Early-stage VC funding and mega-deals carry Canada to second-largest Q2 on record

AI, cleantech stay hot as growth-stage activity keeps quiet, per CVCA’s latest report.

As Canadian tech companies and investors continue to contend with tough economic conditions, the sector just posted its second-largest second quarter (Q2) on record for venture capital (VC) funding, according to the Canadian Venture Capital and Private Equity Association (CVCA).

Per CVCA’s latest VC market report, in the second quarter, and cumulative first half (H1) of 2023, Canada saw a rebound following a weak first quarter (Q1). During Q2, CVCA reports that $2.8 billion CAD was put into Canadian tech startups across 170 deals. By dollars invested, this total represents a 140 percent jump quarter-over-quarter and a 45 percent increase year-over-year.

This also makes Q2 2023 the second-largest second quarter on record for Canadian VC funding next to Q2 2021. In contrast to the United States (US), which saw its lowest quarter since Q2 2020, CVCA noted that Canadian investment activity during the second quarter of 2023 was “just shy of levels seen in 2021.”

During H1 2023, 17 mega-deals accounted for nearly half of all dollars invested, reports CVCA.

That year was red-hot for Canadian VC, but since 2021, funding has been falling back to pre-COVID-19 levels as interest-rate hikes have cooled investor interest in tech, making it much tougher for startups and VC firms alike to fundraise. These conditions were exacerbated by the collapse of Silicon Valley Bank earlier this year.

As CVCA director of data and product David Kornacki told BetaKit, a few factors drove this Q2 rebound, including “the continued strength of pre-seed, seed, and early-stage companies,” and a proliferation of mega-deals worth over $50 million apiece. During H1 2023, 17 mega-deals accounted for nearly half of all dollars invested, including a pair of $200-million-plus financings during Q2, noted Kornacki.

Despite this 45 percent quarterly jump in total Canadian VC investment, the number of deals in Q2 only increased three percent quarter-over-year. This indicates that this additional financing was spread across a more select group of companies, and reflects the fact that despite these positive high-level results, many Canadian tech startups are still struggling to raise capital.

In total, CVCA reports that during the first six months of 2023, $4 billion was invested in 335 deals, making it the third-highest H1 on record, trailing only 2021 ($8 billion, 417 deals) and 2022 ($6.7 billion, 411 deals). As Kornacki noted, a significant portion of this funding has been concentrated on mega deals, including Cohere’s $368-million Series C and Miovision’s $260-million Series D rounds.

“As the overall venture market returns to pre-pandemic levels, and the pendulum swings away from the mania of 2021/22, investors are pulling back on their pace of capital deployment and being more selective with their remaining dry powder,” John Adams, president and CEO of NGIF Capital and managing partner at NGIF Cleantech Ventures, stated in the report.

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CVCA’s data paints a relatively similar picture to that of other providers. Per Briefed.in, $3.4 billion was invested in Canadian startups across 138 deals during H1 2023—approximately $600 million less than CVCA reported. Per Briefed.in, this amount went into less than half as many deals. However, unlike CVCA, Briefed.in does not track unreported deals.

Meanwhile, data collected by Refinitiv falls roughly in line with CVCA’s findings. Refinitiv reported slightly higher total VC investment and deal count figures in its H1 2023 report. According to Refinitiv, $4.6 billion in deal value was invested across 342 rounds during the first six months of 2023. This would mark a seven percent increase in deal value but a 26 percent decline in deal volume year-over-year.

Strong early-stage investment has also been a contributing factor, with $1.2 billion invested across 54 deals during Q2, up 74 percent from Q1 and 26 percent year-over-year. Per CVCA, pre-seed, seed, and “early seed-stage” companies accounted for 86 percent of all transactions in H1 2023, and all three remained resilient or saw growth on a quarterly or annual basis.

For his part, Kornacki noted that “Investors are increasingly seeking more favourable terms at the earlier, riskier stages due to higher valuations at the later stages and a limited number of investors who are able to invest at [later stages].”

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Meanwhile, it was a different story at the growth stage, where CVCA reports that there has been an absence of investments in 2023.

“The absence of growth-stage investments in 2023 can be attributed to cautious investor sentiment amid market uncertainty,” Kornacki said. “The COVID-19 pandemic has created a challenging economic environment, and investors are being more selective in their investment decisions, particularly when considering investing in later-stage companies that are already generating revenue but may not yet be profitable.”

Amid a cool exit market with no initial public offerings (IPOs) on record this year, CVCA noted that many companies have remained patient, while others have explored strategic mergers and acquisitions (M&A). H1 2023 saw 15 exits, a sharp increase compared to Q1, but a decline compared to 2022.

For its part, Refinitiv’s report found that Canadian companies completed only five VC-backed exits during the first half of 2023, totalling $1.8 billion—a 54 percent decline in the number of exits and a 39 percent drop in values year-over-year.

RELATED: CVCA: Canadian venture capital continues to fall back to pre-pandemic levels as venture debt booms amid tough fundraising market

Meanwhile, as valuations have fallen and VC funding has become harder to obtain, many firms have tapped non-dilutive funding sources like Scientific Research and Experimental Development (SR&ED) and venture debt. Per CVCA, Canada set a record for non-dilutive financing deal activity during the first half of 2023 as 126 non-dilutive funding deals closed. Ninety-nine took place in Q2, a new quarterly record.

“This is likely due to a number of factors, including rising interest rates and changing market dynamics, which have made it more difficult for companies to secure traditional equity financing,” said Kornacki.

At the same time, average non-dilutive deal value has declined, and total dollars invested during H1 2023 dropped 70 percent year-over-year to $195 million, indicating that despite seeking alternatives to equity funding, companies have remained cautious and sought smaller amounts of non-dilutive capital amid the current economic environment.

Canada set a record for non-dilutive financing deal activity during the first half of 2023.

From a sector standpoint, information and communications technology (ICT) continued to lead the way in H1 2023 in terms of VC funding. Beyond ICT, there was also a “marked focus” on artificial intelligence (AI) as well as cleantech investments.

On the VC funding side of the equation, Refinitiv reported that nine Canadian VC funds recorded closes during the first half of 2023, including Vertu Capital, Round13 Capital, Diagram Ventures, and Yaletown Partners, raising a combined $1.6 billion.

As far as private equity goes, CVCA reported that Canada saw a year-over-year decline in total funding and deal count in the first half of 2023, with $3.6 billion CAD invested across 316 deals.

“The amount of capital disbursed [in Q2] declined by 19 percent quarter-over-quarter and the average deal size has seen a 22 percent reduction, indicating a preference for targeted, calculated investments,” Furlong stated in the report.

Feature image courtesy Unsplash. Photo by Igor Kyryliuk.

Josh Scott

Josh Scott

Josh Scott is a BetaKit reporter focused on telling in-depth Canadian tech stories and breaking news. His coverage is more complete than his moustache.

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