The Canadian Tech Ecosystem’s Remarkable Transformation: Insights from Inovia’s Chris Arseneault
The Canadian tech landscape has undergone a remarkable transformation over the past decade, evolving from a market dominated by sub-$1 billion exits to one teeming with billion-dollar revenue companies. This seismic shift was the focus of a recent live recording of the Beta Kit podcast at SaaS North 2024, where Chris Arseneault, Partner at the venture capital firm Inovia Capital, shared his insights on the state of SaaS and software in 2024.
Arseneault, who has been in the venture capital business since 2007, provided a fascinating historical perspective, noting that it took Inovia a full two years to raise their first fund back then. “The state of the market in software was very different,” he remarked, “because it was the first evolution to the cloud.”
Fast forward to 2024, and the landscape is virtually unrecognizable. Arseneault revealed that Inovia’s portfolio now boasts over 12 companies generating between $105 million and $900 million in revenue – a staggering statistic, especially when compared to the pre-2015 era, where the top 10 tech companies in Canada were predominantly American subsidiaries.
“Before 2015, we would sell our companies for a few hundred million dollars to our American friends,” Arseneault explained. “Today, we do have billion-dollar value companies, but we’re also seeing billion-dollar revenue tech companies.”
This shift has been driven by a confluence of factors, chief among them the critical role of secondary markets in providing liquidity to founders and aligning cap tables. Arseneault emphasized that prior to 2015, the concept of secondary investments was “badly seen” by LPs, who viewed it as a sign that founders lacked faith in their own companies. “Today, providing secondary to founders basically allowed them to build bigger companies and not sell at the first offer,” he said.
This has had a profound impact on the ecosystem, with angel investors and older investors able to cash out some of their holdings, reinvesting that capital back into the system. The growth of the secondary market has also enabled the emergence of a robust private market for Canadian tech companies. Arseneault noted that there are now more private companies valued at over $1 billion than there are in the public markets, a testament to the confidence investors have in the long-term potential of these businesses. However, this shift has not come without its challenges.
Arseneault highlighted the dichotomy between the venture and growth stages, with the bulk of investment capital flowing into the latter. “In venture right now, we’re back to the right numbers, but it’s a lot of small investments,” he said, noting that the appetite for early-stage deals has become more spread out. This dynamic has had a particularly acute impact on emerging managers, who Arseneault described as a critical component of the Canadian venture ecosystem. “If there’s a high churn over a seven to eight year period, we need the machine to continue to produce emerging managers. Otherwise, you’re not building the pipeline and you’re just selling yourself short to America.”
Arseneault’s concerns around emerging managers are well-founded. Recent data from the RBCx team and the Canadian Venture Capital and Private Equity Association (CVCA) has shown troubling statistics at the early-stage, with a significant drop in investment and capital commitments to Canadian venture funds.
But perhaps the most transformative force shaping the Canadian tech landscape is the rise of artificial intelligence (AI). Arseneault likened the impact of AI to the shift from on-premise software to the cloud, noting that any company not integrating AI into their product development and customer engagement is “doing it wrong.” “The difference, though, is that there’s Gen AI enablement, and then there’s native AI, and there’s only a few native AI companies,” Arseneault explained.
“So if you were an on-premise software provider, you were licensing your product. You had no clue what was going on with your product. You became a cloud SaaS company. Yes, you changed your business model, and then you started seeing a lot of data go through your platforms. And with that data, you could actually better service other customers in this similar segment. With AI, you’re actually doing something with the data.”
This shift is driving companies to re-evaluate their pricing models and revenue generation strategies, with a move away from traditional subscription-based approaches towards more usage-based or pay-as-you-go models.
Follow on resources:
- Inovia Capital’s State of Canadian Software Report 2023
- CanadianVenture Capital Association’s Q3 YTD 2024 Venture Capital Market Overview
