Thalmic Labs’ $120 million funding round shows the limits of Canada’s VCs

Thalmic Labs raised the second biggest funding round in domestic startup history. So where were all the Canadian venture capital funds?

Myo arm band

The Myo arm band, Thalmic Labs’ first product. (Thalmic Labs)

Thalmic Labs announced recently that it raised a whopping $158 million in funding, a deal that’s being touted as one of the biggest venture capital investment in Canadian history—second only to Hootsuite’s $171 million in 2013. But Canadian VC firms were largely absent from the round, which was led by Intel Capital. Although the country’s venture capital ecosystem is slowly improving (Canadian firms invested $2.3 billion in 2015, compared with $1.9 billion in 2013), VCs are still not equipped to participate in blockbuster deals.

“The short answer to why there weren’t more [Canadian investors] is: There are no VCs that can write a cheque this size,” says Stephen Lake, Thalmic co-founder and CEO. “We don’t really have anyone of that scale in Canada.” After Intel, the Amazon Alexa Fund and Fidelity Investments Canada (a mutual fund company, not a VC) were the biggest investors. iNovia Capital in Montreal was the only Canadian VC to contribute funding, along with a handful of other small Canadian investors whose contributions accounted for a tiny portion of the overall fund.

It’s little wonder deep-pocketed investors were willing to make big bets on Thalmic Labs, a wearable tech company and one of Canada’s startup darlings. The four-year-old firm got its start at Y Combinator, the prestigious Silicon Valley accelerator, where its Myo arm band—which lets users control any mobile device by measuring electrical signals triggered by the muscle movements associated with certain hand gestures—won praise and attention. Following the program, the company secured $14.5 million in Series A funding to commercialize the Myo. Today, the device is used to assist surgery, control prosthetic limbs and play video games, among other applications.

When it came time to raise another round, Lake says Thalmic, based in Kitchener-Waterloo, Ont., did approach Canadian venture capital investors. “In the end, the one Canadian VC who was large enough to potentially participate substantially had previously decided the company was not a fit for them and had passed on investing.” (Lake declined to name the firm.)

In fact, the largest VC companies in Canada control between $500 million and $600 million in assets, while the top American VCs have upwards of US$4 billion to invest. “The largest venture investors we have are writing maybe $10- to $20-million cheques at the high end,” says Lake. “For a $120-million round, you can imagine the large investors were significantly bigger than that.” While Lake suggests that OMERS Ventures (which contributed $20 million to Hootsuite in 2013) could have participated in Thalmic’s latest round, he adds that “even for them, this would probably be too large, given their fund size.”

For Georgian Partners, another prominent Canadian VC firm (it has backed the likes of Shopify and FreshBooks), the nature of the Thalmic deal simply wasn’t in their wheelhouse. “We invest in enterprise software companies…while Thalmic Labs is a maker of a sophisticated hardware device,” explains Jane Podbelskaya, senior associate at Georgian Partners.

Canadian startups are enjoying more and bigger venture capital deals (in the first quarter of 2016, venture capital investments reached $838 million, nearly double what they were for the same period the year before), but the VC community, lacking size and versatility, is not keeping pace with their funding needs. Anthony Lacavera, the founder of Wind Mobile turned VC investor, told Canadian Business earlier this year that the situation means entrepreneurs sell out prematurely or get wooed across the border by U.S. investors. “We’re actually gift-wrapping investment opportunities for these people,” he said.

“I think it’s a shame that Canadian VCs are left out of deals like this,” says John Albright, co-founder and managing partner at Relay Ventures. “Thalmic is an incredible company, and it’s a romantic idea to be part of it.” Still, he’s not convinced the source of funds is ultimately that important. Sean Wise, assistant professor of entrepreneurship and strategy at Ryerson University, agrees. “So long as the company stays Canadian, it doesn’t matter where the funding comes from,” he says.

For Lake, selecting an investor with appropriate expertise is more important than nationality. “The number one priority is finding the right partner that’s going to help us be successful,” he says. Intel, a long-standing Thalmic investor, for example, carries brand recognition useful for the company’s global expansion plans. Meanwhile, the Alexa Fund, which supports voice technology innovation, offers a subtle hint at Thalmic’s next product. “There’s no specific partnerships we’re announcing right now with Amazon,” says Lake, “but we’re certainly excited to work with them and figure out how we can bring Alexa into wearables.”

“Ultimately,” Lake continues, “it’s a net benefit when you see venture deals happen with major Canadian companies and major U.S. investors. It’s blowing capital into the community here while also establishing ties and partnerships to the U.S. and to Silicon Valley, in particular.”