VC funding falling back to pre-pandemic levels after stellar 2021, studies show

Canadian money

After a flurry of deals that saw Ottawa firms land hundreds of millions of dollars in venture capital in the closing months of 2021, the funding pipeline slowed to a trickle last spring – as a pair of studies released this week indicate.

The nation’s capital failed to make the list of top-10 Canadian cities for VC investment in the first half of 2022, according to a report Thursday from Toronto-based CPE Analytics.

Toronto, Montreal and Vancouver were the top three centres for attracting capital in the first six months of the year, the study said. 

But data from those and other Canadian cities suggests that venture capital firms are no longer pulling out their chequebooks as readily as they were a year ago. 

Funding has dried up amid an overall slowdown in the tech sector triggered by macroeconomic events such as the lingering effects of the pandemic, ongoing supply-chain disruptions, rising inflation and the war in Ukraine.

CPE Analytics said Canadian companies secured $4.72 billion in fresh venture capital in the first half of 2022, a 40 per cent decline from the previous year. The drop was even more pronounced in the second quarter, which saw a total of $1.17 billion invested in Canadian firms – 76 per cent less than in the same period in 2021.

2021 'an outlier'

Those findings were echoed in a report released this week by the Canadian Venture Capital and Private Equity Association.

The CVCA said Canadian firms attracted $1.65 billion worth of venture capital in the second quarter – down from $5.1 billion the previous year and the lowest level since before the pandemic.

The organization said $6.2 billion in investments were announced in the first half, compared with $7.7 billion in the first six months of 2022. The CVCA called 2021 “an outlier in terms of Canadian VC investment,” adding the first half of this year is seeing “a normalizing of Canadian VC activities, more consistent with pre-pandemic levels.”

While Ottawa was shut out of CPE’s list, it did manage to squeak in to the No. 8 spot in the CVCA’s list of top 10 Canadian VC cities, with local firms landing a total of $23 million across eight deals in the first half of 2022.

CVCA chief executive Kim Furlong said investors are taking “a cautious approach, deploying dollars more slowly and rethinking strategy” as a result of factors such as rising interest rates that are driving up the cost of capital after a sustained stretch of historically low rates.

“The fundraising environment has shifted slightly,” she wrote in the report. “While institutional investors are staying the course, family offices, high net worth individuals, who have seen their public portfolio value decrease, are treading lightly. We’re seeing the same trend lines around the world as market volatility, inflation and interest rate pressures are impacting the investment landscape.”

Incomplete picture

Yet while both reports offer a compelling snapshot of the country’s VC scene, they don’t tell the whole story.

CPE Analytics tracks equity and debt financing from a range of sources, including angel investors, VC firms, private equity firms and law firms, while the CVCA relies on data submitted by venture capital and private equity firms to determine its rankings – meaning not all deals are necessarily included in the reports’ tallies.

Ottawa-based software unicorn Assent, for example, announced in early January it raised $445 million in fresh venture capital, among the largest rounds in the city’s history. But that investment was led by Texas-based Vista Equity Partners, which did not take part in the CVCA’s survey.

In addition, CPE does not factor funding it deems to be “growth equity” – that is, investments from private equity firms that are taking significant ownership stakes in mature companies such as Assent that have moved beyond the startup stage – into its calculations.

Meanwhile, a major Ottawa-based law firm once again cracked the list of top Canadian firms catering to VC deals, according to CEP’s latest report. 

LaBarge Weinstein LLP was involved in six financing transactions in the first half of the year for a total deal value of $27 million, the fifth-highest total of any firm in the country.