Venture funding in Toronto and the Waterloo Region had a particularly sluggish start to 2023, with startups in the neighbouring tech ecosystems raising less than eight percent of what was raised in the same quarter last year.
According to new data from briefed.in, Toronto venture funding reached a three-year low, knocking the region off its usual top spot for venture investment in Canada in terms of dollars raised, while venture funding in the Waterloo Region fell by 80 percent year-over-year.
In Toronto, startups raised a measly $120 million in the first quarter of 2023 (all dollar figures are in CAD). For reference, Toronto startups raised $1.9 billion in the same quarter in 2022, making this a staggering 94 percent year-over-year decline. A total of 16 investments were closed in Toronto during the quarter, a 72 percent decline year-over-year.
Q1 2023 in the Waterloo Region was similarly slow, according to briefed.in. A total of $32.9 million was raised in the quarter through four deals, which represents a 16 percent increase from Q4 2022 in terms of dollars raised, but still a far cry from the $157.2 million raised in the first quarter of 2022.
The decline in investment in Toronto is particularly notable, as it is Canada’s largest tech ecosystem and has consistently attracted the highest amount of funding and deal volume in Canada over the last three years.
The first quarter of 2023 represented Toronto’s lowest funding quarter in at least the last three years in terms of both dollars raised and deals closed. In fact, two other ecosystems, Alberta and Québec, attracted more venture investment in Q1 2023.
“It’s probably on par or close to the largest decline we’ve had, percentage-wise, since 2001,” Matt Roberts, partner at Toronto-based ScaleUP Ventures, told BetaKit.
Despite the challenging macroeconomic climate of Q1 2023, which saw interest rate hikes, rising inflation, and the collapse of Silicon Valley Bank, Roberts is convinced that there are other underlying causes contributing to the funding slump in Toronto and the Waterloo Region.
One, he noted, is the “precipitous decline” in company creation in the region over the last seven years. While this metric is difficult to track and is not reported by briefed.in, Roberts noted it has concerned local investors for some time.
Roberts believes this problem can be traced back to the winddown of several early-stage initiatives in the mid-20-teens, such as Communitech’s Hyperdrive program in the Waterloo Region and MaRS’s Jolt program in Toronto. Programs like Hyperdrive were created to address the perceived lack of early-stage mentorship and investment available in Canada, but at the time of Hyperdrive’s shutdown, Steve McCartney, VP of Startup Services at Communitech, said that was “not simply a worry anymore.”
Roberts argued the decline in company creation became much more pronounced during the COVID-19 pandemic, but given that everything was remote, it was more challenging for local investors to discern. “I think now, we can declare that company creation is where there’s a massive gap,” he said.
With fewer new startups emerging, Roberts noted there could be a scarcity of promising candidates to rise up the funding ranks in the coming years—a trend that may already be taking hold in Toronto and the Waterloo Region.
Valuations find gravity
A defining feature of the 2021 bull market was the abundance of nine-figure venture deals often raised at massive valuations. In Toronto, 13 megadeals—deals greater than $100 million—closed in the first quarter of 2021. In the Waterloo region, companies like ApplyBoard and Faire also raised large and frequent financing rounds between 2020 and 2022, which often accounted for the lion’s share of all dollars raised locally in a given quarter.
Since the macroeconomic picture shifted in mid-2022, megadeal activity has crept down quarter-over-quarter in both regions, but in Q1 2023, deals of this size were entirely absent. The largest deal closed in Toronto during Q1 2023 was a $30 million Series B funding round raised by Smile Digital Health. In the Waterloo Region, the largest funding round was Shinydoc’s $16.3 million round of funding, which was not categorized under a specific stage.
Roberts noted that from his vantage point, late-stage valuations have come down, but are still stable, and he is still seeing a healthy pipeline of late-stage deal flow getting large cheques from US-based funds. “But the insanity around valuations and the capacity of a company to take in lots and lots of money by virtue of that really crazy valuation—that’s gone,” Roberts said.
The lost lead
In Toronto, 11 early-stage deals closed during the first quarter of 2023, including five pre-seed deals and six seed-stage deals. Early-stage deal volume has not recovered in the region since dropping in the third quarter of 2022. In the Waterloo Region, briefed.in tracked zero pre-seed or seed-stage deals in Q1 2023. This is the third quarter in a row in which briefed.in tracked no deals in these stages.
Roberts said seed-stage fundraising has become particularly challenging for local companies in the last few months. “You have a massive valuation gap between the expectations of those seed deals that were done from 2020 to 2022, and what the 2023 Series A investor will pay,” he added.
While there are many early-stage players who will do follow-on rounds, or come in on a party round, Roberts noted it is increasingly difficult for early-stage founders to find a deal lead.
During the years of rapid growth in 2020 and 2021, Roberts observed that many seed-stage deals were structured differently from typical funding rounds. Instead of securing a large sum of funding all at once, many seed rounds were pieced together with Simple Agreements for Future Equity (SAFEs), with one primary contribution from a venture capitalist serving as the final piece to complete the raise.
Roberts noted that the funding landscape has recently shifted, with VCs, angel investors, and seed investors now hesitant to provide funding upfront, due to uncertainty about the company’s future success. “So they’re saying, ‘go find a lead’… and now, all these guys are running around trying to find the lead cheque, and there are no lead cheques,” Roberts added.
A new bottom
Since the end of the first quarter, the funding environment in both Toronto and Waterloo Region has not improved. As the funding environment continues to dry up, more and more companies have announced staffing cuts as they look to extend their runways.
In the last six months, Toronto companies like Ada, Wattpad, FreshBooks, and VerticalScope have announced layoffs. The challenging fundraising environment has already proved fatal for some companies in the region, such as Toronto-based GoodGood, which ceased operations at the end of 2022 after failing to secure additional capital.
Roberts said he expects to see more seed companies fail in the year ahead, but noted, “There will be the survivors, and they’ll do well, and there will be new companies, and they’ll do well, but on the whole, you’re going to see a new shoulder, a new bottom.”
briefed.in is owned and operated by Communitech. BetaKit receives data from briefed.in as part of a media partnership with Communitech and retains full editorial control of all articles that reference the data produced by briefed.in/Communitech.