The Canadian Venture Capital and Private Equity Association of Canada said Thursday that companies raised $896 million across 144 deals in the third quarter, a 50 per cent drop from the previous quarter and the lowest total since the first quarter of 2020.
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Venture capital firms pumped less money into Canadian startups in the third quarter than at any point since the start of the pandemic as investors took a wait-and-see approach amid falling tech valuations and growing economic headwinds, a new report says.
The Canadian Venture Capital and Private Equity Association of Canada (CVCA) said Thursday that companies raised $896 million across 144 deals in the third quarter, a 50 per cent drop from the previous quarter and the lowest total since the first quarter of 2020.
It’s the continuation of a steady decline in VC investments throughout 2022. While the $7.2 billion raised by Canadian companies so far this year is more than in any full year between 2018 and 2020, it pales in comparison to 2021’s record three-quarter investment tally of $11.8 billion.
Meanwhile, Ottawa continued to move up the leaderboard of Canadian cities that have secured VC funding in 2022.
The capital jumped to No. 6 in the CVCA’s top-10 ranking of centres for venture capital investment so far in 2022, with local companies raising a total of $74 million across 15 deals. That’s up from eighth place at the midway point of the year.
The CVCA said total investments across Canada were down 78 per cent year-over-year from July to September, part of a year-long decline as soaring inflation, rising interest rates and other economic challenges batter the tech sector.
The average deal size also fell 50 per cent from the second quarter, reflecting a trend seen south of the border, CVCA chief executive Kim Furlong said.
“Canada’s VC activity is mirroring the U.S. in both deal count and in a similar drop in investment size as investors continue to monitor market conditions and founders hold off on fundraising,” Furlong said in the report.
VCs are scaling back investments across the board, the report added, with average deal sizes declining 51 per cent quarter-over-quarter for early stage startups and 59 per cent for later-stage firms.
The CVCA said founders may be “opting to raise smaller amounts in an effort to preserve equity until the market conditions improve.”
At the same time, seed-stage funding is on pace to match 2021 levels, with $152 million invested across 62 deals in the third quarter.
The CVCA said the slowdown that’s hammered public markets this year “disproportionately impacts later and growth-stage companies, while macroeconomic conditions including inflation concerns and a tighter monetary environment continue to dampen investment into companies in these stages.”
The report said that as valuations decline, founders are turning to non-dilutive sources of capital such as venture debt, which has already surpassed 2021’s record levels and is on pace to hit a new high, with $214 million invested across 29 deals in the third quarter.
Despite all the indicators signalling a slowdown in investment activity, a leading Ottawa venture capitalist recently told Techopia he believes the future remains bright for Canadian companies looking for funding, particularly from U.S.-based firms.
“A big chunk of that is investors getting tired of the Silicon Valley pricing and so they’re coming to Canada,” said Code Cubitt, managing director of Ottawa-based venture capital and private equity company Mistral Venture Partners.
The tech industry veteran, who began his career as an engineer at Ciena before working at various VCs and tech firms in Silicon Valley as well as other parts of the U.S. and Canada, added that the domestic funding ecosystem is maturing. He noted “there are a lot more seed funds and just Canadian funds in general that are mature and at scale.”
Cubitt, whose firm recently led a $2.4-million pre-seed round for Ottawa-based productivity app startup Nook Technologies, said companies with strong fundamentals will continue to attract savvy investors.
“I don’t think we have a funding problem,” he said. “I think anybody who says that we do has a strategy problem. I think good ideas will always get funded, and there’s more places than ever to get it these days.”
In addition, observers note that while the CVCA’s report offers a compelling snapshot of the country’s VC scene, it doesn’t tell the whole story.
The association relies on data submitted by venture capital and private equity firms to determine its rankings – meaning not all deals are necessarily included in the report’s tallies.
That may be part of the reason why Ottawa doesn’t fare as well in the report as some other Canadian centres, local economic development officials point out.
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-headquartered Vista Equity Partners, which did not take part in the CVCA’s survey.
– With additional reporting from James Hale
