Following last year’s decline in investment and deal activity across Canada’s FinTech sector, startups should brace for sustained sluggishness for the next six to eight months, according to a new report from KPMG.
KPMG’s latest Pulse of FinTech report found that in 2023, investment in Canadian FinTech companies dropped by 30 percent in 2023 to $1.2 billion CAD ($920 million USD). Deal volume in the sector also fell last year by roughly half, with only 109 total deals tracked during the year.
According to KPMG’s report, Canada’s results mirror a global decline in FinTech investment, with deals falling by 65 percent and values by 73 percent. In a statement, Georges Pigeon, a partner in KPMG in Canada’s deal advisory practice, said he expects 2024 to be “pivotal” for Canada’s FinTech sector as many startups draw down on capital raised 18 to 24 months ago.
“The next six to eight months will continue to be slow for FinTech investments, which will make it difficult for FinTechs that require funding in the near term and force them to rethink how to position themselves to investors,” Pigeon said.
Crypto and blockchain ventures top deal flow charts
KPMG’s report tracked deal activity in various sectors within FinTech, and for the second year in a row, found more investments in the crypto-assets and blockchain space than any other vertical in Canada. The report tracked 31 deals in 2023.
“The next six to eight months will continue to be slow for FinTech investments, which will make it difficult for FinTechs that require funding in the near term.”Georges Pigeon, KPMG
One of the largest rounds closed in 2023 was LayerZero’s $120-million Series B financing, which valued the Vancouver-based company at $3 billion. LayerZero has developed a messaging protocol that functions as the underlying infrastructure needed for decentralized applications to live across multiple blockchains.
In a statement, Edith Hitt, a partner in KPMG’s advisory practice who specializes in banking technology, said the fact that one of the largest investments in Canada last year was a blockchain infrastructure company is a strong signal for the once-embattled sector.
“Notable investment in blockchain infrastructure suggests that investors could be thinking ahead to the future, where a central bank digital currency or ‘digital dollar’ might one day become a reality in Canada,” Hitt said. “If that happens, blockchain could potentially be the infrastructure that’s used to underpin that system, and that could be another growth catalyst for Canada’s FinTech ecosystem.”
There has been a notable resurgence in the cryptocurrency sector in recent months, with the price of Bitcoin rallying by more than 120 percent in 2023. This bounceback has been fuelled further by the SEC’s approval of the first US-listed Bitcoin ETFs in January.
While crypto and blockchain dominated Canada’s investment landscape in terms of deal volume, KPMG’s report also found software and artificial intelligence (AI)-focused FinTech companies also saw high levels of activity. According to the report, SaaS-oriented FinTech companies saw 24 investments during 2023, while FinTech startups using AI and machine learning saw a total of 15 investments.
Rate reductions, open banking rules to energize ecosystem in 2024
KPMG’s report found that venture capital-backed investments accounted for more than 75 percent of all deals, with 83 VC-backed deals tracked worth a cumulative $962 million CAD ($711 million USD). Several Canadian VCs that focus on FinTech also closed capital commitments during the year, including Luge Capital’s $71-million first close for its targeted $100-million fund.
KPMG said the number of late-stage and corporate venture capital investments is one silver lining for Canadian FinTech startups, as these investments comprised over 40 percent of all FinTech investments in 2023.
Notable late-stage FinTech deals in 2023 included LayerZero’s Series B financing, Koho’s $86-million Series C extension, Procurify’s $68-million Series C funding round, and MindBridge’s $60-million USD growth-stage investment.
Pigeon said investment activity in 2024 will remain sensitive to interest rates and should pick up once the Bank of Canada starts making cuts (last month, the Bank of Canada held the interest rate steady, but signalled that it is contemplating making cuts).
Pigeon noted that upcoming open banking legislation at the federal level could also boost investor confidence in Canadian FinTech companies this year. FinTech startups have expressed frustration over Canada’s slow implementation of open banking, claiming it has sidelined FinTech companies. When it was revealed last month that Koho was pursuing a banking license in Canada, founder and CEO Daniel Eberhard told BetaKit the move was aimed to shift the balance of that equation, as well as fuel its own push toward profitability.
“FinTechs that can demonstrate they are sustainable and valuable businesses will have an edge over those that emphasize themselves as quick technology solutions providers,” Pigeon added.
Feature image courtesy Unsplash. Photo by Allison Saeng.