For the second consecutive year, venture capital (VC) investment in Canada fell as investors remained cautious, according to new data from the Canadian Venture Capital and Private Equity Association (CVCA).
The CVCA tracked $6.9 billion invested across 660 deals during the year. Investment fell by 34 percent compared to 2022, whereas deal volume remained relatively flat year-over-year, declining by six percent.
“Late-stage investment has experienced a decline due to a combination of cautious allocations and a shift towards prioritizing profitability over growth.”
While Canadian VC investment has declined in both years following 2021, investment in 2023 still surpassed the $4.9 billion invested in 2020, and the $6.2 billion invested in 2019. In a statement to BetaKit, CVCA CEO Kim Furlong said last year saw a continued return to pre-pandemic normalcy.
“In 2023, the sentiment of the Canadian VC community can be described as cautious, with a more moderate deployment of capital and a return to normalized value,” Furlong added.
Early-stage investing remains the ecosystem’s bright spot
While deal volume fell overall in 2023, the impact varied across different stages. The CVCA tracked a total of 35 megdeals (defined as raises surpassing $50 million) in 2023, as well as seven additional megadeals that closed in Q4, raising a total of $772 million. The number of megadeals was down significantly from the 78 such deals closed in 2021 and the 45 megadeals closed in 2022.
The largest deals tracked during the fourth quarter of 2023 included British Columbia-based quantum tech startup Photonic’s $137-million financing round, and Calgary-based Eavor’s Series B funding round, which now totals $182 million following an injection from the Canada Growth Fund.
The megadeal downturn speaks to a larger trend of late-stage financing plummeting across Canada’s venture landscape. According to the report, total dollars invested in late-stage deals in 2023 declined by 47 percent to $2.3 billion.
“Late-stage investment has experienced a decline due to a combination of cautious allocations and a shift towards prioritizing profitability over growth,” Furlong said. “This trend indicates a more mature industry that understands the timelines associated with investments.”
While late-stage VC struggled to make a strong showing in 2023, early-stage funding stayed relatively resilient, according to the report. Pre-seed and seed-stage companies collectively raised $969 million across 372 deals, effectively matching the record levels of pre-seed and seed investing set in 2022.
Furlong indicated these results are a sign that investors recognize early-stage funding deals “made today are strategic preparations for potential successes and exits.”
Another silver lining last year was the rebound in exit activity for Canadian venture-backed companies. The CVCA tracked a total of 41 exits in 2023 with a cumulative value of $8 billion during the year. Mergers and acquisitions (M&A) accounted for the vast majority of these exits, with the report calling 2023 a “record” year for exits of this kind.
Last year also saw the first Canadian tech IPO in 18 months, when Turnstone Biologics went public on the Nasdaq in July with a market capitalization of $337 million. This was counterweighted, however, by a sizable group of Canadian tech companies opting to go private. Q4 Inc., BBTV Holdings, mCloud, Farmers Edge, and Mednow have all either delisted from public exchanges or are in talks to go private.
A landmark year for Nova Scotia
Ontario attracted almost half of all investment dollars in 2023, with $3.3 billion funneled into 275 deals. This region also claimed four of the top ten largest disclosed deals, which brought in a collective $904 million. The standout transaction in Ontario last year was Cohere.ai’s $368-million Series C funding round in June.
“For GPs that are currently fundraising, the headwinds are strong.”
Québec secured the second position in investment dollars, representing 20 percent of the national total with $1.4 billion allocated across 136 deals. British Columbia rallied to third place by year-end, accounting for 18 percent of the total with $1.2 billion invested in 92 deals.
Following a banner year in 2022, Alberta continued its strong performance with $707 million invested in 86 deals in 2023. While other provinces saw significant reductions in investment compared to 2022, Alberta’s decrease was minimal at just eight percent. The province’s largest disclosed deal was raised by Edmonton’s Jobber, which closed a $134-million Series D round in February.
Nova Scotia experienced a record-breaking year, surpassing its 2022 high with $161 million invested across 20 deals, an increase of 11 percent. This surge was led by CarbonCure Technologies, which landed $106 million in the province’s largest disclosed VC deal to date.
Furlong believes Canada’s younger tech provinces, including Nova Scotia, are flourishing due to “a combination of high-quality ventures and supportive ecosystem builders.”
“In Alberta, the investment activity has not only tripled … but also the investment value has nearly hit 7x … since 2018, highlighting the quality of companies and the presence of strong ecosystem builders like Alberta Enterprise Corporation that have contributed to sustained growth,” she added.
AI, cleantech continue to woo investors
In 2023, the Information, Communications & Technology (ICT) sector witnessed a significant boost in investor interest, capturing nearly half of all transactions and 58 percent of all dollars, or $4 billion across 312 deals.
Last year was a landmark one for the development and adoption of artificial intelligence (AI), particularly generative AI. While the CVCA does not specifically track AI investment, the report noted that ongoing advancements in the sector helped draw investor interest in the ICT sector last year.
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The cleantech sector also saw its momentum continue in 2023, concluding the year with a record number of transactions, with 75 deals leading to $1.1 billion in investments. Year-over-year, the number of deals surged by 53 percent, although the deal value experienced a slight decrease of one percent.
The report noted that the sector’s commitment to achieving net-zero targets and the support from government initiatives are key drivers of investment.
However, an October report from Export Development Canada (EDC) highlighted that despite recent growth, Canada’s cleantech sector faces several challenges. These include lower-than-ideal levels of private research and development spending per capita and difficulties in scaling startups compared to peers. Other barriers include a scarcity of local investors and increasing competition from markets more favorable to cleantech investments.
Furlong expects AI and cleantech to remain key areas of focus for VC investments in 2024. She said the economic outlook will continue to influence investor sentiment, noting she expects caution and an emphasis on profitability to continue in the year ahead.
She also noted that her outlook applies to VCs that have already completed fundraising. “For GPs that are currently fundraising, the headwinds are strong,” she said, adding that the VC fundraising landscape will be an indicator of capital availability in the coming years.
