Canadian venture capital investment continued its significant decline in Q1 2023 compared to the boom in recent years. However, while it fell quarter-over-quarter and year-over-year, the amount invested is a return to pre-pandemic levels and sets the time period of 2021 to early 2022 as a potential outlier for Canadian venture capital.
The data comes from the Canadian Venture Capital and Private Equity Association (CVCA)’s quarterly report.
CVCA CEO Kim Furlong called the Q1 2023 numbers a “return to normalcy.”
The CVCA tracked a total of $1.17 billion invested into 153 deals overall in Q1 2023 (all figures are CAD). The number is slightly different from Briefed.in’s recent report for the same quarter, which found $876.2 million over 55 deals. It is likely that the numbers vary given where each organization collects its data. CVCA collects information from its member companies as well as other sources. Briefed.in pulls from publicly available data as well as submission from companies that raise capital.
CVCA CEO Kim Furlong called the Q1 2023 numbers a “return to normalcy” that has not discouraged her belief in the strength of the Canadian venture market.
“The spike that we saw in 2021 [to] 2022 created some momentum for Canada,” she said in an interview with BetaKit, arguing, however, that the years prior to that created a foundation for Canada’s venture market that remains strong now.
Jacki Jenuth, partner at health-focused venture firm Lumira Ventures, echoed the sentiment, noting a difference between this recent downfall and the tech crashes of 2001 and 2008 is the state of Canada’s venture market. She argued that after the 2008 tech crash, Canada went through a “nuclear winter” with a lack of venture capital, but that is not the case now. However, she did note a need for more capital to be deployed at a quicker pace, acknowledging that while also pointing out that there have been a handful of firms announcing funds recently.
These trends also align with that is taking place in venture capital globally. Venture capital investment in both the United States and globally declined compared to recent years, but also showed signs of leveling off and returning to pre-pandemic levels.
CVCA reported that this return is due to investors continuing to practice caution and focus on “higher-quality” companies, as they have over the past year, amid “robust macroeconomic indicators” like limited GDP growth and strong employment rates in Canada.
In terms of private equity, the CVCA found that deal count and amount invested remained steady in Q1 2023 compared to the past year. While deal count was down 30 percent compared to the same quarter in 2022, deal value was comparable with $2 billion in private equity invested across 155 deals.
Breakdown in sector, stage, region
Notably, 16 percent of the total amount of venture capital invested in Q1 2023 came from just two “megadeals” (deals over $50 million). These investments were in Edmonton-based Jobber, which raised $134 million CAD ($100 million USD) in Series D funding, and British Columbia alternative proteins startup No Meat Factory, which raised $56 million CAD in Series B capital.
Pre-seed through early-stage (Series A through B) investments were the most popular, with later-stage deals continuing to exhibit a slowdown that began last year. CVCA attributed that slowdown to mature companies turning to non-dilutive capital, given the difficulty of achieving valuations in line with the ballooned ones from the boom times.
Seed-stage companies saw the most deals done in Q1 2023, with 60 investments that amounted to $152 million. Early-stage companies saw the highest number of dollars invested, with $730 million across 50 deals. Later-stage deals amounted to $241 million in nine companies, while the CVCA recorded no growth-stage deals in the quarter. Seed-stage deals showed positive growth in the quarter, with $20 million invested across 23 companies. This is notable, given CVCA reports just $19 million invested overall in seed deals in 2020. Since then, seed deals have pulled in significantly more—$68 million and $97 million overall in 2021 and 2022, respectively.
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In terms of sectors, information and communications technology (ICT) remains the most popular, with 50 percent of all venture capital invested in the quarter, despite a decline compared to Q4 2022.
Agriculture technology saw an interesting boost, attracting a record quantity of venture capital in Q1 2023. This marked a second consecutive quarter of growth in the sector and the highest quarter on record in both investment value and deal count. A total of $128 million was investedacross 16 deals, which surpasses more than half of last year’s dollars invested, and with 265 percent increase in deal value and 60 percent increase in deal count compared to this time last year.
Cleantech, which often bumps up against agriculture tech, also saw strong investment in the quarter with $174 million into 21 deals. The CVCA called this the highest deal count on record.
The interest in agriculture and cleantech likely stems from both a recent industry interest in sustainability, as well as the fact that the federal government made hefty promises to the sector in its most recent budget.
Looking at the breakdown of venture capital regionally, Ontario, as usual, continued to lead in deal count. However, Québec inched into first place in terms of dollars invested, with $373 million invested in 32 deals compared to $324 million across 58 deals in Ontario. Québec, Ontario, and Alberta accounted for 76 percent of all dollars invested during the quarter.
By city, Montréal came out on top with the vast majority of Québec’s deals. Toronto came in second overall, while Edmonton—spurred on by Jobber’s megadeal—received the third-largest amount of money invested.
The CVCA’s data tracks with the trends seen in Briefed.in’s data for Q1 2023, which found that Québec attracted more venture funding than any other province while Toronto, Waterloo, as well as British Columbia experienced lows and Alberta remained steady.
Venture debt
With the collapse of Silicon Valley Bank (SVB) taking place in the first quarter of this year, it’s been an interesting time for venture debt given SVB was a sizeable venture debt investor in Canada.
The amount of venture debt invested in Q1 2023 dropped by 50 percent compared to Q4 2022. However, it also marked the second highest Q1 for venture debt on record. Overall, $98 million was invested in 29 deals.
Comparatively, 2022 saw a high amount of venture debt dollars invested with Q2 through Q4 having around $200 million invested each quarter.
Speaking to the collapse of SVB and Signature Bank, Mark Usher, CIBC Innovation Banking’s new lead wrote in the report that companies have been “scrambling to establish new banking relationships given the uncertainty in marketplace–a phenomenon that isn’t experienced often and for good reason.” Usher recently took over from Mark McQueen.
Usher also argued that venture debt is interesting at this time given that venture capital and growth equity investors are still adjusting to lower valuations. “To survive this challenging economic environment, companies continue to focus on cash optimization and creative equity alternatives with their investors,” he said. “Lenders, in various forms, are being asked to fill the void and they have, as the data shows.”
The most active Canadian venture debt investors in the quarter were Venbridge with $3 million across 15 deals, Espresso Capital investing $4 million in five deals, and CIBC Innovation Banking investing the most with $39 million but spread across just four deals. The trio were also the top venture debt investors in all of 2022.
How Canada compares to United States, globally
“Canada follows a global trend of realignment in normalcy back to [pre-pandemic] levels,” Furlong said.
Pitchbook’s United States data for the first quarter of this year showed that the dealmaking decline leveled off from 2022. Pitchbook called it “a sign that the market could soon regain its footing.” Much like Canada, United States venture capital deals and dollars aligned with pre-pandemic levels. This is similar to the overall global trend, with KPMG reporting deal volume and amount invested that is similar, if not a bit lower, than pre-pandemic levels.
The other similar trend is in the stage of companies being invested in. KPMG reported that investors globally shied away from later stage deals while activity was “quite robust” for pre-seed through Series A deals. This aligns with CVCA’s Canadian data that showed more deals done in early stages than later ones.
Private equity a mixed bag
Private equity had different trends than venture capital, but was also a mixed bag. While the amount invested remained steady compared to 2022, deal count in Q1 2023 was down 30 percent. A total of $2 billion was invested across 155 deals.
Much like in venture capital, cleantech emerged as a standout performer in private equity, attracting the significant share (45 percent) of the amount invested in the quarter, according to the CVCA. This is nearly four times the total investment in the cleantech sector for the entire year of 2022. The CVCA noted that it anticipates even greater interest in the cleantech sector, given the introduction of the new federal Investment Tax Credit for Clean Technology Manufacturing that was introduced in Budget 2023.