Why investment in Canadian SaaS Startups shot up 200 percent in 2019 - Canada News Media
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Why investment in Canadian SaaS Startups shot up 200 percent in 2019

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It’s a great time to be a software-as-a-service (SaaS) startup. Advances in cloud computing and the need for enterprise-level software have contributed to incredible growth in recent years, with the worldwide SaaS industry expected to be worth over $100 billion by 2020.

Of course, every startup is different, and what may work for one SaaS company might be unsuitable for another. Yet, when it comes to Saas startups based in Canada, the long-term trends driving their growth remain consistent.

Here are the top takeaways to note as Canada (not just Ottawa!) becomes a more prominent hub of SaaS startups.

1. Startup investment is part of a long-term trend

The total investment in disclosed SaaS startup deals for 2019 was $5.13 billion, compared to 2018’s $1.62 billion. While this represents a massive increase in scale, investor interest in Canadian startups is by no means brand new.

Ontario earned its title as ‘Silicon Valley of the North’ as far back as the 1980s, when Newbridge Networks was poised to disrupt the telco industry from its Ottawa headquarters. The dot-com bubble brought Newbridge and hundreds of other companies to bankruptcy, yet the strong investment in infrastructure and tech education within Canada’s borders remained. Now, this potential for success has turned into a reality, particularly in the SaaS sector.

It’s certainly not just Ontario driving this trend for SaaS growth. Deals have been inked across Canada, from the Yukon, to Newfoundland, and Quebec. While Ontario remains the leader in overall totals with $1.78 billion, the fact that millions in investment have spread nation-wide is an appealing sign of sustained long-term growth.

2. Average deal growth is up substantially

Two hundred percent growth overall is substantial, yet there is another number entrepreneurs and business investors would be wont to miss. The average deal size for a SaaS startup was $10.6 million in 2018. In 2019, that number grew to $43 million.

What could account for this 300 percent growth rate? There’s no one single reason, yet taking Canada’s SaaS ecosystem as a whole, clear signs point to similar growth rates for the future.

For example, Shopify’s acquisition of 6River late last year drew attention not only to the companies involved, but to Ottawa itself. Here was a Canadian company with worldwide reach acquiring a cutting-edge AI company based in the United States. Likewise, Vancouver-based Hootsuite and Quebec-based Coveo each received multi-million dollar investments, pushing their valuations up to $750 million and $1.3 billion, respectively.

These kinds of numbers and growth among well-known companies have a knock-on effect among smaller startups. When Hootsuite draws $50 million in investment and hits 16 million customers almost simultaneously, investors take note, and react by putting their dollars in other up-and-coming SaaS startups. Canada’s notability as a hub of SaaS activity is beginning to take root, and investors worldwide are noticing.

3. Canada (and Europe) are catching up to the US

The fact that the investors outnumber SaaS companies – 298 to 183 – is no surprise, and is a strong indicator for future investment. More surprising is the split between Candian and US investors in 2019 of 136 to 139, a near neck-and-neck tie.

For years, Canada’s tech sector has been dominated by US investments. There was (and is) simply more money south of the border. Yet, the near-parity achieved in 2019 tells us a great deal about the future of Canadian SaaS startup investment – in brief, that it will be more Canadian.

The ecosystem of Canadian companies and applications is growing, allowing startups from Vancouver, to Ottawa, to Quebec to rely more on their own networking and word-of-mouth. What’s more, this robustness has drawn the eye of investors across the Atlantic as well. Australian, German, British, and French investors all made notable contributions to growth among Canadian startups.

There’s no reason to believe that the US, still number one when it comes to startup investment, is falling away from Canada. The rest of the world is simply starting to catch up, with Canada herself leading the way on a more global approach to startup funding.

4. Business and productivity software drives the most growth

What do HootSuite, Shopify, and Coveo all have in common? Within the SaaS sphere, each company works in the industry that’s seen the highest investment: business/productivity software.

That’s not to say investment hasn’t been substantial in other industries as well. Financial services, for instance, netted $1.73 billion, a massive sum by any means, but just over half of business/productivity’s $3.4 billion.

Once again, these numbers can be attributed to Canada’s growing reputation as a provider of key business software. Startups with multi-million or billion-dollar valuations drive the appeal of newer companies working in the same field.

It’s important not to overlook the impact of other industries currently drawing millions in investment. Financial software, B2B media and information services, and IT consulting/outsourcing all received over $1 billion in investment, with the automation and application industries close behind with several hundred million.

2020: a look ahead

More growth, more investment, and more exits. Forfty five companies exited in 2019, including Wave, Solium, Lemonstand, and SimpleTax. Many of these were acquired by larger corporations, such as MailChimp’s acquisition of Lemonstand, or Solium becoming a subsidiary of Morgan Stanley.

A billion-dollar buyout isn’t in the cards for every SaaS company out there. No matter the goals, however, companies can look forward to a business environment in Canada that’s skewed toward success. One only needs to look at the data for 2019 to see where we’re going in 2020. For Canadians across the provinces, the future for SaaS looks brighter than ever.

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Why we make bad investment decisions, the 2020 ETF Buyer’s Guide, and advice on dumping your advisor – The Globe and Mail

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Tim Ferriss is a venture capitalist – an early investor in Shopify, Uber and Facebook among numerous others – and the host of the massively popular Tim Ferriss Show podcast.

In a recent blog post, Mr. Ferriss announced his initially surprising decision to avoid reading any books in 2020 – not a single one. He confessed that he had spent too much time trying to stay on top of current events and discussions when what he actually wanted to do was get to the bottom of things.

Mr. Ferriss cited an intriguing quote by South African activist Desmond Tutu to provide a metaphor that describes his intellectual goals for the year, “There comes a point where we need to stop just pulling people out of the river. We need to go upstream and find out why they’re falling in.”

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Applied to investing, this suggests we should spend less time listing the numerous common mistakes investors make and attempt to understand the ways basic human psychology leads us to make them.

Nobel Prize winning psychologist Daniel Kahneman, author of Thinking Fast, And Slow was introduced as ‘the most influential living psychologist’ in a recent podcast hosted by Shane Parrish. Professor Kahneman offered insight that can be readily applied to investing, and the highlights are listed on Mr. Parrish’s Farnam Street website along with the link to the podcast.

The one-hour interview is well worth the time, as the discussion ranges through many pertinent topics including why Mr. Kahneman believes people don’t value happiness very highly, and how the colour of a room can distort decision making.

The bullet points below represent the specific highlights, in Mr. Parrish’s words, that are most relevant to investors. I suggest that readers consider each one – slowly, in Mr. Kahneman’s terminology – and look for ways these psychological tendencies might be negatively affecting their portfolios,

· Very quickly you form an impression, and then you spend most of your time confirming it instead of collecting evidence.

· We have beliefs because mostly we believe in some people, and we trust them. We adopt their beliefs. We don’t reach our beliefs by clear thinking.

· Independence is the key because otherwise when you don’t take those precautions, it’s like having a bunch of witnesses to some crime and allowing those witnesses to talk to each other.

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· What gets in the way of clear thinking is that we have intuitive views of almost everything…. What gets in the way of clear thinking are those ready-made answers, and we can’t help but have them.

— Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Stocks to ponder

Air Canada The recent share price weakness is anticipated to continue as the coronavirus spreads worldwide, the death toll rises, and news that the virus can be spread to others even when an infected person is asymptomatic. The share price closed at a record high of $52.09 on Jan. 13 and since then has dropped over 9 per cent. However, as the share price continues to fall, this may represent a buying opportunity for longer-term investors. This is a stock to watch for now; it is not yet in oversold territory. Jennifer Dowty profiles this profile of the stock.

Alpha Pro Tech This Canadian-headquarter protective apparel stock is skyrocketing on the coronavirus outbreak. Traded in the U.S., it’s been a holding of The Contra Guys for some time. They share their latest thoughts on the stock.

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CAE Inc. After Boeing Co. recommended this month that all pilots of its 737 Max planes get training on flight simulators before the grounded aircraft return to the skies, CAE Inc. shares surged to record highs. The reason? The Montreal-based flight simulation company has found itself in a sweet spot amid a swell of interest in its pilot-training services and technology. Now, though, investors are facing a tough question: How much further can this rally go? Read more from David Berman

The Rundown

How equity markets have developed their own idea of fair value

The argument about whether equity markets are too expensive rages on, while, at the same time, stock prices in Canada and the U.S. have arranged themselves into a comprehensible assessment of fair value that no one’s talking about. Scott Barlow has this analysis that could aid investors to uncover promising opportunities.

Others (for subscribers)

Rob Carrick’s 2020 ETF Buyer’s Guide: Best Canadian equity funds

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Monday’s analyst upgrades and downgrades

Monday’s Insider Report: CEO unloads $11-million worth of stock

Four-comma club: Predicting the next company to join trillion-dollar value elite

Hopes are high for tech stock ‘Cadillacs’; so are their prices

Ask Globe Investor

Question: For the past 20 years, my husband and I have had a financial planner at a private company, Aligned Capital Partners, Inc. He has taken care of all of our investments, including RRSPs. He charges a management fee of 1.13 per cent. When I calculated this over the 20 years we have been with him, I was aghast! I blame us for not learning enough about investing before we made the decision to go with this him.

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The returns on our investments have been good as far as I know but I’m embarrassed to say that I do not know for sure, and currently simply don’t have the time to go through all of our records.

My question is: if we “break up” with this advisor (and we would have no desire to go with any other independent financial investment company) and move all our investments to our bank (CIBC) to work with a financial advisor there, who doesn’t charge a management fee, what might the penalty be? Would the bank possibly pay this fee in order to get our money?

We have about 10 years left before we retire, and I am getting rather nervous that we might be making a big mistake by sticking with this advisor.

I’d really appreciate your advice on this because I would find it very awkward to broach this subject with him, especially as we have a good rapport with him and, silly as it sounds, I wouldn’t want him to feel bad! On the other hand, it IS our money! I would be very grateful to get your opinion on this.

Answer: For starters, a management fee of 1.13 per cent is not out of line, presuming he does not charge you for trades and is buying F-series mutual funds. The key question is the net return you are receiving. This should be on the reports you’re getting. If not, ask him for the net return for 2019, the average annual rate of return for the past five years, and the average annual return since you started doing business with him. He should have those numbers readily available. That will give you a much better insight into how you’re doing.

What about switching to the bank? For starters, a CIBC advisor cannot buy you stocks, ETFs, etc. A bank is not a brokerage and is limited in the number of products it can offer. Their advisor will be pushing mutual funds, especially CIBC’s own brand, which will come with a much higher management expense ratio than the 1.13 per cent you have been paying. The advisor will probably earn a commission on those sales. If you’re not paying one way, you’ll pay another.

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So, I suggest your first step is a meeting with your present advisor. Since you have a good rapport with him, he should be willing to answer all your questions honestly. Then, if you wish, have a meeting with CIBC. Ask exactly what investment products would be available to you and how the advisor is paid. You’ll then have enough information to make an informed decision.

–Gordon Pape

Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.

What’s up in the days ahead

We’ll continue to track market developments connected to the coronavirus outbreak.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Globe Investor Staff

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Market preview: 5 pressing questions to hone your investment strategy this quarter – Fortune

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Market preview: five pressing questions to hone your investment strategy this quarter | Fortune

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The ultimate guide to responsible investing – Corporate Knights Magazine

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Illustrations by Kyle Metcalf

When it comes to investing for most people, the goal is to make money, not save the world.

Nevertheless, sustainable or responsible investing (whichever term you prefer) has hit the big-time, particularly around the theme of climate change.

Michael Baldinger, head of impact investing at UBS wealth management, which manages more than US$4 trillion in assets, claims that sustainable investing is now the fastest-growing asset class at scale in the world.

It’s hard to argue with the numbers. The Global Sustainable Investment Alliance says there is a US$30 trillion pot of sustainable investments across various themes as of 2018, growing at about 12% per year. A lot of that growth is coming from pension funds and other institutional investors signed up to the UN-backed Principles for Responsible Investment, whose members control US$86 trillion.

Financial markets are driven by two powerful emotions: greed and fear.
As the outgoing governor of the Bank of England, Mark Carney, puts it, “Companies that don’t adapt [to the low-carbon economy] – including companies in the financial system – will go bankrupt without question. [But] there will be great fortunes made along this path aligned with what society wants.”

To wit: the top five coal companies in the U.S. have all declared bankruptcy since 2016, and Apple is now bigger than all the oil and gas companies on the S&P 500 combined, in large part because they have earned negative returns over the last decade, even after accounting for dividends.

Carbon-intensive companies are suffering because the alternatives are not just cleaner but cheaper. Renewables are now cheaper than coal in two-thirds of the world’s countries, according to Bloomberg New Energy Finance. BNP Paribas estimates that oil needs to come down to US$10 a barrel to be competitive with electricity-driven transport. This does not mean fossil fuels are going away tomorrow, but it does kill the growth story. For oil investors, the market’s realization of this inevitable decline could make the coal horror show look like Bambi.

This increasing speed of the energy transition is part of the reason why investors representing US$11 trillion in assets have made public their plans to divest from fossil fuels.

Perhaps more telling is that beyond these public declarations, many of the biggest investors in the world are selling off their fossil fuel holdings and loading up on green assets. For example, without any fanfare the $200 billion Ontario Teachers’ Pension Plan has dialed down its fossil-fuel equity holdings to just 1%. On the upside, the $306 billion Caisse de dépôt et placement du Québec (CDPQ) has grown its green investment book to $30 billion, earning commercial returns along the way, according to outgoing chief executive Michael Sabia.

Just in case anyone was in doubt whether sustainable investing is really about making money, the vampire squid of investment banking, Goldman Sachs, showed up this December pledging US$750 billion in financing over the next decade to profit from the climate transition and inclusive growth.

While economics are shifting in favour of sustainable investing, so is public sentiment. Call it the Greta effect if you like, but most people are no longer comfortable with the idea that their retirement investments may be helping to set the world on fire.

Andreas Utermann, chief executive of Allianz Global Investors, which manages US$600 billion, says, “Clients have changed their tune. They have said we need to take this more seriously, and that has sharpened the minds of asset managers.”

Despite all this action among big investors, it appears small investors are getting left behind. If you add up the assets of the 130 funds on offer in Canada that declare sustainability intentions in their official documents, it is less than 1% ($12 billion) of total fund investments ($1.6 trillion). That’s an even smaller fraction than they were at in 2003, when Corporate Knights published its first guide for responsible investors. What gives?

It boils down to a belief many people still hold that sustainable investing is about sacrificing returns. The theory is that investing to make a return is hard enough, and if you add social and environmental considerations into the mix you are at a disadvantage. The trouble with this theory is that investing is like hitting a curveball, which is a pretty good metaphor for the world we live in. Putting on a sustainability lens gives the batter a better sense of the ball’s trajectory and increases the chance of making solid contact.

To make things easier, Corporate Knights scores all the equity mutual funds and ETFs available in Canada according to how well their holdings line up with established sustainability criteria and, where available, their three-year financial performance record. While we’re not promising any home runs, the 36 funds listed below were deemed the worthiest for taking a swing at.

Eco-Fund Methodology

Funds are scored according to (1) three-year net return percentile rank (50%), (2) weighted sustainability rating percentile rank based on analysis of their holdings* (40%), and (3) fund manager intention to manage the fund according to responsible guidelines (10%). If the fund is less than three years old, its final score is based on #2 and #3, which are grossed up proportionately to 100%. Funds that score in the highest or second-highest quintile among category peers receive a five-tree or four-tree rating respectively.

* Holdings that are red-flagged automatically receive a 0% CK Sustainability Rating Score. Red-flag holdings include companies that are classified in the Corporate Knights database for one or more of the following criteria: companies blocking climate policy, farm animal welfare laggards, companies causing severe environmental damage, companies causing deforestation, forced and/or child labour, severe human rights violations, illegal activity, controversial and conventional weapons, civilian firearms, tobacco, thermal coal, for-profit prisons, access to nutrition laggards, access to medicine laggards, digital rights laggards, investor climate laggards and gross corruption violations.

Sources: Corporate Knights Research, Fundata, Responsible Investment Association, Refinitiv, InfluenceMap, Business Benchmark on Farm Animal Welfare (BBFAW), Norges Bank Investment Management (NBIM), Chain Reaction, Know the Chain, NZ Super Fund, Stockholm International Peace Research Institute, American Friends Service Committee, Access to Nutrition Initiative, Access to Medicine Initiative and Ranking Digital Rights.

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