How a new generation of engineers-turned-investors is shaping Canadian tech

In the last several years, Canada has emerged as one of the top tech ecosystems in the world. In their annual ranking of startup ecosystems in 1,000 cities and 100 countries each year, StartupBlink recently placed Canada among the top four ecosystems for the third year in a row. 

The thriving venture capital ecosystem in Canada is partly responsible for driving these gains. According to the Canadian Venture Capital Association, $6.2 billion was invested in Canadian startups in 2019 — triple the amount in 2018, and close to the $6.5 billion record in 2000. Past initiatives like the $350 million Venture Capital Catalyst Initiative and government support for ecosystem development are among the reasons for this uptick, but another major factor is founders beginning to exit companies and move into investing.

This new generation of investors will have a significant impact on which companies get funded in Canada. As Colin Webster and Scott Pelton, co-founders of RiSC Capital, wrote in a BetaKit opinion piece about filling Canada’s gap on early-stage deep tech investing, “engineers are becoming investors...the new generation of investors was raised on the Web and may even have built and sold a technology company."

What does this mean, in the long-term? We spoke with six engineers-turned-investors about how they approach investing, what kinds of companies they look for, and the benefits of having former founders give back to the ecosystem. 

The Heart of an Innovator

Almost 10 years after prolific tech investor Marc Andreessen first proclaimed that “software is eating in the world,” marking the explosion of mobile and SaaS technologies, we’re starting to see quantum, artificial intelligence and blockchain — collectively known as deep tech — emerge as attractive investments with long-term impact. 

“These are all important next-generation technologies that require some degree of technical understanding in order to understand how they fit into this next generation of the internet,” says Jim Orlando, managing partner at Wittington Ventures. “The opportunities around building onto the mobile phone are starting to get more limited.”

Udit Bhatnager, partner at McRock Capital, adds that the new generation of companies will focus on logistical challenges, like connecting fleets of trucks to move goods more efficiently. 

“These are industries which have been kind of slow adopters of technology in the first place. A lot of times you have to have the heart of an innovator or inventor and look at the challenge in a totally different way,” says Bhatnager. 

Having a technical background can also have an important advantage for investors working with startups at the early stages of scientific discoveries — both for understanding the technology behind a product, and helping scientists potentially come up with a plan to commercialize their inventions, say Pelton and Webster. 

Non-tech VCs may leave the business case up to the inventor who is still at the early stages of developing their technology or ask to revisit the opportunity at the later stage. “Whereas we say, look, you're a scientist, you're good at this. Let us see if we can help you with the business plan,” says Pelton. 

The same StartupBlink report that places Canada’s ecosystem fourth in the world also points to its lack of large tech companies with major global reach, unlike the U.S., which has seen more entrepreneurs exit companies over the years, who then invest their money into the next generation of founders. 

“A lot of our deep tech stuff coming out of the universities has disappeared to the U.S. and other places,” says Webster. 

Orlando adds that those in product roles — which include past engineers — haven’t yet moved over to venture capital roles in the same way as the U.S. “Over time, as our industry matures, I think what we'll see is you will have people coming out of those successful tech companies becoming a VC,” he says. 

Orlando points out several notable rounds with Canadian deep tech companies in recent years, including General Fusion, which raised $49.3 million in 2018 for its power generation alternative, and Xanadu, a quantum technology company that raised a $32 million Series A in early 2019. “Each had early investors that had more of a ‘technical’ background than ‘business-only’ background.”

A Focus on Solving Problems

Finding the right sources of capital is especially challenging for early-stage founders — a challenge that’s more pronounced in deep tech investing, but could be alleviated with investors that understand the product’s potential.  

“You really don't have a lot of data and numbers to work off of when you're looking at these companies,” says Neha Khera, partner at 500 Startups, on investing in early-stage startups. 

Khera feels that, through her engineering background, she does evaluate opportunities differently than her Silicon Valley counterparts; while there has been more of a focus on business-to-consumer applications in the Valley, Canada skews towards “solving difficult problems.”

Nabeela Merchant, an associate at Relay Ventures, also sees how her engineering background has impacted how she evaluates investments. “I studied engineering physics, which places huge importance on translating physics into applicable use cases,” she says. “So the steps before commercialization and semiconductor physics was a huge focus, which is the heart of the computer revolution and where Silicon Valley got its name from.”

Venture capital isn’t a field with a linear path. Many engineers don’t realize that investing is even a career choice. But some universities, like McMaster University, provide double majors for engineering and business, allowing the next generation of potential investors to learn the skills and opportunities within both fields. 

And Khera points out that bringing more diversity in these classrooms could also encourage more technical investors into the field. “Women sometimes get scared away from these crazy technical roles. Like, am I going to be like a computer developer for the rest of my life?” she says. Even as an engineer herself, she wanted to pursue a business role within her industry, but didn’t know what path to take. “I don't think I even knew what venture capital was when I was an undergrad.”

Many highlight the benefits of having multiple perspectives — while engineers provide a critical and analytical lens that can be important to understanding an opportunity, there are ways that non-technical investors can navigate emerging industries, and most firms seek investors with experience operating a company or building a successful product, regardless of background. Martin points out that even within engineering, there are differences between how a software engineer or mechanical engineer would approach problems, for example. 

“I think that's the beauty of it, like having people from multiple backgrounds look at the same thing and then being able to de-brief afterwards,” says Martin. 

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