Venture capital investment in Canadian companies hit a record high in the second quarter of 2020, much to the surprise of industry leaders, according to Canadian Venture Capital and Private Equity Association’s full report for Q2 and H1 2020.
The second quarter of 2020 saw $1.66 billion in venture capital invested across 145 deals, a 23 percent year-over-year increase and more than double the amount invested in the first quarter of 2020 ($818 million).
“[These trends tell] you that people expected an economic correction.”
The almost $1.7 billion invested in the quarter is the highest amount of venture capital invested in a Q2 since the Canadian Venture Capital and Private Equity Association (CVCA) began collecting data on the industry in 2013.
This quarter, which tracks VC activity between April and June, is the first quarter of 2020 that reflects the effect of the COVID-19 on the market. However, Kim Furlong, CEO of the CVCA, expressed surprise to see such a strong quarter.
“This is not a normal quarter by all means [sic],” Furlong said in an interview with BetaKit. “It’s surprising that we are shy of $2 billion for Q2. This has been eight times that we’ve had a $1 billion quarter since we started reporting [VC and PE data in Canada]. And, if you had asked me in March, ‘Kim is your Q2 going to be a billion dollars?’ I would have said ‘no way.’”
Furlong attributed the surprisingly high amount of venture capital to stimulus and incentives from the federal government, as well as VC firms “doubling down” on investing in the “leading stars” in their portfolios.
“Everyone from March to June was looking at portfolio holdings and saying, ‘we need 18 to 24 months of runway. We need to put this cash to these companies,’” said Furlong, noting that VCs were more likely to put “large injection[s] of capital” into portfolio companies that could demonstrate the ability to “be thoughtful, pivot, add a plan for COVID.” The CVCA CEO’s findings reflect what many VCs have expressed to BetaKit in recent months.
Notable trends in CVCA’s Q2 2020 report point to that strategy. According to the report, later-stage companies received 50 percent ($1.2 billion) of all the venture capital in the first half of 2020. Overall, the first half of the year saw a total of $2.5 billion, spanning 264 deals.
Later stage companies receiving 50 percent of the pie in H1 2020 compared to the just 22 percent those companies brought in last year. Large deals, which CVCA lists as $20 million CAD or more, drove the majority of dollars invested in the first half of the year, accounting for 69 percent of total dollars invested.
In comparison, early-stage companies received $991 million in H1 2020, with seed-stage pulling in $199 million.
“It will be interesting to see if the trend continues, and we see the full year where early-stage funding remains low,” said Furlong. “Or, will VCs and founders find ways in the second half of the year to make things work in a virtual setting.”
Another notable trend was the downtick in VC-backed exits. While exits “picked up,” according to CVCA data, in Q2 with an additional seven exits closed, they remained “slow” in comparison with previous years, with only 10 exits so far in 2020. Life science (healthtech) companies, unsurprisingly however, saw an uptick in both exits as well as capital invested in H1 2020.
“[These trends tell] you that people expected an economic correction,” stated Furlong. “The market had been a bit of a bull market for 10 years. People went back to fundraise perhaps a little earlier than they would have in a normal time and people were sitting on capital.”
“And everyone knows that some of the best deals are done in a downturn,” she added. “So I think people are being thoughtful about their portfolio and just stimulating it and fueling it to bring it across the line.”
“Some of the agility that was demonstrated by governments this year has to be applauded.”
Furlong also attributed the trend to government stimulus packages and organizations like the Business Development Bank of Canada (BDC) and Export Development Canada (EDC) developing programs to match VC investments. She pointed specifically to BDC’s Bridge Financing Program and EDC’s $250 million investment program.
Notably, BDC Capital was the most active VC firm in H1 2020, with $549 million invested in 38 deals. Inovia Capital invested the most amount of capital with $649 across 15 deals. Investissement Quebec invested the third-highest amount at $117 million for 10 deals.
“Some of the agility that was demonstrated by governments this year has to be applauded,” said Furlong, adding that while she was impressed by the speed of the government’s response to support the innovation sector she hopes to see further commitments.
The CVCA CEO noted that her organization is in talks with the federal government about creating a new program to support the sector, which would be a follow on to the likes of VCAP and VCCI.
“These results, to me, point to stimulus and don’t necessarily point to maturity,” said Furlong. “We will be very strong in our conversations with the government for them to stay the course of potentially agreeing to do a third program.”
“I would love to see the government announce before the end of the year a commitment to stay the course and support this industry furthermore,” she added.
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