Valuations for startups are racing ahead of what the companies’ current results appear to justify, but don’t call it a bubble yet, says a seasoned venture capitalist who has backed some of Canada’s most successful new technology companies.

Growth rates for tech startups are running five times faster than normal, making valuations that would have been crazy five or 10 years ago seem reasonable, Chris Arsenault, a founding partner at Montreal-based Inovia Capital, said in an interview.

“Valuations are high, but we wouldn’t be in a bubble like we used to define a bubble, which were basically out-of-whack valuations for companies that could never meet the expectations,” Arsenault said. “I would call it a bubble if it wasn’t for the growth rates that we’re seeing -- the growth rates are just amazing.”

Arsenault’s remarks underscore the debate in the venture capital business as competition from hedge funds, private equity firms and special purpose acquisition companies pushes up valuations on some deals.


Some VCs see trouble ahead. “I think a lot of people are doing a lot less diligence and being a lot less price sensitive,” Freestyle Capital Partner Jenny Lefcourt said last week at an event in San Francisco. “We’re going to see a lot of businesses kind of go up in flames.”

That influx of new investors has contributed to a surge in valuations in early-stage companies and changed the process, Arsenault said. Some U.S. hedge funds are offering term sheets within two weeks of meeting startups’ management teams and closing the deals two weeks later, a development that increases the risks in the funding ecosystem, he said.

Inovia has backed companies such as payments firm Lightspeed POS Inc., which listed in New York last year and now has an US$11 billion stock market value, and Clear Finance Technology Corp. and Wealthsimple Inc., two still-private companies that have achieved valuations of more than US$1 billion. The firm includes former Twitter Inc. Chairman Patrick Pichette and former BlackBerry Ltd. executive Dennis Kavelman among its partners.

SPACs are one part of the startup financing world that Arsenault does consider a bubble. He estimates that 90 per cent of the SPACs that exist aren’t viable vehicles for entrepreneurs to take their companies public. Many of SPAC investors just want to quickly flip their portion of the company or have only bought into the vehicle to make a quick profit on warrants, he said.

“These are not the investors you want in your company when you’re going public,” he said. “You want those who believe in your vision, understand what you are doing, and are investors today that will help build the company going forward.”

Globally, more than 450 SPACs have raised about US$123 billion in initial offerings this year, according to data compiled by Bloomberg. That compares with US$84.5 billion raised by nearly 300 SPACs in all of last year.

Still, some SPACs do provide a legitimate pathway for companies to go public and will remain a part of the financing world for some time to come, Arsenault said.

“Those who have strong management teams behind the SPACs, that have long-term incentives to actually support the company and their entrepreneurs, that have a real board and have smart capital behind them, they will succeed,” he said. “I do not see SPACs going away.”