PitchBook analysts say 2023 VC funding is “pretty much shot,” long-term recovery appears likely

PitchBook analyst: “It’s not going to be a six-month turnaround.”

As the economy has deteriorated, non-traditional investors have pulled back from the venture capital (VC) space and the initial public offering (IPO) market has cooled.

Combined, these factors have put a strain on the VC market, PitchBook analysts told BetaKit during an interview at the Collision Conference in Toronto.

There is still “a huge spread” between what many companies are willing to pay and the price acquisition targets are willing to stomach.

Many non-traditional VC investors entered the space during the low-interest rate environment of years past, which helped fuel the 2021 VC funding and IPO boom. “As things have broken down in public markets, those investors were the first to take flight and focus on putting out the fire in their public portfolios,” said PitchBook VC analyst Vincent Harrison.

PitchBook lead VC analyst Kyle Stanford noted that amid these conditions, late-stage, venture-backed tech firms have had a particularly tough time. “No exit opportunities, very little capital availability,” he said. “Those are the companies that are struggling to raise.”

The latest available PitchBook data on the Canadian market, shared with BetaKit, indicates that from a deal-count perspective, the VC investment deal count in Canadian tech companies has been falling steadily since the second quarter of 2022. Per PitchBook data, first-time deal activity by global VCs in Canadian tech firms has also plummeted. On a quarterly basis, first-time deals per quarter have fallen 70 percent since Q1 2022, while the total value of them has dropped 90 percent during this time.

Despite the slowdown, there have still been some major Canadian funding rounds this year. Per PitchBook, the biggest have been Svante, Cohere, Peak Power, Hostaway, Blockstream, LayerZero Labs, Abdera Therapeutics, Jobber, Kepler Communications, and Eavor.

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At the same time, PitchBook data indicates that there is a backlog of about 450 companies globally that should have gone public but haven’t been able to do so due to the state of the exit market. In 2023 so far, PitchBook reports that there have only been 35 Canadian tech exits, totalling $900 million. This represents a steep drop from the same time period last year, when 66 exits worth a combined $1.7 billion took place. That’s not to mention the first half of 2021, when 72 exits totalling $3.1 billion occurred.

According to PitchBook’s deal indicator, the current venture market is also the most investor-friendly it has been in years. Market conditions have made financings more complicated with terms and valuations that favour investors more than investees.

Harrison noted that it is also currently an “acquirer-friendly” market. “There’s this saying going around now that a flat round is kind of a new up round,” he said, arguing that companies that can sell today at either the same or a similar valuation to their last fundraising in 2021 or early 2022 are probably achieving a good outcome in this environment.

Most mergers and acquisitions lately have been relatively small, noted Stanford, who added that there is still “a huge spread” between what many companies are willing to pay and the price acquisition targets are willing to stomach.

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On the early-stage front, Harrison noted that while startups at this level experienced some headwinds in late 2022, the funding slowdown was less pronounced than it was for late-stage firms. Now, he said, emerging firms are feeling the burn to a higher degree.

“Early-stage companies may be more insulated, but they are not immune from the challenges, and I think a lot of those challenges are starting to catch up [to them],” said Harrison.

Sector-wise, per the seventh PitchBook-Collision VC survey, artificial intelligence (AI) has dominated investor interest at the conference. According to the survey, which saw participation by almost 100 VCs from around the world, nearly three-quarters of respondents claimed they had recently made investments in the space.

This AI focus has also been reflected in Collision’s content, as much of the conference’s programming either centres on or touches upon AI. This contrasts with 2022, when investors surveyed singled out FinTech and blockchain as the tech with the most disruption potential. This year, both were surpassed by climate tech and healthtech.

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On the VC side of the equation, as public market conditions have worsened, limited partners (LPs) have also pulled back, making it more difficult for VCs looking to close funding. More than half of VCs surveyed anticipate that it will become more difficult to raise from LPs during the next 12 months in light of high interest rates and economic uncertainty. For his part, Stanford believes VC fundraising “could be on track to drop to levels not seen since 2017.”

“At a very broad level, funding for this year is pretty much shot,” said Stanford, who noted that lots of VC firms have pushed out their fundraising timelines until 2024. Many LPs who over-allocated towards VC in previous years are pausing or decreasing their investments in the asset class as they have sought to rebalance their broader portfolios.

“At a very broad level, funding for this year is pretty much shot.”

According to Harrison, much of the capital that has been put into VC funds during the downturn has been concentrated on established rather than emerging fund managers. “For LPs that are willing to allocate, they’re going for more experienced VCs with longer track records and returns they can speak to,” he added.

Per PitchBook, by deal count, the most active VC firms in Canada so far this year have been government-affiliated, including BDC Capital—the frontrunner by a large margin—Investissement Québec, Invest Nova Scotia, and EDC.

Despite some positive signs recently indicating that the state of play is on its way toward improving, Stanford and Harrison both believe that it will still take some time for the overall VC market to rebound—let alone reach its previous highs.

“It’s not going to be a six-month turnaround,” said Stanford. “It’s not going to be a year-long reallocation. It’s going to be a long-term [recovery].”

Feature image courtesy Unsplash. Photo by Алекс Арцибашев.

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. He was also the winner of SABEW Canada’s 2023 Jeff Sanford Best Young Journalist award.

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