It has been a tough couple of years for Canada’s technology sector, and data indicates that 2024 is shaping up to be even worse from a venture capital (VC) fundraising standpoint.
This year is currently on pace to see the fewest total dollars allocated to Canadian VC funds in a decade, according to new research from RBCx on VC fundraising in Canada since 2013. “It is incredibly difficult for everyone, and that’s not news to anyone,” RBCx director of capital John Rikhtegar told BetaKit in an interview at Startupfest in Montréal this week.
“It is incredibly difficult for everyone, and that’s not news to anyone.”
John Rikhtegar, RBCx
BetaKit checked in with Canadian general partners (GPs) and limited partners (LPs) attending Startupfest to get a better sense of the current state of the VC market, what the mood is like on the ground right now, and what the future might hold from an investment standpoint.
Despite continued signs of strain, most Canadian tech investors BetaKit spoke with believe the market has hit the bottom and expect to see a gradual, uneven recovery from here, reiterating that a return to the pandemic and zero interest rate policy-fuelled VC boom of 2021 is unlikely to occur anytime soon.
“I don’t think that we’re continuing in a downward spiral,” Whitney Rockley, the co-founder and managing partner of Toronto-based McRock Capital, told BetaKit in an interview. “I feel like we’ve hit the floor, and so now it is [about] trying to climb back out.”
Isaac Souweine, partner with Vancouver’s Pender Ventures, echoed Rockley’s assertion. “I would characterize the current market as [being] on a comeback, but comebacks take time,” he told BetaKit in an interview.
Per RBCx, so far in 2024, five Canadian VC funds have collectively raised a total of $500 million CAD, putting the country on pace to match 2014. This marks a far cry from 2021 and 2022, when $7 billion and $7.4 billion were raised across 46 and 34 VC funds, respectively. RBCx’s findings are based on proprietary data, Pitchbook data, and publicly available information.
After many invested heavily in Canadian VC when the market was hot, LPs have become more cautious and selective amid the downturn, which has led to smaller funds and longer fundraising timelines for the VC firms that invest directly in the country’s tech startups.
“Any GP who says that the money just flowed in, you’d have to double click on that and really understand where they’re coming from,” Rockley added.
Less than two years after raising its first fund, Toronto-based Storytime Capital has already begun fundraising for its second. “We’re buckling up and expecting it to take twice as long as we would have normally,” Storytime co-founder and managing partner Neil Grunberg told BetaKit in an interview.
RELATED: Québec Tech’s new mission prompts ecosystem vibe check at Startupfest
While times are tough across the board, not all Canadian VC funds have been affected equally. Amid the downturn, Rikhtegar said that Canadian LPs have focused on backing established VC firms with experience navigating multiple market cycles and a track record of returning cash, adding that many have either slowed down or paused their commitments to emerging fund managers. RBCx reports that Canada is on track to have the lowest volume of first and second fund raises in the past 10 years.
“The first-time [VC fund] manager is at the back of the line,” Souweine said. “Those are the people who are feeling the most pain.” While a few more established Canadian VC firms have “broken through”—including firms like Montréal-based Inovia Capital and Toronto’s Golden Ventures—many other managers fall somewhere “in the messy middle,” he said.
Rockley noted that entrepreneurs and VC fund GPs alike are “exhausted” right now. She said it “breaks [her] heart” to see how many emerging managers decided to pull the plug this year. “We will see, without doubt, more GPs in Canada this year just say, ‘We can’t do it’ … they’re going to skinny down their teams, you’re going to see a lot of talent go, and that’s just the cycle we’re in unless big change happens.”
Sophie Forest, managing partner at Montréal’s Brightspark Ventures, noted in an interview with BetaKit that first-time fund managers need to be especially resilient and possess the personal wealth necessary to navigate the current fundraising market, which eliminates some players from contention.
RELATED: Here’s what VCs are saying about the fundraising environment at Collision
Forest fears the shift among LPs towards established VC firms will have a larger impact on the seed and pre-seed stages—where emerging managers naturally concentrate—and expressed concern that down the road, this may create a gap in the funding ecosystem between incubators and early-stage VC funds.
VCs that have not been able to return material cash to investors are now in a difficult spot, Rikhtegar noted. As RBCx and other investors BetaKit spoke with have reported, deteriorating economic conditions have made Canadian tech exits less lucrative and tougher to obtain as private sector acquirers have become more wary and discerning, and the initial public offering market has cooled and remained down.
“In today’s world, capital calls are outpacing capital distributions,” said Rikhtegar, supporting past BetaKit reporting on the topic.
Many LPs invested heavily in Canadian VC when the market was hot. Multiple investors BetaKit spoke with noted that some of the pension funds, corporate VCs, family offices, and high-net-worth individuals that were previously more active in the Canadian VC market have pulled back amid the downturn, as they have sought to rebalance their broader portfolios or adjust their investment strategies.
RELATED: Q1 Canadian VC funding posts mixed results as PE market rebounds, CVCA reports
This shift has fuelled pain for many Canadian tech startups, in the form of layoffs, pivots, selloffs, and shutdowns. “I think the companies that raised in the 2020, 2021 Wild West are in probably grave danger or have succeeded,” Grunberg said. “There’s not a lot left in the middle ground.”
Most of the VCs BetaKit spoke with said they expect to see more Canadian tech startups shed staff, close up shop, or quietly sell as current market conditions continue.
For her part, Forest, who has navigated hot and cold markets before, is excited about the change of pace the downturn has brought. “There’s no race,” she said. “There was a period of time where everybody was racing—including the entrepreneurs and the investors—which led to crazy investments, too much money spent on stuff that didn’t make sense, or people building without knowing if there was a product-market fit.”
The downturn has given LPs “the opportunity to really make sure that we were investing in solid franchises,” said Beatrice Couture, principal at Teralys Capital, a Montréal-based, Venture Capital Catalyst Initiative-backed fund-of-funds that is an LP in many Canadian VC funds.
RELATED: Report: Canadian corporate VC funding is dismal compared to the US
“You can really see who is there for the long run, and who might not be there for the long run,” Couture said in an interview with BetaKit.
In an interview with BetaKit, Danielle Filistin, director of strategic investment funds at Québec credit union Desjardins, noted that LPs have been negotiating more around the key-person clause, which prohibits VC firms or managers from making new investments if one or more key leaders leave a VC fund or are no longer able to perform their duties.
While this clause is a standard mechanism for ensuring sustainability and continuity at VC funds, Filistin said that in today’s market, LPs have honed in more on what it represents, what triggers it, and what the aftermath might look like should core folks at the VC funds that Desjardins and other Canadian LPs invest in depart.
“You can really see who is there for the long run, and who might not be there for the long run.”
Filistin and Couture noted that LPs want to ensure that the fund managers they back are committed long-term. “What we want to do is make sure that the people that are there are passionate, that they have the expertise needed, and that they understand that they’re accountable for how they generate returns,” said Filistin.
As to how Canadian and United States (US) VCs are interacting these days, investors BetaKit spoke with said that following an initial pullback during the downturn, they have seen US activity in Canadian tech heating up again. In some cases, US investors are beating Canadian VCs on deals because they are willing or able to move faster and are less price-sensitive when it comes to valuation, multiple VCs confirmed to BetaKit.
Some investors BetaKit spoke with expressed worry that Canadian LPs aren’t moving quickly enough. In an interview, Rhiannon Davies, co-founder and managing partner of Halifax-based Sandpiper Ventures, noted that decision-making by some of the large Canadian capital allocators is taking longer than usual these days. She argued that Canadian LPs need to move faster or the country risks falling behind, noting that some other countries are recovering and moving more rapidly than Canada.
“Canada is at a really, really exciting place at the moment, but we are at a great risk as well of not being able to meet the capital requirements of the companies that we’re creating here—and we know where they’ll go, because there is capital south of the border,” Davies said.
Feature image courtesy Startupfest.