom canada’s private capital industry.

venture capital

privateequity

serviceprovider

vice president &senior vice president

About the CVCAThe CVCA is the voice of Canada’s venture capital and private equity industry. We are focused on improving the private capital ecosystem by broadening industry awareness, providing market research, and coordinating networking and professional development opportunities. We also advocate on behalf of the industry to ensure sound public policy that encourages a favourable investment environment.

Hello! Welcome to the first edition of our new Private Capital magazine. The concept remains the same, but with an updated look and feel. For the first time, the

CVCA has now taken the entire production of Private Capital “in-house” and we’re leaning on supporters to round out the efforts – like RR Donnelly, who is graciously printing the magazine for us and our Content Committee, who is helping us with direction and sourcing relevant content. It is a lot of work all around but it al-lows us more flexibility on all fronts and will lead to an even better product going forward. Please let us know what you think.

Given this is the Annual Conference issue as well, it’s worth looking at the year we’ve had and what lies ahead. First off, I’m sure you would all agree that the industry is really hum-ming along. With all the dry powder out there, and more and more great Canadian private companies starting, growing and remaining private longer, investment activity has level-stepped up from the previous decade and this will most likely continue. For us at the CVCA, the activity has translated into a big boost in membership. While I don’t have the data going back to the CVCA’s origination in 1974, I think it’s safe to say that our membership is at record levels and is growing rapidly. This is also a result of our renewed efforts in advocacy, communica-tions, networking and research, of course! Either way, it pro-vides us with the resources to do more and more, and increases networking opportunities to our members.

On the advocacy front, we had a good year as well. Among the notable items were stock options. With the new Liberal Government coming in, much of the industry was worried about their platform commitment to change the tax treatment of stock options. This would have had a significant impact on talent and retention in Canada, but importantly as well, presents risks on the treatment of capital gains writ large. The CVCA, along with a number of other industry groups, convinced the Government that this was wrong for the country. The Government deserves credit for listening to the industry and making the right decision in the end. The CVCA also supported the reinstatement of the labour-sponsored venture capital tax credit.

a warm welcomeBY Mike Woollatt, Chief exeCutive offiCer,

Canadian venture Capital and private equitY assoCiation

Join us as we take Private Capital in new directions

Going forward, we have a real opportunity ahead of us. In Budget 2016, the government announced the launch of a new Innovation Agenda to coincide with Budget 2017. They are thinking big here in terms of changes — an “everything on the table” discussion. And they have asked for our input. As a result, we are going to compile a significant submission on what the industry thinks is the best way forward for innovation and growth in Canada. I include growth here because it will be important to remind Government, who is often focused on early stage, that later-stage growth companies have a profound impact on the Canadian economy and the Government’s policies impact growth companies as well. As a result, if you are a member of the CVCA, you will be hearing from us shortly on a series of member round- tables across the country to solicit your input toward our sub-mission. Our goal will be to ensure that the industry’s collective voice is heard and has an impact on the Government’s Innovation and Growth Agenda. I hope you can attend them.

Lastly, provided this is the special 2016 Annual Conference issue of Private Capital, we owe a tremendous thank you to every single one of our conference speakers (many of whom also took the initiative to write content for this magazine), and of course our long list of generous sponsors, who make much of the content on our program possible. And, a big thank you to our event co-chairs, Erik Levy (CPPIB) and Kent Thexton (Scale Up Ventures).

Thanks for reading. And as always, please do not hesitate to contact me anytime with questions, comments or concerns. And, if you’re attending our 2016 Annual Conference in Toronto, we hope you enjoy it. s

7 2016 Conference Edition • Private Capital 6 Private Capital • 2016 Conference Edition

OFFICERS Dave Mullen, Highland West Capital Ltd, Chair & Board MemberWhitney Rockley, McRock Capital, Vice-Chair & Board MemberMark Usher, Wellington Financial LP, Vice-Chair & Board MemberPeter van der Velden, Lumira Capital, Past-Chair & Board MemberPierre Schuurmans, Birch Hill Equity Partners, Treasurer & Board MemberGary Solway, Bennett Jones LLP, Secretary

VICE-PRESIDENTSJocelyn Blanchet, KPMG LLPRob Connoly, Westcap Mgt. Ltd.

BOaRD MEMBERSRob Barbara, Build VenturesTom Birch, Caisse de dépôt et placement du QuébecCheryl Brandon, Waterton Global Resource ManagementJoseph Catalfamo, Partner of Whitecap Venture PartnersChing-yen Chen, InstarAGF Asset Management Paul Day, Export Development CanadaAlain Denis, Fonds de solidarité (FTQ)Chris Erickson, Pangaea VenturesSteve Faraone, Teachers’ Private CapitalAki Georgacacos, Avrio CapitalRyan Giles, TriWest Capital PartnersWally Hunter, EnerTech CapitalEdmund Kim, ONCAPKent Kirkpatrick, Alberta Teachers’ Retirement FundHans Knapp, Yaletown Venture PartnersSteve Leightell, Georgian PartnersAlan Lever, TorQuest PartnersErik Levy, CPPIBJeff Linner, PFM CapitalGeneviève Morin, FondactionRob Normandeau, SeaFort CapitalDavid Nowak, Brookfield Asset ManagementJérôme Nycz, BDCJim Orlando, OMERS VenturesMarc Paiement, NovacapMichelle Scarborough, Kensington Capital PartnersWray Stannard, Roynat Equity PartnersJohn Stokes, Real VenturesKent Thexton, Scale Up VenturesRob Wildeman, Parallel49 Equity

2016 Board of directors Join us in welcoming our new board:

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top vc sectors

1 ict 86 deals • $616m

life sciences 17 deals • $137m

2 clean tech 10 deals • $26m

clean tech 6 deals • $1B

agribusiness 4 deals • $60m

life sciences 5 deals • $454m

33 14

168206

86 18

27

3

17$450M

$104M

$4M

$693M

$939MOntario

BC

Alberta

Manitoba

Quebec Nova Scotia$51M

New Brunswick

Newfoundland& Labrador

$8M

$3M

$3MSaskatchewan

Prince EdwardIsland

$4M23

6

completed vc deals and $ by province

$838Mtotal

118 dealstotal #

top 5 disclosed canadian vc deals

2016 Q1 CANADIAN venture capitalinvestment activity

2016 Q1 CANADIAN private equityinvestment activity

1515451

121

5

3$8.0b

$3.1B

$5.4B$5.8b

Ontario

BCAlberta

Saskatchewan

Quebec

Newfoundland& Labrador

$280M

4

Manitoba Nova Scotia

NewBrunswick

117

$175M

1

Prince EdwardIsland

completed pe deals and $ by province

$3btotal85 dealstotal #

top pe sectors

2oil & gas, power3 deals • $772m

mining & resources12 deals • $320m

4

top 5 disclosed canadian pe deals

company province vc firm(s) $ mil

zymeworks inc. bcbDc capital, lumira capital, eli lilly, brace pharma capital, merlin biomeD private equity aDvisors, merlin nexus, northleaf, teralys capital, fonDs De soliDarité, celgene, perceptive aDvisors, cti life sciences funD

87

farmers eDge mb mitsui & co., kleiner perkins caufielD & byers (kpcb), osmington, avrio ventures 58

builDscale, inc. on battery ventures, bessemer, inovia capital, omers ventures, salesforce ventures, softtech 49

inDochino apparel inc. bc Dayang group 42

real matters inc. on 1001

2

3

4

5

whitecap venture partners, bmo capital partners

company province vc firm(s) $ mil

rimrock oil & gas ab warburg pincus 690

lifemark health anD viewpoint meDical assessments on auDax management company 245

transalta renewables inc ab aimco 200

aralez pharmaceuticals on broaDfin capital, DeerfielD management company, Jw asset management 150

QC 80012

3

4

5

highbriDge principal strategies, macquarie infrastructure anD real assets (mira), hawthorn equity partners

services matrec/ gfl environmental

9 2016 conference edition • private capital 8 Private Capital • 2016 conference edition


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the year since the e-commerce star’s IPo has hardly been a cakewalk. In fact, says Chief Financial Officer Russ Jones,

it’s just the beginning of the company’s grander plans.

By Carolyn Goard, Senior CommuniCationS manaGer,

Canadian Venture Capital and priVate equity aSSoCiation

If you ask Shopify’s Chief Financial Officer, Russ Jones, what the company’s initial public offering one year ago – May 21, 2015 – means to him, he’ll tell you that it was just one exciting chapter of the company’s overall growth story.

“Some companies view the IPO as the end event, but our view here is that we’re going to be around for hundreds of years, so we saw the IPO as just one part of our com-pany’s journey,” Jones says.

When describing the IPO process, Russ uses the analogy of a triathlon, explaining that meeting with the bankers is much like the initial swim event, while the filing of the IPO with Ontario Security Exchange Commission and US SEC was much like the bike portion of a triathlon. The roadshow and meeting with the investors: the final marathon.

Throughout each stage of the IPO – pre-IPO, IPO, and post-IPO – Russ relied on relationship building, effective communication and the ability to influence. All of which, Russ says, are key skills for CFOs – particularly those at the helm of an IPO.

But in reflecting upon the last year as a publicly-traded company, Russ says the most exciting part of the experience has been that Shopify has been able to maintain – and will continue to maintain – this notion of “creating a public version of Shopify”, rather than falling victim to the conventional public company structure, which Russ explains happens to many companies after they IPO. Shopify, on the other hand, is all about subverting the norm, and is keen on maintaining a super close-knit community and spunky office culture.

At the end of the day, the company is all about “getting shit done” – together – as one unified, energetic, creative, hardworking and determined team of staff, Jones explains, while chuckling over the fact that Shopify is likely the only SEC filing that references a profane word. Admittedly, though, he says, “It’s how we think. We’ve got huge ambi-tions and we want everyone to be focused on that.”

shopify365 days

after the ipo


Celebrating one year as a publicly-traded company and looking forward to many more to come

People PowerThere are no outliers at Shopify. Every single member of the team – which has doubled in head count since the IPO last year – plays a key role in driving future growth.

“We’ve always really wanted to involve our employees. We’re very transparent and open and even as a public company, we want to maintain that,” Jones says. “We want people to act like an owner and therefore have an ownership stake.” He adds that he can see firsthand the staff benefit from working within this type of culture. They’re engaged, energetic, and extremely committed to helping the com-pany drive growth.

For the Shopify team, the IPO was all part of a bigger objective. And, that’s where Russ played his role in the process – ensuring that the company’s close process was strong so that once the IPO was achieved and the bankers disappeared, Shopify could continue to efficiently and successfully move up the growth ladder and move on to its next big objective: increasing its user base and growing internally.

One of the biggest highlights in the year since the big IPO – a significant mo-ment in Canada’s VC success story – has been the growth that Jones has witnessed the company undergo in only twelve short months. The fact that they’re growing at

such an impressive and rapid pace has provided the team with a newfound confi-dence, which, in turn, drives an eagerness to continue growing and raising the bar.

“I think that’s an important thing. I think another thing that makes us unique is that we spend as much time thinking about how you build a company as we do thinking about building the business.”

When Jones joined Shopify in 2011, the company had just over 50 employees. Today, Shopify employs more than 1,200 people.

It’s not hard to see that Jones takes great pride in Shopify’s hardworking staff. You can see the genuine zeal he exudes when he talks about his excitement in continuing to see the team get bigger and

stronger, expanding alongside the com-pany. For Russ, who speaks on behalf of his staff, it’s all about working diligently and passionately to exceed expectations.

“At the rate we’re growing and when you’re developing systems and processes, you need to be thinking about this,” he explains, adding how important having a strong internal culture is in the grand scheme of corporate success. “Because, if you don’t have this, by the time you get to these big events, you’re two steps behind.”

Looking AheadIf anything keeps Jones up at night, it’s thinking about the exciting growth that lies ahead for Shopify and ensuring the

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company maintains the utmost calibre of security among its client base. “We’re a tech company where people are trusting us to run their businesses on Shopify and we take that quite seriously. At this large of a scale, you worry about potential oper-ational, privacy and security issues and we always want to ensure we don’t reduce that trust that we have with our merchants.”

Looking ahead, the Shopify team is wholeheartedly driven to continue grow-ing the company. While Shopify presently serves over 275,000 merchants, they’re striving to see one million merchants running their businesses on the Shopify platform. The IPO has allowed this to be a realistic and achievable goal.

More merchants using Shopify brings with it increased profitability. Jones says the company is extremely focused on hit-ting profitability. “We see that as another key step in the journey. This event itself will be another milestone for us,” Jones adds, much like the IPO was one year ago.

The company is targeting reaching this milestone in quarter four of 2017.

Lessons LearnedA big component in the Shopify IPO success story was, and continues to be, preparedness and comprehensive due diligence in all respects. While the success itself presented a big learning experience for Jones and his colleagues, he says much of the lessons learned came from know-ledge gained from the trials and tribu-lations experienced by other companies going through similar processes, such as companies that missed on their initial earnings. Jones says he’s also leaned on other CFOs for information regarding aspects they’d wish they’d done differently.

Ultimately, it’s all about not repeating other peoples’ mistakes.

As such, Jones says the team was par-ticularly thoughtful in how they executed their processes leading up to the event.

They demonstrated good discipline and great forecasting, and had strong systems in place to ensure they’d achieve what they set out to achieve.

Jones attributes all of the above to good, trustful relationships with investors. “Part of being a growth company is con-tinually learning.”

Inspired by the fact that many CFOs were willing to help him during the IPO process, Jones speaks and participates at industry events as a way of giving back.

the National PictureThe Shopify story is undoubtedly a very important narrative for the Canadian private capital ecosystem. Jones admits it can be a disappointment to see that, more often than not, the press tends to shine a negative spotlight on Canadian private capital happenings, often focusing on Canadian losses, which in turn causes the industry to be wildly underrepresented and not given the credit it deserves.

Jones says he hopes in due course that Canadian media will be more supportive of Canada’s success because by doing so, it would help drive more successes.

Having spent a handful of years in California prior to joining Shopify, Jones maintains that there’s no particular “magic” with respect to private capital and growth in the Bay Area. He explains that there’s a degree of confidence amongst Silicon Valley companies that Canada unfortunately doesn’t have, but that Shopify is committed to demonstrating that Canada can indeed build exemplary, high-performing companies.

Ultimately, Shopify is a testament to the fact that Canada has what it takes to make it big. s

Russ Jones is the Chief Financial Officer of

Shopify Inc. Prior to joining Shopify in 2015,

Jones resided in California, but he is originally

from Ottawa, Ontario. Jones was at the helm of

Shopify’s 2015 IPO.

What makes us unique is that we spend as much time thinking about how you build a company as we do thinking about building the business.


tech support

By Whitney Rockley, co-foundeR and Managing PaRtneR, McRock caPital

Disrupt or Be Disrupted. In the ever-accelerating world of technological advancement, this

statement is not just a clever tweet, it’s a sober competitive reality. We live in a world where every company, industry, city and country is being disrupted at a very fast pace. Recent history proves that new winners are emerging and past champions are afforded no certainty.

The Digital Age, which official-ly began in 2010 and is expected to continue until 2030, will be five to 10 times bigger than the Information Age (1990 – 2010)1. This Digital Age is driven

by the Internet of Things (IoT) and is estimated to have an economic benefit over the next decade of $19 trillion, or the equivalent to the US economy today. The Digital Age takes us beyond simply accessing volumes of data. It moves us closer to controlling and predicting complex outcomes. Advancements in software analytics and operational auto-mation will drive a major wedge in the growing digital divide.

The inflection point of the Digital Age arrived in 2015, when we looked back to see how far we had come. Here’s the IoT growth by the numbers since 20122:

2012 Today

Things connecTed To The inTerneT 8.7 billion 18.2 billion

machine-To-machine connecTions (m2m) 2.6 billion 5.9 billion

ioT revenue $450 billion $779 billion

m2m service revenue $66 billion $122 billion

predicTive mainTenance revenue $400 million $1.4 billion

How the digital age presents huge investment opportunities — for those willing to embrace them

16 Private Capital • 2016 Conference Edition

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Over the past five years, we have seen the number of corporate groups engaged in the IoT and, more specifically, the Industrial IoT (IIoT) soar. Corporate consortia involvement has grown 50-fold since 2012. Today more than 350 different corporations belong to IoT consortiums as they prepare to survive and thrive in the new Digital Age.

McRock was founded in 2012 when only a handful of corporations, such as Cisco and GE, seriously understood the potential of the IIoT. We had a vision that the profound digital transformations taking place in the consumer and enterprise markets would similarly provide massive opportunities and disruption to large trillion-dollar industries.

Today, companies such as Électricité de France, Schneider, Pitney Bowes, SKF, Siemens, Rio Tinto and Schlumberger have started the transition into the Digital Age. GE has aggressively positioned itself as the Digital Industrial company. This provides exciting opportunities for ven-ture-backed IIoT tech companies looking for reputable customers, channel partners and, ultimately, acquirers.

Canada is well positioned to be a leader in the IIoT given its formidable resource sector, highly technical work-force, and innovation ecosystem. Some examples: Dundee Precious Metals has created a completely connected

underground mine. BC Hydro has re-duced energy theft by 75% and generated $224 million in self-service savings. The City of Mississauga has sensored the city to significantly improve public safety. Equally as exciting, IIoT tech companies in Canada are leading the charge with global deployments, profitable business models and demonstrable scale.

Take industrial app company, RtTech Software, based in New Brunswick, for ex-ample. RtTech has deployed its industrial apps with 30 top-tier customers in 67 sites across the world. In 2016, RtTech launched a project with ADM Engineering and Clearwater to optimize production and reduce equipment downtime aboard state-of-the-art fishing vessels. These floating factories are using RtTech’s cloud-based software app deep in the Atlantic Ocean to enhance production capacity and equip-ment performance.

mnubo is another example of a Canadian IoT tech company that has experienced impressive growth since its inception only four years ago. The team has worked with a variety of customers in the smart home, manufacturing and agriculture sectors. In April 2016, mnubo announced it was collaborating with CaSA, a Montreal-based energy management company, to deliver actionable insights to thousands of connected smart-home clients.

These are just two of many examples of how Canadian IoT tech companies are working with corporations to enter the Digital Age. The companies, industries, cities and countries taking action today will be the leaders of tomorrow because they understand they must keep moving or die. Which side of the digital divide will you be on? s

Whitney Rockley is the co-founder and

managing partner of McRock Capital, an

entrepreneurial venture capital fund focused

exclusively on the Industrial Internet of

Things. For more information and reports on

the IoT and IIoT, visit www.mcrockcapital.

com and follow @McRockCapital on Twitter.

Sources

1. Cisco Chairman, John Chambers, IoT World

Forum December 2015, Dubai

2. Machina Research, IDC, ABI Research, Cisco

Consulting Services

THE CHALLENGE CONTINUESWednesday, August 24th 2016

The Club at Angus Glen

The CVCA Open is a charity golf competition between teams representing PE and VC, which combines various on-course challenges and overall

score for the coveted CVCA Open title.

REGISTER NOW AT CVCA.CA

For sponsorship opportunities contact [email protected] #CVCAgolf2016


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buyer bewarebuyer bewareif you underestimate the importance of cybersecurity during

due diligence, you will pay the consequences

By Imran ahmad

Partner, CyBerseCurIty PraCtICe, mIller thomson llP

Imagine the following scenario: A Waterloo-based company is developing an innovative technology that integrates

artificial intelligence into the aerospace manufacturing process. A private equity firm, seeing a great opportunity to invest in a technology that is both cutting-edge and focused on a high-growth industry, decides to acquire the company and invests signifi-cant funds to further develop the technology and to bring it to market.

Several million dollars of investment later, the private equity firm learns that a Chinese company is offering an almost identical product — at half the price! Suspecting that its technology has been stolen, the Canadian company conducts a full cyber diagnostic and learns that its de-fences have been compromised for years. Critical intellectual property has been regularly exfiltrated and hackers continue to have access to the network.

The private equity firm must now face the prospect of not only losing the “first mover advantage” it was counting on, but also that the value of its investment will be significantly diminished. Is there anything they could have done differently to protect their investment? The short answer is yes, and it should have happened at the due diligence phase.

Why it MattersWith most organizations digitizing many of their key assets (e.g., intellec-tual property, customer information, details about internal investigations, etc.), the importance of an adequate cybersecurity assessment cannot be overstated. In fact, for most trans-actions, cybersecurity should be a risk category in its own right.

Buyers should not only review historic breaches, but also the target organiz-ation’s vulnerability at the time of the transaction. This is particularly true given that, on average, it can take up to 200 days for organizations to discover that they have been breached. Accordingly, while the target may be representing in good faith that it is not aware of any breach, the organization’s key data may have already been compromised unbe-knownst to the seller.

While cyber risks are hard to quantify, a thorough analysis of the target’s cyber-security will inform deal terms, deal value and post-deal indemnity claims.

There are several types of cyber risks to consider. The table on page 19 summar-izes some of the most common types of cyber risks and their potential impact on post-transaction.

key ConsiderationsWhile cyber risks vary from one organiza-tion to another, an adequate cybersecurity due diligence will help the buyer deter-mine deal terms, deal value and post-deal indemnity claims. Below are a few key areas that buyers should consider:

Preliminary assessment: Buyers should attempt to quickly determine the target’s most important information assets, sys-tems and business processes. At a min-imum, the target should be able to quickly identify which information technology (IT) systems and data sets are most valu-able to the business and explain at a high level the security measures it has in place to protect them.

Customize the diligence: The buyer should determine whether the target’s management has a clear understanding of the types of cyber threats the organ-ization faces, as well as the potential cyber-related liabilities (including an understanding of regulatory require-ments in the case of a breach).

target’s cyber readiness: Diligence questionnaires and interviews should seek to understand the target’s

administrative, technical and physical information-security controls currently in place to safeguard the most critical business data sets. The buyer should look for signs to determine whether cyber readiness is embedded in the target’s corporate culture (e.g., Does the target conduct regular cyber assessments? Does it provide cyber training to employees on a regular basis? Does the cyber-monitor-ing team meet and report its findings to management on a regular basis?).

Enlist cybersecurity experts: Buyers should retain cybersecurity experts to conduct an assessment of the target’s cyber defences. The ensuing expert report will serve as a basis for negotiating deal terms — where the target’s cyber-risk profile is negative, the report can serve to negotiate deal terms, including deal value.

target’s employees: More often than not, employees represent the weakest link when it comes to cyber attacks and major data breaches. The buyer will want to ensure that the target’s employees are adequately trained and able to identify and take proper steps when faced with cyber threats such as social engineering campaigns, spear phishing, etc.

Final thoughtsHistorically, the due diligence process focused on identifying the target’s existing obligations and liabilities and allocating risk accordingly. With organizations digit-izing their key assets and cyber threats growing at an exponential rate, buyers now need to use the due diligence process to determine the target’s existing vulner-abilities and anticipate what impact — if any — they will have in the future on the

organization. That said, we anticipate that going forward prudent buyers will incor-porate cybersecurity as a standalone due diligence item for most transactions. s

Imran Ahmad is a lawyer specializing in

cybersecurity law at Miller Thomson LLP.

Imran works closely with clients to develop

and implement practical and informed strat-

egies related to managing cyber risks, deal-

ing with data breaches and cyber attacks.

risk iMPaCts

Data Breach Discovery

» cost of remediation » loss of reputation » diversion of resources » legal proceedings » regulatory actions.

intellectual ProPerty

» company IP is not as valuable as initially thought. » Consequences of not being first to market » loss of market share » decline in profit margin » emergence of new competitors.

Persistent attacker

» Intruder leverages employees (without their knowledge) to get confidential information resulting in:

» possible insider trading » advantage in negotiations » espionage » exfiltration of data and R&D.

Weak security » diversion of resources to clean up target’s network.

SCHEDULE OF EVENTStoronto 20 6


TUESDay may 24th

TimE EVENT LOCaTiON

3:00 - 7:00pm Conference Registration (hours of operation) Frontenac Foyer

12:30 - 2:30pm ILPA Networking Lunch (invite only) Marine Room

2:45 - 4:30pm LP Meeting (invite only), sponsored by HarbourVest Partners Queens Quay I & II

3:00 - 5:00pm KPMG Industry Awareness Workshop Frontenac Ballroom Session A (3:00 to 4:00): Value and Effects of Data & Analytics in the Transaction Process Session B (4:00 to 5:00): Dealing with the New World of Cyber Risks

5:00 - 7:00pm Welcome Cocktail Reception, sponsored by Torys LLP Metropolitan Ballroom East

7:00pm - 12:00am KPMG Annual Networking Reception & Event (invite only) Pier 4 & 5

wEDNESDay may 25th

TimE EVENT LOCaTiON

7:00am - 7:00pm Conference Registration (hours of operation) Frontenac Foyer

7:30 - 8:30am Buffet Breakfast, sponsored by CIBC Frontenac Ballroom

8:30 - 9:15am Conference Welcome & Opening Keynote Metropolitan Ballroom Tony James, Blackstone Capital Centre and West with Pamela Ritchie, Bloomberg TV Canada

9:15 - 10:30am “Voice of” Series Metropolitan Ballroom With Boris Wertz (Version One Ventures), Thecla Sweeney Centre and West (Birch Hill Equity Partners), Mike Serbinis (League Inc.) & Guthrie Stewart (PSP Investments)

10:30 - 11:00am Coffee and Networking Break, sponsored by Fondaction Metropolitan Ballroom East Featuring: Chargespot, Glyph, GymTrack, Muse, OMsignal, TeaBot, Tesla...

11:00 - 11:45am Fonds de solidarité FTQ presents: Pier 2 & 3 The IoT - Momentum Continues Deloitte presents: Frontenac Ballroom Private Equity Debt Panel Spy the Lie: Queens Quay I & II Deception Detection

wEDNESDay CONTiNUED...

TimE EVENT LOCaTiON

12:00 - 1:00pm Networking Lunch, sponsored by CPA Metropolitan Ballroom With 2016 PE and VC Deal of the Year Awards Presentations Centre and West

1:00 - 1:45pm Afternoon Keynote Metropolitan Ballroom Steve Nash, 8-Time NBA All Star and President of the Steve Nash Centre and West Foundation, with Jeff Mallett, Mallett Sports & Entertainment LLC

2:00 - 2:45pm Alberta Enterprise Corporation presents: Queens Quay I & II Government Policy & Venture Capital Cambridge Associates presents: Pier 2 & 3 The Best in Class GP – An LP’s Perspective The Digital Transformation: Frontenac Ballroom Threats and Opportunities for Various Industries

2:45 - 3:15pm Premium Coffee and Networking Break, sponsored by IKONIC Fund Services Metropolitan Ballroom East Featuring: Chargespot, Glyph, GymTrack, Muse, OMsignal, TeaBot, Tesla...

3:15 - 4:00pm TSX presents: IPO & Exit Strategy - Behind the Scenes with Shopify Metropolitan Ballroom Centre and West

4:00 - 5:00pm Closing Keynote & Remarks Metropolitan Ballroom Scott Galloway, NYU Stern Centre and West

6:00 - 7:00pm Gala Cocktail Reception, sponsored by Aequitas NEO Exchange Metropolitan Ballroom East

7:00 - 9:30pm Gala Dinner, sponsored by BDC Capital Metropolitan Ballroom With 2016 Ted Anderson Community Leadership & Centre and West Entrepeneur of the Year Awards Presentations

9:30pm - 12:00am Wine and Whisky Tasting, sponsored by Choate, Hall & Stewart LLP Pier 4 & 5

THUrSDay may 26th

TimE EVENT LOCaTiON

9:00 - 10:00am Buffet Breakfast Frontenac Ballroom

10:00 - 11:00am CVCA AGM Queens Quay I & II

KEyNOTE SPEAKER

ADMINISTRATIVEMEALS PANELDISCuSSION

NETWORKING RECEPTIONS

23 2016 Conference Edition • Private Capital 22

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investing with

heartwhy doing good is good business

BY AdAm Spence, co-founder, mArS centre for ImpAct InveStIng

The Lucky Iron Fish is a simple idea that’s life-changing. A palm-sized piece of reusable natural

iron, it can be placed in cooking pots as a low-cost way to fight anemia, a health problem impacting more than two billion people worldwide. The inspired move was to shape the product like a cheerful fish, making it much more appealing than simply tossing a hearty chunk of metal in soup. Lucky Iron Fish, the start-up based in Guelph, Ont., that developed this idea, now employs a team of four and has racked up sales of more than 46,000 fish.

Lucky Iron Fish’s smart design is crucial in helping it win over customers, but so too is the way it does business. The firm’s founder, Gavin Armstrong, named on the Forbes 30-under-30 list, is a model of the idea that for-profit businesses can be in the business of doing good.

He’s not alone. From start-ups to major corporates on the TSX, more companies are measuring success by social and environ-mental impact as well as profit margins.

Bottom-Line BenefitsIn 2004, Google went public under the motto Do no evil as a way to differentiate itself from the corporate pack. Today, the pack has upped its game. More than 80 per cent of large Canadian firms now issue an annual corporate social responsibility report,

indicating a desire to be perceived as doing the right thing. And it’s not hard to see why: Last year, Project ROI — a partnership of Verizon, Campbell’s, research firm IO Sustainability and Babson College — found that firms building a reputation on good cor-porate citizenship enjoyed higher sales and could charge a 20 per cent premium for their product. Doing good drives revenues.

Some forward-looking companies are taking it a step further, using business as a platform to solve pressing problems. B Lab is an organization that has created a system for certifying firms that are living up to these values. Today more than 1,700 companies in 50 countries hold its B Corp designation, from start-ups like Lucky Iron Fish to large organizations like Ben & Jerry’s and BDC.

demographic demandSome of these changes are driven by the most populous living generation: millennials. They’ve consistently told researchers that they value companies that are seen as giving back to the communities where they operate.

Over the next two decades, these mil-lennials will be beneficiaries of the largest inter-generational transfer of wealth in history as their parents pass on their assets to them. There are indications that many will seek to deploy this wealth through investments that match their values.

Our transaction services professionals help you identify opportunities and bring deals to a close – no matter the size. We commit to making an investment in our relationship and providing solutions to help you achieve your business goals.

Ask us anything. Collins Barrow Toronto

K now a big deal when you see one? We do, too!

Audit | Tax | Advisory

Miguel Amaral, [email protected]

Ben Gibbons, [email protected]


Richard Tomczykowski203.602.1219

[email protected]

Benjy Sanford203.602.1289

[email protected]

Are you rewarding and performing?Attracting, managing and rewarding best-in-class human capital is critical to your firm’s success. That’s why McLagan (an Aon company), in partnership with the CVCA, is pleased to announce the launch of the inaugural Compensation Benchmark and Pay Practice Survey for CVCA members. This report will provide firms with the robust data and market insight needed to make effective decisions in attracting and retaining key talent.

McLagan provides compensation benchmarking and advisory services to more than 100 private markets firms globally. Based on their extensive experience in this area, McLagan is working with the CVCA to design, coordinate and deliver a meaningful compensation and pay practice report for its membership.

What’s involved? The survey focuses on benchmarking core elements of pay for roles typically found within private equity/venture capital organizations. In addition to the benchmarks, we will help answer questions such as:• How do firms fund their annual bonus pool (e.g. as a % of management fees)?• How are individual bonus awards determined (e.g. formulaic vs. discretionary)? • Who in the firm is eligible for carried interest? Team/House carry pool split?• How are carry awards communicated? Fund-wide vs deal-by-deal/vintage?• What is the vesting schedule of your firm’s carried interest scheme?• What are typical co-investment practices? Are they mandatory/leveraged?• How many levels do firms use for their Investment Professionals? • What are the expectations, timeframes and achievements at each level? • What are typical leaving provisions/notice periods? What happens to unvested awards?• As 2016 gathers momentum, what are firms’ key concerns/focus points?

What’s in it for you?The core report, available free of charge to participating CVCA members, will provide firms with median and average market compensation levels and pay practice information specific to private equity and venture capitalist investment professionals.

The advanced report ($5,000) will provide firms with tailored benchmarks for additional investment and non-investment roles found within member firms.

2016 CVCA &McLAgAnInitiative

To pARTicipATe, pleASe conTAcT:

SuRvey RegiSTRATion cloSeS eARly July.

MclaganAon Hewitt

A recent study conducted on behalf of the Responsible Investment Association found that 58 per cent of millennials would be interested in “impact” investments, which are specifically dedicated to solving social or environmental problems — two times more than boomers. Doing good drives investment dollars.

This shifting landscape presents great opportunities. Social or environmental missions can be major selling points for an organization seeking to generate customer loyalty or attract investment. Helped by innovative marketing, Zooshare, a Toronto cooperative, whipped up excitement around the idea of converting animal waste into elec-tricity. It raised $3 million, primarily from small investors, and has broken ground on its first biogas plant, near the Toronto Zoo.

walking the talkBut there are also challenges. Impact-focused companies have to tread carefully and be authentic. The public has a harsh view of firms that fail to live up to their social and environmental promises.

There is also a perception that in-vestments in companies with a positive purpose have lower financial perform-ance. The good news is that recent evi-dence suggests impact investing delivers returns roughly similar to other asset classes. A recent study by the Global Impact Investing Network found that 92 per cent of investors who had made impact investments had returns that are in line with or exceeded their financial expectations. Doing good can generate resilient returns.

To demonstrate the potential of this kind of investing, the MaRS Discovery District recently partnered with Sir Richard Branson’s Virgin Unite founda-tion to set up the MaRS Catalyst Fund, which aims to generate market returns from early-stage impact ventures. We also operate an online investment platform called SVX to connect accredited invest-ors with quality ventures, funds and pro-jects that generate positive impact along-side the potential for financial return.

If we succeed, it will be a clear indication that doing good really is good for business — and good for your investment portfolio. s

Adam Spence is Director of Social Venture

Connexion (SVX) and co-founder of MaRS

Centre for Impact Investing.

More than 80 per cent of large Canadian firms now issue an annual corporate social responsibility report, indicating a desire to be perceived as doing the right thing.


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The FinTech ComplaCenCy ConundrumLeveraging future opportunities to ensure iterative success

By Peter Misek, Partner, BDC CaPital it Venture FunD

Canada’s financial institutions have enjoyed an enviable track record, especially when you consider their

record in the financial crisis of 2008. Even way back in 2002, we led the world in electronic banking, payments and digital funds transfer, thanks to innovations such as Interac, debit cards and the highest per capita ATM network penetration. And last year, with only 0.5 per cent of the global population, Canada’s bank-ing industry enjoyed 5 per cent of global banking profits, ranking Canada as the country with the highest banking profits per capita in the world.

But complacency and past success

may have led to the current situation in FinTech. We are behind.

In a recent report, McKinsey & Company identified Hong Kong, Singapore, London, New York and Tel Aviv as the top FinTech hubs in the world. In terms of FinTech usage we lag significantly: at five per cent market penetration, versus 15 per cent for the market leaders. Our best and brightest in FinTech have already started to approach hubs, capital and programs in Singapore, Hong Kong, London and NYC. At a recent conference the head of one of these hubs warmly invited me to speak and transfer my knowledge to them. He proudly proclaimed that it will take years for Canada

to catch up, and that a Canadian FinTech start-up has more access to capital, govern-ment support and private sector partner-ships in his country than in Canada.

opportunity is knockingHowever, it is neither too late nor too little. Canada boasts one of the highest smartphone and high-speed Internet pene-trations in the world. Our quantum com-puting efforts have a direct and indelible link in FinTech, as the two disciplines will actually feed off of each other. Advanced FinTech will require world-class machine learning, artificial intelligence and quan-tum computing — all of which we lead.

And it doesn’t stop there: according to stackoverflow.com, we rank eighth in the world in terms of high-quality developers. We graduate some of the best programmers in the world at over a dozen world-class uni-versities and our colleges are also getting into the act. We have significant talent.

What’s Missing?While there have been considerable stud-ies on Canada’s growing productivity gap and our innovation dilemma, what is clear is that we need a systemic solution to the growing importance of FinTech, or we risk becoming a global laggard. Based on empirical evidence from leading centres,

we need a multi-pronged approach that includes a FinTech lobby, a network for collaboration and information sharing, comprehensive public and private sector involvement and, importantly, a grass-roots effort to incorporate entrepreneur-ship and technology into our education systems as early as possible. Our fantas-tic system of CTAs, accelerators, hubs and associations need top-grading and continued ramping. Government at all levels and private industry must become buyers of technology at higher rates and, especially, Canada has to instill a culture of iterative success.

safe ExperimentationMuch has been written about the need to accept failure in technology start-ups. But in FinTech, failure has different and often catastrophic personal and business impli-cations for customers of FinTech products and services. Trust is the most important commodity in financial services. As such, we need to allow these FinTechs to iterate to success. That means not “failing fast,” or other tech start-up euphemisms, but rather a continuous approach to finding success, modifying initial products and services incrementally until market fit is understood and reliability is assured.

We need zones where technology can be tried without fear. The regulatory environment has to become more adaptive, responsive and in general more customer- friendly, allowing initial alpha and beta trials with lower barriers by using regula-tory offerings as a service from companies such as Trulioo, Stripe and AWS as a base-line service, thus lowering the cost of entry.

Fraud Focus We have to modernize our own systems immediately as a country, otherwise we risk becoming a haven for fraud-sters, organized crime and the funding of terrorists. The financial fraud issue in Canada is so much more than being diligent about updating and securing passwords on your online accounts: In many provinces, if someone copies your driver’s license you CANNOT cancel it or get a new number. The current systems underlying the driver’s license database do not allow for alterations or removal. The only instance that would allow it is a name change. And the same is unfortunately true with many of our other government accounts and informa-tion. Meanwhile, the law says that you continue to be responsible for anything that happens on those accounts. This means that when you lose your driver’s license after someone has been using it to impersonate you, you will receive your same number back again and the thieves can continue impersonating. We can do better than this.

To be world class, we need to set aside Canadian prejudices and look at our opportunity through the lens of world-class programmers, working with world-class financial institutions, leveraging improving enterprises and backed by world-class government. Our time is now. s

Peter Misek is Partner, BDC Capital IT

Venture Fund. The views expressed are

those of the author and do not necessarily

reflect those of BDC and/or its affiliates.

While there haVe Been ConsiDeraBle stuDies on CanaDa’s groWing ProDuCtiVity gaP anD our innoVation DileMMa, What is Clear is that We neeD a systeMiC solution to the groWing iMPortanCe oF FinteCh, or We risk BeCoMing a gloBal laggarD.

SHOPIFYA Canadian success story

INVESTMENT & EMPLOYMENTInvestment and new employees by city

DEALS & EXITS

ALL DEALSSorted by category

THE BIG GUYS

Here’s how Canada’s big banks are making sure they don’t get left behind.

RBCIn April, RBC joined forces with the University of Toronto to create ONRamp, a new collaborative workspace for students and entrepreneurs focused on innovative commercial ideas.

ScotiabankScotiabank is getting in on the ground floor with Digital Factory, their own in-house FinTech incubator.

TD BankTD is investing in Communitech, snapping up Waterloo’s tech talent to help them keep innovating. They’re also investing in cryptocurrencies.

BMOBank of Montreal is investing in Ryerson University’s DMZ. This keeps them on top of FinTech startups from around the world, so they always know what’s new.

THE MaRS FINTECH CLUSTERThe MaRS Discovery District helps to grow & nurture tech startups at home and around the world, and MaRS FinTech Cluster empowers the conversation between the FinTechs and financial services multinationals.

FINTECHBY THE NUMBERS

“You don’t normally think of City Hall as a place of innovation, and we have to change that. I’m trying to change that with a team of people including public servants and elected representatives,”

- Mayor John Tory TechToronto.org 2 of the world’s

largest life insurers 3 of the world’s

top 25 banks

3 of the top 50 global pension funds 9 of Canada’s top

10 mutual fund companies

3rd largest equity exchange (TSX) in North America

7th largest equity exchange in the world

123 financial securities firms

“In the next 10 years, banking as we know it is set to change forever.”

- Moneywise

59%

$110.86M +382+76+726+208+622+144

$63.78M$83.26M

$42.22M

11%

12%

8%9%GLOBAL FINTECH

Globally, the financial sector is a hotbed of innovation. As FinTech evolves, the world evolves with it.

Investment in dollars

2015

2014

+57%

72%VC-Backed Companies

Investment deals

2015

2014

+25%

Overall FinTech investment dollars in 2015

Shopify Inc.

In its initialpublic offering

MILLION

raised$131

The IPO price indicates a market value of

$1.27BILLION

Based in Ottawa, Ontario

Formerly VC-backed

1000+ employees at the end of 2015

$14.3BILLIONfrom transactions

in over

250,000STORES

CONSUMERS OF FINTECH IN TORONTO

Financial Services | $272.83M

Alternative Lending | $50.70M

Blockchain | $56.43M

Payments | $38.52M

Robo-advisor & Wealth Management | $40.74M

$131M$7M

Toronto

Montreal

Vancouver

Winnipeg

Ottawa

Surrey

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Fe Mar

$11.4MVANCOUVER

progressa

$131MOTTAWAShopify

$55MMONTREALBlockstream

$23.6MTORONTOAequitas

Innovations

$40.47MWINNIPEG

Mogo

$85.16MMONTREAL

e-SignLive

$15MVANCOUVER

Lendful

$6.09MVANCOUVER

Bench Accounting

$19.5MWATERLOO

eSentire$6.4MTORONTOBorrowell

VENTURE CAPITAL

PRVATE EQUITY / IPO

an infographic by:

All data from PitchBook and CB Insights

2015 2016

30 Private Capital • 2016 Conference Edition 31 2016 Conference Edition • Private Capital

The view from hereBest practices for thriving in Canada’s current and future VC environment

By Boris Wertz, Founding Partner,

Version one Ventures

Provided it is CVCA’s 2016 Annual Conference, it’s a good time to reflect on the state of the Canadian

VC landscape. In a nutshell: We’re building a healthy ecosystem, but also facing cyclical market and tech challenges (and opportun-ities, but I’ll get to that later).

According to data from the CVCA, Canadian VC investment was strong in 2015, with 536 completed deals, capturing $2.3 billion — a 24 per cent increase in deal volume, and 12 per cent increase in finan-cing compared with 2014. Those are the best numbers we’ve seen since before the 2008 financial crisis. Exit numbers give us even more reason to be optimistic: There were 42 total exits for Canadian start-ups, which netted a $4.4 billion transaction value.

Of course, enthusiasm about these numbers can be tempered by the fact that we have just a fraction of the activity seen in the US. Close to US$60 billion was in-vested in US start-ups in 2015. Even if you consider the ten-to-one population ratio, the amount of money pouring into US companies far outpaces the cash going into Canadian start-ups.

Throughout the high-tech industry, there is a lot of concern about the number of unicorns and if we’re currently at the bubble. Markets are markets, meaning that cycles of boom and bust are inevitable.

The Risk of Being Risk AverseHigh-flying success in tech sectors attracts VC attention. More and more money pours in. Yet with more investors comes the risk of lower returns. As a result, investors become more risk averse: rather than seeking out

emerging high-tech markets, they put their money in proven sectors that have already had big exits. As Jerry Neumann cautioned: “Don’t worry about irrational exuberance fueling a bubble, that is not what is happen-ing. Worry about fear of risk.”

Looking back at history, the combina-tion of an influx of investors and being at the tail end of a technology platform has led to inferior VC returns. This is where we are now. The good news is that just as markets are cyclical, so is technology. We’re due for a new technology platform that will re-spark high-tech, high-risk investments — as well as the big returns and exits that go along with it.

Historically, we’ve seen a major new tech cycle every 10 to 15 years that brings along a new era of computing: we saw this with personal computers in the 80s, the Internet in the 90s, and now with the smartphone era. If this 10 to 15-year pat-tern continues to hold true, we should be entering the growth phase of the next big era in just a few years. That means that we should already be in the early stages of the next big era.

The big question for investors is predicting what this next big computing platform will be. It’s possible that it will be one of the large cloud platforms, like Amazon Web Services (AWS), Google or Microsoft Azure. Certainly, the next platform will be driven by a few key computing trends: the rise of Artificial Intelligence, computing everywhere, microservices for faster development cycles, and conversational interfaces and voice-driven UI.

Now What?So now that we have a lay of the land, where does that leave us? Here’s how to thrive in the current VC environment:

Go beyond borders: Just as we expect our Canadian start-ups to play on a global stage, we as investors need to think beyond domestic opportunities. Today, Canadian LP money invested in Canadian start-ups is too high a percentage of our overall VC activity.

Raise your expectations: By looking be-yond their backyard (and even beyond the US to the rest of the world), investors see a greater number of opportunities, and thus gain a better appreciation of what “great” looks like — in terms of companies, talent, management teams and ideas.

Specialize: Canadian VCs need to develop an area of expertise that’s not based on geography (i.e., focusing on SaaS compan-ies or hardware rather than Vancouver or New Brunswick). Thematic and thesis-driv-en investors can bring more value to their portfolio founders, helping them navigate the specific challenges in their industry.

Be fearless: The Canadian VC community is picking up steam, but now we need to think big. We need to look globally and be ready and willing to take the high-tech, high-risk opportunities to catch the next computing wave. s

Boris Wertz is the founding partner of Version

One Ventures, an early-stage venture firm

based in Vancouver and Silicon Valley.

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Move over, social media: Financial technology has become one of the fastest growing sectors in the

world of start-ups. Finance has long been a category in

need of disruption. The average consumer, until very recently, saw finance as mono-lithic: slow-moving, bureaucratic — and the furthest thing from user friendly. That’s why trailblazers in the industry have been welcomed by their peers and customers at large. This shift in thinking has been good to Canada, and Toronto specifically — some of the world’s top-tier FinTech talent call Toronto home.

In fact, two of the world’s largest life insurers, three of the world’s top 25 banks, 123 financial securities firms, three top global pension funds, and nine of Canada’s top 10 mutual fund companies are all based in Toronto, also the home of the third largest equity exchange — the TSX — in North America. “You don’t normally think of City Hall as the place of innovation.... I’m trying to change that with a team of people, including public servants and elected representatives.” To this end, the City’s now forging relationships with and showcasing our talent to other global financial hotbeds — London, China, and Japan.

It’s not only big companies helping build Canada’s FinTech industry — start-ups and small players are equally import-ant. An amazing Canadian case study is Shopify, the Ottawa-based e-commerce giant who redefined how consumers buy, sell and grow commerce online. The formerly VC-backed company raised $131

million since its May 2015 IPO, indicating a total market value of $1.27 billion.

Another sample case study is Verafin, the St. John’s, Newfoundland software company that has become the leading cloud vendor in defending financial institutions from financial crimes. The company now serves more than 1,400 financial institution cus-tomers, employs 200 people and has become a strong market leader with venture capital backing from Information Venture Partners and Spectrum Equity in Boston.

A New Generation of SeedlingsSuccess stories like Shopify and Verafin have given rise to a new generation of seedling start-ups that are now being sought out and nurtured by Canada’s biggest banks. According to McKinsey & Co: “...banks could lose as much as 60 per cent of the profits and 40 per cent of revenue from their retail arms to financial technology or FinTech start-ups within the next decade.” Banks are taking notice and investing in incubators, new talent and new ideas.

Scotiabank got in on the ground floor with their own FinTech incubator, Digital Factory. Bank of Montreal is an investor in Ryerson University’s Digital Media Zone, a cross-disciplinary incubator. TD has invested heavily in Waterloo’s Communitech in order to gain access to a new generation of talent.

Toronto’s largest incubator collective is the MaRS FinTech Cluster. A few start-ups involved in the MaRS FinTech Cluster are Wealthsimple, SmoothPay, Wiser, Mogo, RateHub and Slice. MaRS not only pro-vides office space and resources, they also

connect these budding entrepreneurs with significant players like Wonga and BitGold. These efforts are a collaboration between 12 domestic and international FinTech brands: CIBC, Interac, PayPal, Moneris, TMX, Ugo, Manulife, Information Venture Partners, Tangerine, Ingenico, American Express and Square.

Going GlobalFinTech is not only growing in Canada, however. Global FinTech investment dollars have grown by 57 per cent between 2014 and 2015. In that same period, global FinTech deals have grown by 25 per cent. Venture capital continues to play a huge part in global FinTech growth, as well. VC-backed companies made up 72 per cent of overall FinTech investment dollars last year.

FinTech is also setting VC funding records, a sure sign of the global value of innovation and disruption in this category. Ant Financial, an affiliate FinTech company of Chinese giant Alibaba, just had a record-breaking Series B fundraising round of US$4.5 billion.

As today’s innovators rethink the way banks, institutions and consumers ap-proach all things finance, it’s safe to say 2016 is just the beginning of a blooming financial tech industry, both here at home and around the world. s

Information Venture Partners is an entre-

preneur friendly, early stage venture fund

focused on North American enterprise

and financial technology companies. They

launched Canada’s first FinTech focused

venture capital fund in early 2016.

By InformatIon Venture Partners

The NexT Big ThiNgWhy financial tech is becoming Canada’s most talked-about industry


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Venture capital as the building block of Canada’s innovation: a global investor’s perspective

By Senia RapiSaRda, pRincipal, HaRBouRVeSt

When I first arrived in Canada six years ago, the term venture capital was almost inevitably

met with both a mix of scorn and sym-pathy. I was often presented with horror stories about the dismal returns for institu-tional investors (resulting in a flight from the asset class), the bleeding of the best Canadian companies and minds to the US (therefore very few repeat entre-preneurs able to go beyond the start-up phase), and the lack of engagement of Canadian corporates in emerging technol-ogies as investors or, possibly even more disappointingly, as anchor customers.

Fast-forward to today: things have changed! Thanks to a variety of private and public initiatives — as well as a small group of institutions and resilient individ-uals crusading for Canadian technology companies — there is core support for a functional venture market as neces-sary fuel for innovation. As a result, the Canadian landscape has vastly improved and made significant steps towards a sustainable infrastructure of value-add-ed capital. This is key to the future of

innovation in Canada and its role as a knowledge-based economy.

HarbourVest opened its office in Canada eighteen months ago as the only inter-national manager chosen to implement the Venture Capital Action Plan (VCAP), the private-public initiative supported by the federal government to revive the Canadian venture market. But HarbourVest has been successfully investing in Canada for over two decades and has more than thirty years of experience in private equity and venture globally as an investor in private funds, secondary purchaser and direct investor. As a result, HarbourVest has seen many economic cycles and gained valuable experience, especially in emerging venture capital markets. This pattern recognition has proven to be a crucial skill in knowing what it takes for a venture ecosystem to become successful.

Favourable ForecastLooking at Canadian entrepreneurs, emerging fund managers and valuations of technology and healthcare companies, we continue to see opportunity. Canadian

venture appears to be at an inflection point and many of the critical quantita-tive and qualitative metrics are evident, demonstrating that this region has the potential to outperform.

According to data released by the CVCA in 2015, a total of $2.3 billion was invested in Canadian companies — the highest level of investment recorded since 2002. We see this as an encouraging indicator because, despite performance in the VC sector often being counter-cyclical to the amount of money raised by VCs, Canadian companies have been chronic-ally underfunded for the past ten years. More often than not, capital has been in-efficiently allocated based on geographical or other non-market-driven considerations.

Nevertheless, with an increasingly connected global venture community, the Canadian venture market will not be immune to — and must be mindful of — a potential future correction. This includes being wary of potential issues such as wounded unicorns (or Canadian narwhals), mutual fund mark-downs of their high-est valued companies, scarcity and poor

performance of some tech IPOs, inflated multiples and the necessity of down-rounds across many regions, and fund managers and companies that have been less disci-plined than they should have been. As Fortune magazine put it: “Silicon Valley’s USD $585 billion [liquidity] problem.”

Weathering a stormSo…what would a global market correc-tion mean for the fledgling Canadian venture market at this point?

While a ripple effect will surely be felt, and dramatic headlines will ensue, it may not be as dramatic in Canada. It could ac-tually be a tremendous opportunity for us to ride the upcoming storm successfully if, collectively, “we” (entrepreneurs, investors and government) stay the course and focus on building value in Canadian technol-ogy companies for the long-term. Reason being, recently raised Canadian venture funds still have young portfolios which are significantly less inflated by paper returns and have not created unrealistic expecta-tions among their CEOs and LPs. Those fund managers have to be disciplined with

valuations based on potential in companies and prioritize sustainable business models during what could be difficult times.

Canadian technology companies have traditionally been frugal and are used to the idea of scarcity of capital. Entrepreneurs in Canada have strong expertise in areas such as data analytics, FinTech, agriculture technology and in-dustrial internet of things (IIoT) that cater to traditional industries, where there is a focus on efficiency to stay competitive and where the “me too” factor and presence of wounded unicorns is greatly reduced.

Lastly, venture capital and high-flying tech start-ups have undergone a fundamen-tal urban shift that works to the advantage of Canada’s big cities, which have great universities, diversity and top tech and creative talent, all of which are scarce but indispensable for long-lasting innovation.

The road to engaging the minds and hearts of individual, institutional and, especially, corporate investors, in the ven-ture capital asset class has been and will continue to be a long one. It will inevit-ably require the delivery of compelling

financial returns with Canadian-based suc-cess stories of building large-scale global venture-backed companies. Only then will this make it a viable and self-sustaining venture ecosystem based on innovation.

To deliver results beyond paper returns will require some time. Venture investing has a long cycle, and the next few years are crucial to ensuring that the foundation of the Canadian venture industry has been built solidly this time. Of course, we couldn’t end this piece without a hockey analogy. Although we may be a little behind, we need to be patient as it’s only the first of three periods. However, the hungry, young-but- talented individual players and their teams look strong, which should make for very interesting second and third periods. s

Senia Rapisarda is the head of HarbourVest’s

team in Canada. She is focused on sourc-

ing and evaluating partnership and direct

co-investments in Canada, managing the

HarbourVest Canada Growth Fund (a VCAP

program), and expanding relationships with

clients and investment partners in the local

Canadian market.

“The road to engaging the minds and hearts of individual, institutional and, especially, corporate investors, in the venture capital asset class has been and will continue to be a long one.”

Globally Minded


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Roads to Riches

A look at alternative financing structures and the implications for raising growth capital

By Ben GiBBons, Partner, CorPorate FinanCe, Collins Barrow toronto llP

Royalty financing: Where there is a future predictability, a percentage of the revenue can be financed through a royalty structure. For example, a royalty may be five per cent of the revenue paid to the financier for an upfront capital investment, which therefore moves up and down with the revenue of the company.

This can be a very effective fi-nancing method where a cap and collar is introduced to the royalty for a high-growth company, as the downside is protected for the financier. If the company out-performs, the effective royalty rate reduces accordingly as the imposed cap limits the upside for the financier.

As the royalty is often placed at the revenue level, the most important consideration is the impact on the profit margin of the company, and hence the applicability for low-margin businesses is limited.

Asset-based lending (ABL): When a company has a receiv-ables and/or inventory balance that has value, this can be financed at a lower cost of cap-ital. While traditional lenders have been large financiers in the ABL space, increasingly, pri-vate equity investors are adding an ABL facility in conjunction with a common or preference share equity position. This increases the capital available to the company while minimiz-ing equity dilution, and also provides the private equity firm with the control position as a secured lender without bringing in another third-party financier.

Contract/purchase order financing: Similar to roy-alty financing, where there is a long-term contract or

purchase order that provides a private equity investor with comfort on future cash flow, some or all of the investment could be structured in a way that aligns the capital need to the contract. Particularly relevant for software-as-a-ser-vice (SaaS) companies, where monthly recurring revenue is secured on contracts over multiple years, such financing availability generally increas-es as the monthly recurring revenue increases. Most often structured without an amortization of the facility, it provides more flexibility than traditional debt structures.

Debt: An often overlooked position, debt is becoming increasingly important for certain private equity invest-ors in the traditional secured side of the capital structure. Where investment mandates allow for the flexibility, some private equity firms are look-ing at providing a complete capital solution to a company, without requiring a third-party financier. In addition to ABL structures, some firms are providing senior secured debt facilities, and venture debt for earlier-stage compan-ies, which gives them access to a return based on the security profile of the company with some equity upside based on attaching warrants and/or equity position.

Pros and ConsWhile these structures will generally be at a lower cost of capital (where a rule of thumb of a target return of 8-25 per cent could be used depending on the security offered) than traditional common-share equity investing (where a rule

of thumb of a target return of 30-40 per cent is standard), they do come at the cost of addition-al controls. Where delays in the business model lead to reduced cash flow, step-in provisions give the financiers the ability to protect their investment through rights such as board and management changes, reductions in capital investment and other spending, etc.

To find and implement the right financing option, it is important to have a thor-ough understanding of the terms of the financing and

the resulting implications from a cash flow and capital structure perspective. While less dilution may be the goal, it is imperative to under-stand the potential impact of non-dilutive capital on cash flow, especially in scenarios where the downside or upside case prevails. This will en-sure the right financing and capital structure is in place, through a comprehensive re-view of the options available, to align the private equity financing with the company’s business strategy. s

While private equity and ven-ture capital firms are always focused on identifying ways

to de-risk their investment in a com-pany, alternative financing structures can help a company minimize dilution and still ensure they receive the growth capital they need to execute on their business plan.

Traditional investment structures have tended to focus on equity pos-itions, through common shares, pref-erence shares, convertible notes and

warrants. These structures generally provide significant equity ownership in the company, especially for early-stage companies, which means the founders have to consider carefully their loss of control and upside in their equity position.

However, different business models are continuing to emerge with start-up and growth companies that will increas-ingly allow companies to access differ-ent funding alternatives, predominantly based on a business model that de-risks

the investment opportunity for a third-party financier. Many of these options rely on the visibility of the company’s future cash flows, and seek security in these streams of cash as their trade-off for equity in a company and the pos-ition upside this could bring.

Some of the most common alterna-tive financing structures deployed by private equity firms — which are increasingly being offered by niche alternative financing firms as standard and standalone products — include:

HSS Transaction Advisory Services team provides transaction support to private equity firms, search funds, alternate lenders, entrepreneurs and high net worth investors.

Our transaction advisory services include:

• M&A advisory

• Buy side financial due diligence

• Sell side advisory and due diligence

• Assistance with divestitures and spin offs

• Identification and evaluation M&A opportunities

• Borrower due diligence

• Transaction tax

• Corporate finance

www.hss-ca.com

Contact Dwijo Banerjie, Partner at [email protected] or 416-499-3100 x227

Ben Gibbons is a Partner, Corporate Finance, with Collins Barrow

Toronto LLP. Ben focuses on supporting and managing local and

cross-border transactions, and leading M&A and capital advisory

transactions in the private and public company sectors across a variety

of industries. Contact: tel. 647.725.1749, [email protected].


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gaining the edge

advances in data & analytics elevate the science of the deal

By John Cho (national PraCtiCe leader, Partner, transaCtion serviCes)

and eugene Chan (data & analytiCs lead), KPMg llP

After several years of focus on organic growth and internal cost management strategies, corpora-

tions around the world are again embracing M&A — and more strongly than ever, note many observers and forecasters. J.P. Morgan, for example, suggests that “with the possibil-ity of renewed and diversified activity from private equity players, 2016 may see a rise in transaction volumes supported by a greater number of deals.”

This rising, competitive environment only heightens the challenge for private equity (PE) investors to effectively iden-tify and close on deals, whether acquisi-tions or divestitures. The challenges they face — increasing multiples, more com-petition for key industry assets, etc. — are only growing. As such, M&A players, often needing to determine their course quickly or lose out, are looking for new approach-es and methodologies to help them com-pete in the marketplace and strengthen their decision-making. This change in per-spective means augmenting the traditional attention paid to reducing risk with greater focus on business analysis, revenue and profit sustainability.

Empowered Decision-Making A strong concentration on risk remains critical to pre-deal due diligence. However,

as leading PE players are quickly finding out, adding data and analytics (D&A) to the process lets you take that due diligence to a demonstrably higher level. Rather than relying on summarized data and qualitative information supplied by management, organizations and investors can now leverage advanced D&A tools and metrics to access transaction-level information directly, ana-lyze it and extract insights in near-real time when decisive action is required.

With far greater information available more immediately, investors can shift their investment strategy from a largely defen-sive approach — focused on existing risk indicators — to a future-focused, offensive one, where emphasis is on the assessment of revenue/profit sustainability and the quantifying of potential revenue and cost synergy upsides. This ability to leverage vast quantities of transaction-level data can be a real game changer, putting savvy in-vestors on the high ground of an extremely competitive landscape and ultimately allow them to bid on quality assets with increased conviction.

Deep Data Dive Using analytics platforms that can process data at deal speed, investors have a new level of detail and granularity available to them. For instance, they can now assess

areas of concern, such as pricing power, commodity implications, foreign currency impact and more. They can also identify, evaluate and quantify their key invest-ment theories regarding a target company. Combined, these abilities enable them to make deals with the confidence in knowing not only what they’re getting, but also what they will have in the future. They can even dive deep enough to produce analysis relat-ed to specific customers, products, segments and locations — whatever variables drive the business and industry in question — to evaluate future sustainability for each.

Recent experience with clients around the world clearly indicates that combin-ing traditional due diligence with data analytics and deeper business analysis is a winning formula. For instance, companies that use KPMG’s Strategic Profitability Insights platform (SPI) gain the ability to process enormous amounts of trans-action-level information and evaluate it across 70 value characteristics.

This scenario is just one example of a D&A platform being used by leading organizations and investors to significantly enhance due diligence engagements — and results to date have been notable. For example, applying D&A on the sell side of the deal can increase business value by up to two multiples over original forecasts.

Similarly, on the buy side, investors have regularly reduced or increased their bids based on a better understanding of per-formance sustainability. D&A can also help clarify the value of an existing investment, providing insight into how well it’s operat-ing, whether it’s time to sell and potential areas of unlocked value.

the impact on M&a In the M&A space, PE investors have always led the way in terms of risk analysis and due diligence. Many are now lever-aging D&A capabilities to gain a competi-tive edge. The methodology’s potential to extend value and increase profit by evaluat-ing not only how a business has performed to date, but how well it may perform going forward, provides a clear advantage—one that investors in today’s marketplace are finding increasingly indispensable. s

John Cho is the National Practice Leader for

KPMG’s Transaction Services practice. He is

responsible for the execution and coordin-

ation of the transaction services offering

to both domestic and international clients.

Eugene Chan is the Data & Analytics lead for

the Transaction Services practice. His man-

date is to integrate technology enablers and

data and analytics into KPMG’s transaction

support service offering.

*J.P. Morgan, Dealogic as of January 8, 2016; M&a as a % of GDP is rounded to the nearest whole number

global m&a activity*

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&a

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5 tm

4 tm

3 tm

2 tm

1 tm

0 tm

12%

10%

8%

6%

4%

2%1998 2000 2002 2004 2006 2007 2008 2010 2012 2014 2015

Global M&A deal value (US$tn)

M&A as a % of GDP

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Full service, mid-market focus.

THIS AD PREPARED BY: RYAN EDWARDS FILE NAME: GT-16-079_PRIVATECAPITALAD DOCKET: GT-16-079 CLIENT: GRANT THORNTON TRIM SIZE: 7.125" X 4.75” COLOURS: CMYK

© 2016 Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd. All rights reserved.

Audit • Tax • Advisory

To help meet your needs, our full service approach to private equity is built around:

• Integrity and reputation

• Dedicated and experienced corporate finance, M&A, and productivity improvement professionals

• Dedicated valuation and transaction advisory services professionals

• A full suite of mid-market professional advisors that operate and deliver as a cohesive team

Contact us to see if we can add value at any critical point in your fund lifecycle and to help drive growth for your investors.

Jeff PocockPartner, Corporate FinanceNational M&A and Private Equity LeaderT +1 416 360 2382E [email protected]

Troy MacDonaldPartner, Corporate FinanceNational Corporate Finance LeaderT +1 416 369 6401E [email protected]

www.GrantThornton.ca/PrivateEquity

39 2016 Conference Edition • private Capital 38 Private Capital • 2016 Conference Edition

a protective stance How to fully realize the benefits of Representations & Warranties Insurance

By RoByn WeBeR, Vice-pResident, pRiVate equity pRactice LeadeR, HuB inteRnationaL

In the past few years, Representations & Warranties Insurance (RWI) has become one of the fastest-growing

trends across the Canadian M&A land-scape – and for good reason: It is a valu-able tool to bridge the gaps in a deal that would have otherwise fallen through.

RWI provides protection against the fi-nancial loss suffered by either the buyer or seller (depending on the policy requested) due to a breach of a seller representation or warranty under the acquisition agree-ment. Although the placement of RWI can be done in as little as 10 days from start to finish, the real benefit is maximized when both brokers and insurers are engaged on a potential transaction as early as possible. We have chosen to focus this article on broker engagement, and how getting your broker involved early is the best tool to help mitigate the chance of unforeseen expenses and costs while you are midway through the deal.

From the Buyer’s PerspectiveBuyers can use RWI as a tool to make their bid more attractive in an auction (by accepting lower indemnity provisions or survival periods from the seller), securing higher indemnity for uncertain risks, or by avoiding having to sue selling shareholders

who may be retained on the acquired company moving forward. Many buyers engage their RWI broker as soon as they begin looking at a potential acquisition. A broker can request a Non-Binding Indication Letter (NBIL) from the RWI insurers, which will outline the following: » Limits with respective deductibles

(retention) » Premiums for each limit/deductible

combination » Non-refundable due diligence fee » Coverage restrictions

In order to provide a full NBIL, insur-ers will request to see: » A draft SPA » Financials for the target » A CIM (not always required)

Even if all these documents are not available, a premium range may be ob-tained based on deal size and the target industry. Having even a preliminary indication of coverage and pricing early on in the process may translate to a more attractive bid to the seller, by having more flexibility for items such as indemnities, escrow, survival period, etc., which may otherwise be addressed through RWI.

The NBIL will also often include two sections of coverage restrictions: exclusions and areas of heightened

concern (“concerns”). The insurers will have common exclusions built into their policy wording for issues that RWI is not intended to cover (pension plan under-funding, breaches of covenants or for-ward-looking statements, etc.), but will also list exclusions that they know will not be covered based on the target company’s industry or business operations.

The items listed as concerns on an NBIL are flagged risks that may not necessarily end up being excluded from coverage. Insurers list items they need to analyze further before providing a position on coverage, often by looking at diligence provided by the buyer and/or their advisors. Given the fact that the insurers require a non-refundable fee once engaged in diligence, the intent of the concerns listing is to make the buyer aware that these issues do exist, and to avoid any surprise exclusions having to be added after engaging in diligence and pay-ing the fee. For example, environmental matters are often listed as concerns on the NBIL simply because they are difficult to underwrite by anyone other than an expert in the field, and losses are often significant when they happen. However, if adequate diligence has been conducted and an underlying insurance program exists, the

insurer may be able to provide coverage for the environmental representations.

Other typical concerns include product warranty/recall, cyber/privacy, international exposures, and wage & hour/ employment Issues.

RWI is intended to provide protection against loss related to ‘unforeseen events’ only – there is no coverage for issues that have been flagged and presented as problem-atic by advisors during diligence. Tax and litigation issues are two examples of areas that require separate dedicated policies, however coverage can be costly depending on the risk, and may require a more signifi-cant underwriting process. A broker will help flag these issues early so that the bid is amended if needed, separate indemnities are added under the purchase agreements for these exposures, or the ‘known risk’ specific insurance policy is placed.

From the Seller’s PerspectiveAlthough it is common to see sellers re-questing the use of RWI on a transaction,

they are often requesting a buyer-side policy structure for the deal, which is ultimately up to the buyer to secure. From the seller’s perspective, even though they are not ultimately the insured under the policy, having an idea of the pricing/cover-age that is available for the RWI puts them in a stronger negotiating position with the bidders, as well as potentially speeding the process along.

Depending on the relationship, many brokers will agree to collect indications on behalf of a seller that will eventually flip to a buyer (and the buyer’s broker) with-out charging a fee. For example, the seller could engage the broker to solicit pricing for a $10 million limit with a $2 million retention (deductible), and the difference in premium if the seller contributes 50 per cent towards the retention ($1 million) via an escrow versus an option where the seller is providing no indemnity. Based on the results, the seller may propose nil in-demnity, but agree to contribute towards to the premium cost.

In summary, engaging a broker to look at the possibility of placing RWI (and/or any other necessary transaction-al liability product) as early as possible may help to avoid or mitigate unforeseen expenses down the line in the transaction process. Most brokers are paid through commission on the eventual placement of the insurance (with the commission amount being included in the quoted premium from insurers), and do not charge any sort of upfront or non-refund-able fees should the deal fall apart, which should further encourage both buyers and sellers to seek their advice on poten-tial deals as early as possible. s

Robyn Weber currently serves as the Private

Equity Practice Leader for HUB International

in Canada. In addition to her expertise in the

placement and negotiation of transaction-

al liability insurance products, her team at

HUB is responsible for the executive liability

insurance placements for both private equity

firms and their portfolio companies.


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thank you to all our 2016 sponsors

Your lawyer. Your law �rm. Your business advisor.

KENSINGTONsmart alternatives TM

the right stuffWhy Canada’s private capital community is well positioned in a challenging environment

By Jonathan D. See (Partner), Jake IrwIn (aSSocIate),

& omar SolIman (aSSocIate) mccarthy tétrault llP

Financial market volatility in China and significant declines in equities and commodity prices have

contributed to a challenging investment environment globally, which has had a disproportionate effect on Canada.

Against this backdrop of macroeconomic uncertainty, however, the private equity (PE) sector in Canada has demonstrated resiliency. Deal value and deal volume in 2015 peaked at all-time highs, with approximately $23 billion invested across 424 completed deals.

Why is this? In our view, the conver-gence of four market dynamics have bolstered the view of a prevailing optimism for Canadian PE in 2016. Here’s how:

1. Internationalization of pEThe weakened Canadian dollar in 2015 precipitated an influx of investment from foreign (mainly US) PE and strategic buy-ers. According PitchBook Data, foreign investors comprised nearly half of all PE deals in Canada last year, affirming the advantage served by their ability to pay higher prices for Canadian assets than their domestic counterparts.

the Impact: Canadian financial insti-tutions, which remain very well capitalized, represent the bulk of all deal lenders and continue to facilitate this trend of foreign investment by helping to provide debt financing to primarily US-based PE buyers. Canadian PE and pension funds, meanwhile, continue to pursue direct investments do-mestically and abroad, having participated in many of the global marquee transactions of 2015. These funds have demonstrated

that they will participate in deals that come to market in any viable jurisdiction.

2. private Capital as an alternative to the public MarketsSome issuers are approaching private financing as a diversification strategy (particularly YieldCos and MLPs). In other situations, private capital is a must in order to get a deal done or to obtain a continued source of capital for public companies that are unable to access the capital markets.

the Impact: The concentration of private capital and competition for deals in what has been a seller’s market has led to PE committing capital towards the acquisi-tion of minority investments or engaging in joint ventures with issuers in certain sectors, which may signal that funds are content with longer-term investment horizons. The lack of public market alterna-tives has resulted in relatively balanced negotiations and an environment that has enabled these deals to be completed.

3. Differentiated Investment platformsInvestment strategies in certain special-ized sectors, such as the real asset sector, have been implemented by PE funds in Canada with increasing frequency.

the Impact: Due, at least in part, to the exploitation of “big data” by more advanced PE funds, general partners are now able to leverage newfound expertise and efficiencies in these platforms. For the most part, exits in these sectors remain accessible through M&A and, at least in the case of real estate, via IPOs. PE-backed add-on acquisitions

represented a large percentage of overall PE activity in Q1 2016 in Canada, which reinfor-ces the trend of PE funds supporting current platforms through acquisition. It remains to be seen whether increased government leadership in areas such as infrastructure, energy and water will catalyze investment opportunities in those sectors.

4. robust VC activityConsistent with the record levels of PE deal activity and capital in 2015, the Canadian VC community last year witnessed some $2.3 billion in completed financings, by far the largest tally recorded in the past decade. As was the case in 2015, a significant percentage of VC deals in Q1 2016 focused on the technology sector (approximately 73 per cent), followed by life sciences (14 per cent), cleantech (8 per cent) and agribusiness (3 per cent).

the Impact: Ultimately, these figures speak volumes about the maturity of the Canadian VC scene, spurred in part by the federal and provincial governments’ increased efforts to invest in start-up and innovation programs with a view to shifting the country’s economic base away from its over-dependence on commodities. s

*Unless otherwise stated, all statistics are

sourced from the Canadian Venture Capital

and Private Equity Association

Jonathan D. See is partner at McCarthy

Tétrault LLP and the co-head of the firm’s

private equity group. Jake Irwin and Omar

Soliman are associates at McCarthy Tétrault

LLP and practice M&A and securities.


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By KirK SimpSon

Co-founder and Chief exeCutive offiCer, Wave

homegrown successWhat it’s going to take to fuel next-gen tech growth and cultivate big,

meaningful businesses right here in Canada

Reflecting back on the early days of Wave in 2010, I’m amazed at how much has changed in the tech

landscape—all within a short six years. Firstly, while raising capital is never

easy, it’s increasingly viable for Canadian companies today — once they’ve gained some traction — to raise large and am-bitious rounds from Canadian VCs like OMERS Ventures or BDC, or from the plethora of US investors who have proven that they are more than willing to write large cheques to Canadian start-ups.

Even for early-stage ventures, we’ve seen far more seed-round activity. We’ve even seen successful entrepreneurs, such as Ryan Holmes (Hootsuite), Markus Frind (PlentyofFish), Dan Debow (Rypple/Salesforce), David Ossip (Ceridian), Allan Lau (Wattpad) and my co-founder, James Lochrie, give back to the start-up ecosystem by making angel investments in early-stage companies. In fact, Holmes even started the Maple Syrup Mafia to bring some formality to this growing group. The fact that experienced start-up entrepre-neurs are helping to fund the next genera-tion of Canadian founders is a truly positive sign that the ecosystem is maturing.

sow the seedsFor me, the greatest difference in the past six years is how Canadian tech founders are viewing success. In the early part of this decade, as I was first coming into this

ecosystem, any exit with eight figures was a big one—like BumpTop, PushLife and BufferBox, all of which exited to Google in the $25-30 million range, all around the same time. We celebrated their success—and rightly so. But these are not the exits that will drive our ecosystem to the next level. For that to happen, we need hugely successful companies to form, to train amazing leaders through the experience and show their employees that massive success and wealth can be created (and through that experience, have them want them to do it all over again themselves). In other words, we need the phenomenon of the PayPal Mafia to truly echo on this side of the border.

I believe we are now on the cusp of doing just that. There’s never been a time when we’ve had such a plethora of growing tech businesses that are creating value. With Shopify leading the charge and fol-lowed by Kik, Hootsuite, D2L, Wattpad, Hubba, Influitive, 500px, Nymi and, of course, Wave, we are growing big, mean-ingful businesses at a pace that hasn’t been seen before in Canada.

Embrace the newbiesBut there are still a few gaps. If you’re a visionary entrepreneur with all the right stuff, but no previous connections, there remains a chasm between you and seed capital. Add a hard-to-understand model (free accounting and invoicing as an example—which was the case for Wave),

and the chasm can be un-crossable. A well connected second-or-third-time entrepre-neur has options, but when I meet with ambitious, usually young, entrepreneurs on their first time around, it’s the lack of connections, and a reticence on the part of investors, that stands in their way the most. We still suffer a bit from Canadian conservatism at the early stage—especial-ly with investors who haven’t been tech founders themselves.

Keep it CanadianAnd then as these companies grow, we need more Canadian players to be writing the large growth-round cheques rather than always relying on US investors to step up. Let’s face it, the stakeholders who often reap the biggest rewards when these large companies IPO or have massive out-comes are often the firms that wrote the cheques. Our goal should be to keep more and more of that wealth right here at home so that it helps fuel the next generation of amazing Canadian entrepreneurs. To me that is our next big challenge. s

Kirk Simpson is the Co-founder and CEO

of Wave (waveapps.com), the world’s fast-

est-growing financial software for small

businesses. In five years, Wave has signed up

nearly two million small businesses around the

world, and raised $42 million in funding, while

building disruptive FinTech tools in payments,

accounting, invoicing, payroll and more.

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