June 29, 2022

Putting your money where your mouth is: Alberta’s venture capital attraction

We’ve all heard Alberta described as having a “spirit of innovation.”

Yes, we do have a history of innovation in developing natural resource production methods, but how true is this descriptor about Alberta’s tech scene?

One way of measuring Alberta’s ‘spirit of innovation’ is by tracking the province’s venture capital (VC) attraction. In this Quick Read we’ll look at Alberta’s recent VC attraction trends, why VC attraction is a key measure of homegrown innovation, and what the future could hold.

What is venture capital and what does it signal?

VC is private financing provided to start-ups or smaller, privately held businesses with future growth potential. Companies attracting VC are often too small, unestablished, and high-risk to access financing from the sources used by larger, more established businesses: public capital markets and/or bank loans.

VC typically flows to businesses with innovative ideas, new technologies, and novel business plans. In that sense, they are a gamble; the risk of failure is high, but the possibilities that come from success are tremendous. This is why higher value VC investment deals are typically forged with businesses further along their path to maturity.

Mapping a region’s VC attraction growth can help paint a picture of that region’s ability to produce new, potentially valuable ideas in dynamic, high growth segments of the emerging economy—usually involving companies developing or applying new technologies. VC attraction is a good proxy for measuring Alberta’s ‘spirit of innovation’—especially insofar as we’re contributing to the emerging knowledge and tech-centric economy.

Alberta’s recent VC attraction trends

Put simply, Alberta is on a roll.

Alberta has set three consecutive annual records for venture capital attraction from 2019-2021, bringing in $227 million, $455 million, and $561 million in those three years, respectively. To put this in perspective, Alberta’s 2019 total was itself a 40% increase over the province’s previous record set in 2013—and 2019’s record has been beaten each year since.

Not only that, but in the first quarter of 2022, Alberta set a single-quarter record, attracting $466 million in VC—already surpassing the annual record-breaking totals for 2019 and 2020. Neo Financial led the way by raising $191 million to scale the company, the fifth largest deal in the country and the largest outside Ontario and Quebec.

Canada’s VC distribution

For each of the last three years, Ontario has attracted the largest share of Canada’s total VC (39-54% with 39% of Canada’s total population), with Quebec in the second spot for two of the three years (19-26% of VC with 22% of the population) and BC hovering in either second or third position (20-21% with 14% of the population).

Whereas BC and Ontario regularly punch above their weight and Quebec is performing within the range you’d expect given their populations, Alberta lags. Ideally, Alberta would attract a share of Canada’s total VC greater than or equal to its share of Canada’s total population (11.6%). This has not been the case.

However, this takes nothing away from the total VC investment growth Alberta has experienced in each of the last three-and-a-quarter years. Even as Canada’s total VC saw a decline in 2020, Alberta continued to build momentum.

The future of VCheadwinds and hope?

Despite this momentum, there are clouds on the horizon. Publicly traded tech companies have seen valuation declines in recent months. It is anticipated that this will likewise impact venture capitalists and cause high risk VC investment activity to normalize.

However, the recent billion-dollar-plus valuations of Alberta-based companies Benevity, Shareworks, and Neo Financial will hopefully strengthen a foundation for tech entrepreneurs and future VC attraction in Alberta for several reasons:

      1. Proof of regional success: These companies prove that tech start-ups can raise capital and scale in Alberta. This can build confidence for individuals looking to pursue their ideas here rather than having to leave to attract funding.
      2. A growing pool of local talent: Growing, local tech businesses provide a larger pool of talent. This can help infuse the province with tech entrepreneurs and provide them access to the talent they need to build their own ideas.
      3. Increasing sectoral alignment: Research shows that corporations engaging in VC investing tend to fund companies working in similar sectors. In Alberta, the largest corporations are predominantly natural resource-based, but venture capital in Canada has tended to flow towards the Information and Communications Technology (ICT) sector. The emergence of Alberta’s growing tech companies could create greater sectoral alignment between them and the types of ICT start-ups that tend to attract the most VC.

Alberta’s “spirit of innovation”—largely historically defined by our successes in natural resource production—is showing signs that it may extend to a growing tech scene. While Alberta’s share of Canada’s total VC could improve, growth in its total VC value and its recent business success stories are setting up a foundation for future growth.

        Dylan Kelso, Policy Analyst

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