Canadian Venture Capital and Private Equity Association (CVCA) CEO Kim Furlong noted that Canada’s venture capital (VC) industry demonstrated both resilience and cause for concern during the first half of 2024.
Nearly $2.4 billion CAD in total VC funding was deployed into Canadian technology startups across 143 deals during the second quarter, per CVCA’s latest VC market report. This marks an improvement compared to Q1 on both counts but trails the second quarter of 2023.
“The persistent decline in seed deals raises concerns about the long-term pipeline of investment-ready companies.”
Kim Furlong,
CVCA
On a year-over-year basis, total funding declined by 14 percent and deal count dropped by nearly 16 percent in Q2 2024. Relative to what was a mixed Q1 for Canadian VC funding though, VC investment jumped 85 percent while deal volume increased by only five percent.
In a statement, Furlong said this performance was “driven by investors doubling down on companies with proven track records and strong fundamentals,” reflecting what many VCs have dubbed a ‘flight to quality’ amid the tech downturn.
But the first half of 2024 also showed some worrying signs: after several years of growth, seed investment has reverted to 2020 levels. While investment activity across all stages declined during this period year-over-year, the largest drops took place at the pre-seed and seed-stage levels, as total dollars invested fell by 64 percent and 45 percent, respectively.
“The persistent decline in seed deals raises concerns about the long-term pipeline of investment-ready companies,” Furlong added. “We will continue to monitor this trend closely as it could impact the sustained growth of the ecosystem.”
Furlong also argued that the Government of Canada’s recent capital gains inclusion rate hike creates “disadvantages” for domestic investors relative to foreign capital, and expressed worry about how this change might impact how founders, family offices, and angels reinvest in VC, especially at this stage. The CVCA and others continue to advocate against this move.
On the other end of the startup equation, later-stage deal count during the first half of 2024 was the lowest on record, even though total dollars invested for the period resembled last year. The second quarter was an improvement over a slow Q1, with $832 million invested across 12 deals, a 228 percent jump in value and a 20 percent rise in volume.
As BetaKit recently reported, 2024 is currently on pace to see the fewest total dollars allocated to Canadian VC funds in a decade, according to new research from RBCx on VC fundraising in Canada since 2013.
Despite some mixed results overall and a continually cool market for tech initial public offerings (IPOs), 2024 has seen strong VC exit activity, with 25 deals so far worth a total of $3.6 billion combined. This activity has been fuelled by mergers and acquisitions (M&A) with no VC-backed IPOs yet this year.
Meanwhile, on the private equity (PE) side of the equation, Q2 was a particularly strong one with $4.2 billion deployed across 332 deals, per CVCA’s latest PE market report. “Despite the challenges in the market, this quarter has been exceptional for private equity in Canada,” Furlong noted.
After 2023’s record low, Canadian PE activity showed signs of recovery during the first half of 2024, as CVCA reported that deal values during this period outpaced the same periods in 2023 and 2022 by 50 percent and 28 percent, respectively.
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CVCA reported that PE exit activity remained steady during the first half of 2024, with 44 exits valued at $5.7 billion collectively. This number surpasses the total exit value of 2023, putting the year on track to exceed 2021 and 2022. M&A accounted for three-quarters of these exits and 58 percent of total exit value, with the remainder coming from secondary buyouts as no PE-backed initial public offerings took place during this period.
According to CVCA, privatization deals remained a theme in this period, as the first half of 2024 also featured a rise in buyout and add-on investment activity with $5.6 billion raised across 87 deals. This trend began during the first quarter, while Q2 saw a slight decline in total dollars invested but across a greater number of deals.
“This quarter, we have observed a significant increase in privatization deals, demonstrating that private markets offer companies the ability to focus on growth without distractions,” Furlong noted.