Performance anxiety and access to capital top of mind for Canadian VCs

Difficulty accessing capital and concerns about fund performance were the talk of the town among Canadian venture capitalists (VCs) at Elevate’s recent CIX Summit in Toronto.

In closed-door conversations at the Mar. 26 event’s Investor Forum, leaders from Canada’s VC industry gathered to discuss some challenges they are facing and how to address them.

While the impact of tariffs and the global trade war has dominated VC discussions since then, the Investor Forum focused largely on the structural issues limiting Canada’s technology investment community. Topics ranged from tensions between investors and their limited partners (LPs) to prevailing narratives about poor VC performance and competitive pressures at the seed and growth stages.

BetaKit attended the Investor Forum under the Chatham House Rule, which means that information from the meeting can be shared, but not attributed to specific people.

VC fundraising remains “an uphill battle”

Many Canadian VCs currently find themselves in a difficult position. A key topic of discussion among Investor Forum attendees was ongoing access to capital challenges amid what remains a tough VC fundraising environment.

At the Investor Forum, VCs lamented a core contributing factor: Canadian pension funds, endowments, and corporates remain relatively inactive in domestic VC compared to their international peers.

Like others globally, Canadian LPs invested heavily in the asset class during the height of the VC boom in 2021 and 2022, and have since become more cautious and selective as macroeconomic conditions have deteriorated and the merger and acquisition and initial public offering (IPO) markets have cooled.

This LP pullback has resulted in smaller funds, longer fundraising timelines, shifts in investment strategy, and turnover across Canada’s VC industry. Last October, Toronto’s Information Venture Partners pivoted to single-asset, special-purpose vehicle investing. Last month, Toronto and Montréal-based CMD Capital paused its operations indefinitely after failing to secure anchor institutional investors for its first fund. Investors that BetaKit has spoken with indicated that CMD Capital is not alone and expect to see more Canadian VC firms quietly follow suit amid continued challenges.

The challenges are compounded for emerging managers like CMD Capital, typically defined as firms on their first, second, or third fund. Attendees noted that emerging managers—a category most Canadian VCs fit into—face “an uphill battle” as LPs have reduced VC allocations and concentrated dollars on established investors with a track record of returning cash.

Performance an albatross around neck of Canadian VCs

While broad market conditions are one part of the equation, Canadian VC performance—both actual and perceived—is another limiting factor on VC fundraising. Investor Forum attendees acknowledged that the “prevailing narrative” at the moment is that the performance of Canadian VC funds has not been up to snuff. Public awareness of writedowns by two of Canada’s largest VCs, Georgian Partners and BDC Capital, has added fuel to the fire, but both are far from the only firms feeling the impact of the downturn.

Some attendees expressed fear that this narrative of poor Canadian VC performance will become self-fulfilling. Other VCs asserted that many Canadian VC firms simply have not performed well enough, and argued that fund managers need to ask themselves hard questions as to why, including whether they have the right priorities and approaches.

One VC that BetaKit spoke to after the Investor Forum argued that Canada needs to create a safe space for not just entrepreneurs but also fund managers to build and fail, noting that the country’s VC industry will not get ahead unless it becomes more willing to admit and accept failure and shift to new strategies. Failure to do so could mean the emerging managers turnstile will continue.

Not all attendees at the Investor Forum were aligned on the best approach. One investor posited that the VC firms with strong fund performance despite the downturn should share that information publicly, arguing that some un-Canadian bragging could help build more confidence in the industry among LPs and founders alike. Some attendees expressed support for this idea.

In response, another investor noted that many VCs are not currently disclosing their fund performance for a reason, which was met with begrudging agreement.

“Price-takers” across stages

Together, limited access to capital and performance issues have contributed to deployment pressure at multiple stages in the VC lifecycle, including at the seed and Series A levels. Attendees asserted that Canada lacks enough seed investors who can lead deals, noting that there are “more price-takers than price-setters” in the country’s early-stage VC ecosystem.

Emerging managers typically focus on startups at the pre-seed and seed stages. While some investors told BetaKit that the impact of emerging managers’ fundraising struggles has not yet been deeply felt at the seed level, they anticipate that this will become more apparent over time and create problems down the road.

Meanwhile, Investor Forum attendees affirmed that the Series A crunch is real, noting that the bar for a Series A has been raised. Some contributing factors investors cited include later-stage firms investing earlier, more capital being concentrated on perceived winners, and some fast-growing companies, particularly those in AI, increasing VC expectations for startup traction across the board. This comes at a time when attendees also said Canada could use more Series A investors.

While megadeals kept Canadian VC funding afloat in 2024, later-stage capital availability also remains an issue. A recent Canadian Venture Capital and Private Equity Association (CVCA) analysis found that US investors play a key role in scaling Canadian startups and highlighted a need for deeper domestic capital pools at the growth and late-stage levels, something that the CVCA is now advocating for.

In an interview with BetaKit after the CIX Summit, CVCA CEO Kim Furlong noted that this high proportion of US investment means that “all that value at the moment of exit leaves Canada.” At the moment, Furlong said there are only “a handful” of Canadian VC firms capable of writing cheques at those stages. She argued that having more funds with the ability to do this would go a long way towards ensuring more of that wealth stays in Canada.

“By the time you get to Series C, most of your capital is coming from the US, the talent to grow that company is in the US, and your customer base is in the US,” Furlong said. “If the capital rate is not [incentivizing] you to stay here, why are you building it here?”

Investor Forum attendees expressed concern about Canada’s lack of growth and late-stage capital—something BDC Capital recently committed nearly a billion dollars towards addressing—amid an environment where some Canadian tech companies are considering or pulling the trigger on moving south. Artificial intelligence hardware firm Tenstorrent recently did just that, redomiciling from Toronto to California to raise more money from US investors and prepare for an eventual US IPO.

One investor argued that it was embarrassing that Canadian VCs did not invest in BC-based legaltech company Clio’s record-breaking, more than $1.2-billion CAD Series F last year, which was financed entirely by new US investors—an assertion that prompted some quiet nods from others in the room. At the time, Clio co-founder and CEO Jack Newton told BetaKit that this was not a deliberate choice, but candidly admitted that “The number of investors in Canada that can write the kind of cheques … in this round is pretty limited.”

However, it was not all doom and gloom. While there were certainly signs of frustration and tension given these challenges, the conversations were largely optimistic and solutions-oriented, and attendees expressed belief that all of this turmoil is ultimately healthy and that the country’s VC industry will emerge stronger from it.

Some attendees also hailed the recent death of the Liberals’ planned capital gains tax inclusion rate hike as a win for both the VC industry and the country, and view the fast-approaching federal election as an opportunity to lobby incoming leadership to think differently about how to aid domestic VC, which still remains reliant on government support.

Earlier this week, the CVCA began doing just that: pitching federal parties on a series of policy recommendations aimed at incentivizing domestic investment in a new white paper. Among other things, the document called on Canada’s next federal government to temporarily slash the capital gains tax inclusion rate and double the Lifetime Capital Gains Exemption limit, launch a new national investment tax credit, recapitalize the Venture Capital Catalyst Initiative, and explore encouraging Canadian pension funds to invest more domestically.

Feature image courtesy Elevate.