Despite market conditions, 2022 second-highest year on record for Canadian venture capital

CVCA CEO: “Considering the macroeconomic conditions, the finish in 2022 was surprising.”

After declining for three quarters, Canadian tech venture capital capped the year with a pleasant surprise: the second-highest deal count and amount invested on record.

In its latest report, the Canadian Venture Capital and Private Equity Association (CVCA) attributed the rise to momentum from the 2021 highs that carried through much of last year.

“Considering the macroeconomic conditions, the finish in 2022 was surprising.”

In the fourth quarter $2.5 billion CAD was invested across 162 deals. That closed the year with $10 billion across 706 deals.

In contrast, the third quarter of 2022 showed an annual and quarter-over-quarter decline with just $896 million invested across 144 VC deals.

“Considering the macroeconomic conditions, the finish in 2022 was surprising, and it’s a testament to the resilience of Canadian businesses and our VC market,” said Kim Furlong, CEO, CVCA.

The Q4 venture activity experienced a slight uptick after three consecutive quarters of decline in 2022, increasing by 182 percent in dollars invested and nine percent in deal count compared to Q3.

Comparatively, Q4 2021 saw $3.2 billion invested across 203 deals. The full year of 2021, which marked an all-time high for venture capital investment in Canada, saw around $15 billion invested in more than 800 deals.

Early-stage and growth-stage deal sizes declined from 2021, but the average deal size year-over-year increased for investments in pre-seed, seed, and later stages. Pre-seed and seed deal sizes increased by 79 percent and eight percent, respectively, compared to the previous year.

Venture debt in 2022 also chalked up new records in both value and deal counts. Venture debt reached $139 million across 34 deals in the fourth quarter, totalling $664 million across 24 deals for the entire year. This compares to $493 million across 95 venture debt deals in 2021.

The Information, Communications and Technology (ICT) sector accounted for half the venture capital deals, leading again in 2022 with $6.2 billion invested across 381 deals. Life Sciences closed 16 percent of all venture capital deals (112) and $1 billion or 10 percent of total deal value.

RELATED: Investor liquidity issues are putting the squeeze on Canadian startups

The CVCA reported that venture capital investments in cleantech and AgTech remained resilient, with cleantech achieving its first $1 billion year, surpassing the record set in 2021 by 52 percent. The CVCA forecast that the growth trend will continue into 2023.

The AgTech sector saw $226 million in venture capital invested into 46 deals in 2022, exceeding 2021 by eight percent in value and 15 percent in deal count,

Sanjay Zimmerman, a partner in White Star Capital, said in the report that tougher economic conditions forced a strong refocus toward capital-efficient and recession-proof businesses. This resulted in increased investor interest in B2B SaaS, with only marginal slowdowns in sectors such as cybersecurity, cloud, and automation.

“Yet sectors such as FinTech, logistics, and e-commerce, remain affected by the rising cost of capital, loss of consumer confidence, and general economic slowdown,” Zimmerman said. “Despite rough conditions, we expect startups with strong unit economics, healthy growth, sticky revenue, and a diversified customer base, will continue to attract funding.”

Market uncertainties continued to impact companies seeking capital through the public markets in 2022, according to the CVCA, which noted no Initial Public Offerings (IPOs) took place in the year.

The annual exit value also declined precipitously, experiencing a 92 percent decline from the previous year, the lowest year on record.

“While the pace and frenzy has receded, VC investors have remained active,” Furlong said. “Importantly, the pre-seed and seed-stage average deal sizes have increased year-over-year, continuing to expand our healthy pipeline of companies. No economic correction is alike and the job numbers and economic resilience both in the US and in Canada has also been an element of surprise.”

RELATED: Venture investment returning to pre-pandemic levels, shows Q2 2022 CVCA report

Ontario, Québec, and British Columbia respectively ranked as the top three provinces for venture capital investment activity, accounting for 88 percent of all dollars invested in 2022. Those provinces have already surpassed the investment levels set in 2020 with all three exceeding pre-pandemic levels on an annualized basis.

Ontario received 47 percent of all Canadian investments in 2022 with $4.7 billion invested across 293 deals, and the majority of the investment activity focused on Toronto-based companies ($4.1 billion over 216 deals). Ontario alone attracted five of the top 10 largest disclosed deals in Canada, with the combined five deals raising $1.6 billion in 2022.

The largest deal in the province also marked the largest in Canada, the investment in Toronto-based password company, 1Password, which closed a $775 million Series C round in the first quarter from a consortium of United States and Canadian investors.

Québec-based companies received 25 percent of all venture capital dollars invested in 2022, with $2.5 billion invested across 153 deals, while BC took a 16 percent share of all venture capital investment in 2022 with $1.6 billion invested in 106 deals in 2022.

Alberta was one of the few provinces to experience an increase in investment in comparison to the $607 million raised in 2021. For the fifth year in a row, the prairie province attracted a record number of investments, with $729 million invested across 85 deals in 2022. The largest disclosed deal in the province was raised by Neo Financial raising $185 million in Q1 2022.

Some of the largest disclosed deals in the quarter included TouchBistro, raising $150 million in venture growth from an US investor; and Xanadu Quantum Technologies, which secured $135 million in a Series C round, becoming an unicorn in the process.

BDC Capital, Investissement Québec, and Export Development Canada were the most active VC firms, respectively funding 87, 35 and 27 funding rounds over the year.

The top three most active non-government-backed firms were Thin Air Labs, the Golden Triangle Angel Network, and Anges Québec with funding 25, 24 and 23 rounds, respectively.

Desjardins Capital distinguished itself as the most active public fund in the pension, retail and corporate sector; while BDC Capital stood out as the most active government fund. BDC also topped the firms with the largest funding rounds, with some 87 rounds for a total of $2.3 billion.

In terms of private equity, investors chose to focus on smaller deals and add-ons because of macroeconomic pressures. That resulted in $2.3 billion invested over 194 deals compared to third quarter investments of $2.4 billion over 199 private equity deals.. Even so, despite a downshift in total investment value year-over-year, $10 billion was invested in 890 deals, a record high for deal counts.

The CVCA attributed the lack of larger deals to the fastest interest rate increase cycle in the last 40 years. Deals under $25 million CAD dominated the market, accounting for 85 percent of all disclosed private equity transactions.

In the CVCA report, Sean O’Connor, managing director with Conexus Venture Capital and Emmertech, called 2022 a unique year in the history of Canadian investments. “At first blush, we see the second-largest year of venture capital being deployed, which signals a growing strength in the Canadian tech space,” he said. “However, looking under the hood, we can see that investments started dropping significantly after Q1 due to economic pressures.”

O’Connor speculated that a significant portion of activity between the second and fourth quarters went into bridge rounds supporting portfolio companies.

Laura Lenz, a partner at OMERS Ventures, told BNN Bloomberg that according to another recent report about 37 or 38 percent of Q4 2022 financings broadly were down rounds. “It needs to happen to give management teams the optionality to continue to execute and to continue to execute on their mission.”

Her counterpart on the BNN Bloomberg panel, Michelle Scarborough, managing partner of the Thrive Venture Fund at BDC Capital, added “I think things are coming back to, let’s say, reality. We’re in a place now where business fundamentals need to take hold and we need to operate on that basis.”

“Plan for a more reasonable valuation or even a down round. Don’t be wed to the valuation you got in 2021,” said Lenz, noting that while venture firms are still investing, due diligence is taking as long as six months now. “We are seeing some restructuring happening in our terms,” she added. “Meaning liquidation preferences, two-times liquid preference, more dividends attached, more shareholder rights attached to it as well.”

However, that won’t be the case forever, and Scarborough added: “I think there’s a lot of opportunity that we’re going to see in the market in the next 24 months.”

In the CVCA report, O’Connor argued that the fourth quarter was the first sign of the industry bouncing back. And that, O’Connor said, is “hopefully a sign of positive trends into 2023.”

Feature image courtesy Unsplash. Photo by Алекс Арцибашев.

Charles Mandel

Charles Mandel

Charles Mandel's reporting and writing on technology has appeared in, Canadian Business, Report on Business Magazine, Canada's National Observer, The Globe and Mail, and the National Post, among many others. He lives off-grid in Nova Scotia.

0 replies on “Despite market conditions, 2022 second-highest year on record for Canadian venture capital”