There’s nothing artificial about the power of AI. This groundbreaking technology has driven public equity markets to new heights, with the “magnificent seven” stocks leading the way.
Wise investors, however, might already recognize the echoes of past disruptive innovations.
“What tends to be quite consistent with investing in these emerging technologies is the hype that surrounds them,” says Joseph Abramson, co-chief investment officer at Northland Wealth Management, a multi-family office in Oakville, Ont.
The hype could indeed yield to disappointment, Abramson says. But this will likely take longer than anticipated, and investors should expect a volatile journey as tech companies spend their way to owning the most semiconductors and having the best algorithms to mine vast amounts of data.
“The main reason for investing in Big Tech is that AI requires a tremendous amount of capital and data,” says Abramson, who is based in Montreal. “These guys have the money and the data, and no one else can touch them.”
Yet he believes big tech does not have a true competitive advantage “because they’re all using the same data, essentially,” he says.
“The next opportunity is companies with small models at the enterprise level that use proprietary data.”
That means smaller, upstart companies with data that others—even Big Tech—don’t have. That’s where venture capital can play a role in building wealth for family offices, particularly in Canada, he says, which is an often overlooked corner of VC.
“I don’t want to be investing in a big AI model that will challenge OpenAI,” Abramson says. He would rather invest in a company using AI to optimize the trucking industry or make aquaculture more sustainable. Those companies do exist in Canada, already attracting VC capital, he says.
Canada has tremendous AI talent and great fledgling companies that make our nation an even more fertile ground than Silicon Valley and other tech hubs, says Janet Bannister, managing partner of Staircase Ventures, a Toronto-based venture capital firm.
“We have great talent, particularly with AI, and we are seeing more and more homegrown tech companies,” Bannister says.
The challenge has long been a lack of capital, she notes. It’s not that VC in Canada isn’t well developed, but the number of players is substantially less than other markets, and investors are typically more conservative than those in Silicon Valley.
Funding bar is high for Canadian firms
Seed round funding for companies in the U.S. flows more easily, while in Canada companies must prove themselves more—they need stronger revenue and clearer paths to profitability.
That has only become more so following the pandemic, Bannister says. “The pandemic significantly accelerated the rate of technology adoption because people were at home.”
That led to a VC funding frenzy, and valuations for technology startups soared as investor capital clamoured for a piece of the action. “You had very rapid growth of technology plus low interest rates, and both factors combined led to a lot of dollars invested,” she says.
But high interest rates ultimately dampened the capital flow, and valuations fell to the point where today’s investment environment looks more like 2019.
It’s difficult to give an accurate snapshot of valuations now versus during the pandemic, Bannister says, because valuing early-stage tech companies is like trying to value a house in a real estate deal. It’s very transaction-specific.
Yet data from the Canadian Venture Capital and Private Equity Association show that 2019 saw $6.2 billion invested in 539 deals. In 2023, 660 deals were done worth $6.9 billion in Canada. In 2021, 751 deals accounted for $14.2 billion—by far the most on record.
Bannister expects 2024 to be more active than last year as interest rates drop, which often increases activity in the VC space. A return to the level of activity in 2021 is unlikely, however.
The big picture is that Canada’s VC industry has seen long-term growth, Bannister says; indeed, it has grown 10 times over the past 15 years.
Sibli, startup using AI to aid institutional investors
One company in Staircase’s portfolio is Sibli, a Montreal-based firm using AI to help institutional investors with research.
“Our goal is automating as many aspects of investment research as possible,” says Alik Sokolov, chief executive officer of Sibli.
Staircase’s infusion of capital has been paramount because without it, Sibli likely couldn’t grow. “What we’re doing is pretty ambitious—trying to radically transform the investment research process,” Sokolov says. “Solving that absolutely requires external funding.”
Getting that seed funding is no small feat even for startups with experienced teams, proven technologies and revenue. “Canada does not have a developed venture capital ecosystem like the U.S.,” Sokolov says.
Seed funding is much harder to attract here even for the best of the best, he says. “The seed round in Canada looks at metrics that U.S. VC looks for in companies closer to series A,” he says, adding these firms have solid business models, clearly addressable markets and revenue.
The reality for many homegrown, potentially revolutionary tech companies in Canada is that they often must look to the U.S. for funding, or fail.
For Canadian investors, including family offices, their risk is they might “miss the boat,” he says.
However, they can’t invest “willy-nilly” like in 2021, Sokolov adds.
Canada is home to many promising startups, but family offices should not dive in without expertise, Bannister says. Among the risks is investing in companies funded during the pandemic that don’t have a path to profitability and are weighed down by debt. They are essentially zombie companies, she says.
“But the best founders always raise money and choose where they take it from.”
VC firms with good track records and connections get access to those deals, she adds, noting Staircase has a history and goal of a 30-per-cent internal rate of return.
Another Canadian VC firm with a strong track record in technology is Georgian Partners in Toronto, which actually leverages AI itself, Abramson says. “Every tech investment they do, they use their AI to optimize these startups’ operations.”
Indeed, the opportunity to invest profitably in AI is at hand for intrepid investors in Canada, he further notes. It’s just that family offices must sharpen their investment thesis.
“This entails investing in startups with AI based on data no one else can get,” he says. “Now that’s a true competitive advantage.”
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