On Wednesday, Canada’s largest-ever venture funding deal was made for $515 million — a sizeable sum of money by any measure — going to a world leader in providing financial crime management software to financial institutions.
The lucky recipient of more than half a billion dollars in funding is one of this country’s largest tech companies using artificial intelligence and isn’t based in Toronto. It’s not based in Vancouver, or in the Kitchener-Waterloo tech hub that built up around BlackBerry.
The company is called Verafin, and it’s based here in Newfoundland and Labrador, with most of its 500 or so employees working out of St. John’s — a homegrown success story bolstering a growing tech industry that many in this province are largely unaware of.
“Partially by design,” Verafin co-founder and product specialist Brendan Brothers said, laughing. “We have tried to stay under the radar a little bit.”
That is changing somewhat with this deal, which shone a light not just on Verafin but on the surrounding players that have both helped the company — which works with almost 3,000 banks and credit unions in Canada and the United States to detect activity like fraud and money laundering — grow over the past 16 years and have benefited from its expansion and international success.
“It’s already been generating quite a bit of interest in Genesis over the last 24 to 36 hours,” said Michelle Simms, the CEO of Memorial University’s Genesis Centre, where Verafin spent its first few years and where its founders now work with startups in the tech industry it now anchors.
This is a major, major, major investment of capital.– Paul Preston
Simms is uniquely placed to know about Verafin’s success, and wasn’t surprised the company brought in new funding. The deal’s size, however, was a “big, pleasant surprise,” she said.
Paul Preston, CEO of the Newfoundland and Labrador Association of Technology Industries, was similarly enthusiastic. “It’s huge,” he said. “This is a major, major, major investment of capital.”
That capital is significant for St. John’s, where Verafin is by far the largest of the province’s 80 digital technology firms, with annual revenues of $1.5 billion — more than the traditional fishery, tourism or farming in the province. Those revenues increased eight per cent each year between 2014 and 2017 — more than the national rate of five per cent, according to a report of digital technology firms in Atlantic Canada released by the Atlantic Provinces Economic Council earlier this month.
It’s a small tech industry compared withToronto or Vancouver, but it’s here — and there’s no reason why it shouldn’t be, Brothers said.
“We always joke with our customers, there’s a natural moat around this island,” Brothers said. In Silicon Valley, the next big thing is always right around the corner, he said, but in Newfoundland and Labrador, people tend to stay put if they enjoy their work and the company they’re doing it for.
“We give people an interesting problem to work on, and we create an environment where people want to work,” Brothers said.
“And I don’t think there’s any reason that we can’t do that from here.”
The Verafin story
About a decade and a half ago, Brothers, Jamie King and Raymond Pretty were doing graduate work in robotics software at Memorial University when they met alumnus David Kelly, who had identified a problem with money laundering and fraud in the banking industry.
“He came back to the engineering business schools and basically said, ‘This is something that somebody could probably do something about,'” Brothers said.
At the time their research focused on artificial intelligence and decision-making, Brothers said, but that technology could also be applied to identifying financial crime. So Brothers, King and Pretty — all three of whom are still with Verafin today — pivoted.
To understand what Verafin does, think about credit card fraud: credit card companies phone customers when they notice unusual activity on their accounts, to ensure that nothing fraudulent or unapproved is happening.
If we focus on that underlying crime, and think about that as the motivation, you’re not just building software, you’re actually doing good.– Brendan Brothers
“It’s that kind of idea, but more broadly applied to different kinds of fraud and different kinds of unusual activity,” Brothers said.
The company’s software scours financial transactions for unusual patterns that indicate fraud, money laundering and human trafficking. With its cloud-based system and machine-learning algorithms, which analyze enormous amounts of financial data shared by the banks and credit unions Verafin works with, the company can flag suspicious activity that can then be investigated for criminal ties.
The trio first began this work in a MUN research project, before deciding in 2003 decided to make a go of the company. For Verafin’s first several years, they were hosted by the Genesis Centre’s startup incubator program. That experience was invaluable, Brothers said — they were surrounded by like-minded people who were also trying to figure out how to start a business. It also helped them find their very first customer.
“We went far and wide, travelled the world, everywhere looking for our first customer,” Brothers said, “until somebody on our board of advisors was like, ‘Well, have you ever tried asking Newfoundland and Labrador Credit Union?'”
They had not. It turned out that the province’s credit union had the same issues with money laundering and financial crime as any other financial institution. They took a chance on Verafin and became their first customer, which led the company to focus on credit unions in other parts of the country: throughout Atlantic Canada, the Prairies, British Columbia, Ontario.
You’re not just building software, you’re actually doing good.– Brendan Brothers
A few years later, Verafin launched into the United States, Brothers said. That was a different landscape: more than 10,000 financial institutions there versus about 400 in Canada. For more than a decade the company has focused on the U.S., with apparent success. In the first quarter of 2019, Verafin hit $100 million in annual recurring revenue — growth of 87 per cent since the beginning of 2017. Sales bookings and deal size at the company each grew by more than 100 per cent between 2017 and 2019.
That growth comes from successfully identifying those fraudulent patterns for financial institutions, and the challenging problem solving involved there is part of the motivation, Brothers said. But in more recent years for Verafin, the underlying crime — and its human victims — has shifted into focus and become key to their motivation as a company, Brothers said.
“Whether it’s human trafficking, drug trafficking, terrorist financing — those are the reasons that people launder money, because they’ve committed some kind of crime,” he said.
“If we focus on that underlying crime, and think about that as the motivation, you’re not just building software, you’re actually doing good. I think that’s pretty powerful for a lot of people here.”
The talent pipeline
With the growth sure to come from its new funding deal, it’s clear which challenge Verafin must tackle next: finding the talent it needs to both continue its own expansion and to fuel the growth of the tech sector surrounding it.
For now, that often means looking outside the province, Brothers said, either to lure back expat Newfoundlanders and Labradorians or to draw in graduates from more robust computer science programs at schools in Nova Scotia and New Brunswick.
We see one company that’s thriving and other companies now know that it’s possible to do the same.– Michelle Simms
It also means hiring new Canadians — Brothers estimated that 20 per cent of Verafin’s workforce is made up of international hires. And the company is working to encourage high school students to consider careers in tech, he said, in order to keep that talent pipeline flowing.
Increasing the number of tech-focused college and university graduates is another piece of the hiring puzzle, for Verafin and the other tech companies in the province. Getting the talent needed to sustain and grow the province’s tech sector is that sector’s biggest challenge right now and NATI’s top priority, Preston said.
“Our ability to really benefit from that $500-million investment is going to be directly related to, can we get people to work here, stay here, attract people here?” he said. “So we need to figure out how we’re going to address the talent gap.”
The size of the province’s digital labour force increased by 11 per cent between 2011 and 2016, but the share of Newfoundlanders and Labradorians in the labour force in digital occupations was Atlantic Canada’s lowest at 2.9 per cent. The Brookfield Institute has predicted that about 2,000 tech positions will need to be filled in the province in the next three to five years, Preston said, but right now MUN and the College of the North Atlantic are producing just a few dozen graduates a year for those positions.
“We don’t have two years to figure this out,” Preston said of the trickle coming through the province’s tech talent pipeline. “We’ve got to move fast.”
That work has begun at multiple levels. At CNA, next fall’s planned relaunch of its software engineering program comes in direct response to that need in the local tech industry, says Stephen Warren, dean of CNA’s school of business and information technology.
“There’s no doubt that right now the big need in the province is entry-level software developers,” Warren said.
To help meet that need, in the fall of 2020 the college will offer three-year software development programs with a paid co-op component to 25 students each in both St. John’s and Corner Brook. A cybersecurity program is also in the works, and the school expects growth in tech sector to also fuel continued interest in its business programs focused on human resources, marketing and accounting, he said.
Simms acknowledged that talent recruitment is a challenge for the sector, but it’s one she’s confident that all parties working together can solve.
“We see one company that’s thriving, and other companies now know that it’s possible to do the same,” she said.
Homegrown success story
Verafin has long since outgrown the Genesis Centre and now runs out of its headquarters on Hebron Way, with a Starbucks located on the same lot and parking garages under construction out front.
Inside, lounge areas are mixed in with open-concept workspaces. Growing units from Sucseed, another company that got its start at MUN, add pops of green to the red, grey and white colour scheme, and point to Verafin’s continued work with Genesis.
Simms said she still sees most of the 30 employees who were with Verafin when it left Genesis on her visits to its new headquarters. Verafin employees make the trip to Genesis headquarters as well; members of its management team are on the Genesis board, and the company provides strategic guidance to startups in its incubator.
“They’re quite committed to the tech sector in the province, and to giving back to the tech sector,” she said.
Part of that commitment comes from their conviction that Newfoundland and Labrador should — and can — have 10 companies like Verafin, not just one, Brothers said.
“We’re generally not competing with each other, so there’s a reason for us all to help each other to kind of do this,” he said of the existing tech firms in the province, which include CoLab Software, Mysa and Genoa. Verafin’s financial success so far has helped to fuel other companies in the province — Killick Capital was one of the company’s earliest investors, and the money made there has been reinvested in several other startups.
“When we create success, I think we can continue to create that success,” Brothers said.
“That’s personally one of the things that I think is so exciting about this. We need 10 Verafins here, we don’t need one, and let’s find out how to try and create those.”
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