Canada’s tech ecosystem is experiencing something of a resurgence in 2017, with few sectors illustrating its recent success better than the business-to-business (B2B) software firms who received funding from former Dragon’s Den investor Bruce Croxon’s Round13 Capital earlier this month.
Croxon tells ITBusiness.ca that while it wasn’t his venture capital (VC) firm’s intent to focus its latest $95 million investment fund, announced on Aug. 15, on companies dealing in B2B software-as-a-service (SaaS), they’ve proven to provide some of the tech industry’s most reliable returns.
“By virtue of the fact that we decided to stay in Canada, and the stage we’re looking at in terms of investment – well past startup, with a good idea where your customers come from, and looking for capital to scale – you can’t limit yourself to one category of investment,” he says.
“And – though I’m not putting it down to coincidence, I’m also not predicting that it’s going to continue – it just so happened that what floated to the top among the hundreds of deals that we’ve seen so far were business to business software as a service companies.”
B2B SaaS firms have several advantages over their rivals, Croxon says: For one, the technology they use has become so affordable that subscribing to their services represents a cost savings for clients; and whatever form their solutions take, they quickly become so embedded in the operating systems of their clients that it doesn’t take long for B2B investors to benefit from the “sticky, low-churn, fast-growing, essential services” the firms provide.
Round13, which Croxon runs alongside veteran technology investor John Eckert, GrowthWorks Capital investor Scott Pelton, and entrepreneur Craig Strong, hasn’t invested exclusively in B2B firms, but the three investments announced since it announced the closing of its $95 million fund for “growth stage” Canadian companies were all Toronto-based B2B software companies: Statflo, which helps retailers use artificial intelligence (AI) to boost sales; document collection and management software developer Hubdoc; and point-of-sale (POS) developer TouchBistro.
“Of those firms, one is in the restaurant industry, another is targeting accountants… their markets are not small, and so when you look at it in aggregate, the downside risk from an investment perspective is relatively low,” he says.
Other companies that Round13 has invested in include Custom Tattoo Design Inc.; Kitchener, On.-based construction software developer Bridgit; and Toronto-based Wi-Fi marketing software developer Aislelabs.
Redefining venture capital
Though Croxon emphasizes that it’s impossible to predict what any one company’s return on investment is going to be, subject as it is to variables such as how quickly their customers grow and the market outlooks for the sectors they serve, he doubts that any of the companies with the characteristics he’s mentioned are likely to hit zero.
“The B2B category’s almost redefining the phrase ‘venture capital,'” he says. “When I was coming through the system, it was about rolling the dice on 10 and really hoping that three do okay, one does really well, and accepting that the rest were writeoffs.”
B2B firms, by contrast, are much more solidly build companies, Croxon says: their main expenses are sales and marketing rather than technology, and so long as they remain reasonably priced and useful to customers, they aren’t going anywhere.
That isn’t to say they’re as wildly successful as they would have been a decade ago, when clients would have had to buy their software lock, stock, and barrel, he notes. Fortunately, the industry has responded by using its lower cost of business to reach more customers.
“If you were doing a startup venture firm, and looking for the one needle in a haystack that was going to give you a return in the thousands, I’m not sure that B2B software companies rise to the top,” Croxon says. “If you look across the landscape of unicorns, the companies that fundamentally change consumer behaviour – Facebook, Uber, AirBNB – are still in the direct to consumer space.”
For a VC firm like Round13, which Croxon acknowledges is relatively conservative from an investment perspective, however, B2B companies are perfect. The Lavalife co-founder and former Dragons’ Den investor says that his team’s primary goal is to assist entrepreneurs who have found a market for their product, but need funding, mentorship, and hands-on involvement from seasoned veterans to accelerate their growth.
Companies that receive funding from Round13 benefit from the expertise of its Founder’s Board, a team of 20 entrepreneurs who have started, grown, and exited world-class companies in Canada, including Axonify founder Carol Leaman, Shopify co-founder Scott Lake, and Clearnet Communications founder Bob Simmonds.
“I’m at the stage in my career where I lie awake about the one or two out of 10 that aren’t working rather than celebrating the eight that are,” Croxon says. “All of the companies in our portfolio are doing very well right now, and that’s the way I like it.”