Q3 2023 marked a three-year low for venture deal volume in Canada

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VC investment fell 60 percent quarter-over-quarter, while seed-stage funding remained “robust.”

The third quarter of 2023 marked Canada’s slowest quarter for venture capital (VC) activity in three years, according to a new report from the Canadian Venture Capital and Private Equity Association (CVCA).

The CVCA tracked $1.18 billion in venture funding across 134 deals in Q3 2023, which is the lowest amount of dollars tracked in a single quarter since Q3 2022. Investment in terms of dollars raised fell by a staggering 60 percent quarter-over-quarter, whereas deal volume dropped by 26 percent quarter-over-quarter. Q3 2023 marked the country’s slowest quarter for deal volume since the third quarter of 2020.

The CVCA partly attributed the slowdown in investment to a decline in megadeals during the quarter and its resulting impact on average deal size (the CVCA defines a megadeal as one valued at $50 million or higher). Per the report, only seven megadeals closed in Q3, nearly halving the average deal size quarter-over-quarter to just $8.9 million.

The CVCA tracked a total of $5.4 billion across 494 deals so far in 2023.

Canada’s economy is continuing to show clear signs of a slowdown thanks to high interest rates and stagnant GDP. These conditions have led to tighter capital conditions, less deal-making, and lower valuations for the country’s tech startups since spring 2022.

For CVCA CEO Kim Furlong, the country’s Q3 numbers signal a return to pre-pandemic normalcy. “The primary focus on growth has been replaced with a focus on solid businesses with sustainable plans and a path to profitability,” Furlong said in the report.

Despite the significant slowdown in investment during Q3, investment in terms of total dollars raised did increase by 14 percent year-over-year, according to the CVCA. Still, Q3 2023 was the country’s second-lowest quarter for investment in three years, only beating out Q3 2022, which saw $1 billion in total investment.

The CVCA tracked a total of $5.4 billion across 494 deals so far in 2023, roughly half of the $10.5 billion raised in 2022 and 65 percent of the 755 deals in 2022. David Kornacki, director of data and product at the CVCA, noted that despite the deceleration in Q3, “confidence remains high in Canadian venture capital,” adding that artificial intelligence, cleantech, and life sciences continue to be key drivers of investment activity.

Seed funding “robust” as late-stage flounders

Of the seven megadeals closed in Q3 2022, among the largest were Tenstorrent’s $133-million raise and DalCor Pharmaceuticals’ $108-million late-stage financing round. In total, the CVCA has tracked 27 megadeals in 2023, which cumulatively account for 51 percent of all dollars raised nationally.

However, seven megadeals represent a sizable dip in volume in Q2, which certainly depressed deal size averages in the third quarter, but Canada’s venture landscape was also hindered by a decline in deal volume at Series A and higher deal stages.

At the Series A and B stages (the CVCA classifies these as early stage), the CVCA tracked $2.6 billion from 145 deals year-to-date, with the average deal size growing by 15 percent compared to 2022, reaching $17.8 million.

At the late stages (Series C and higher), investment activity has declined in 2023 with $1.7 billion raised across 40 deals year-to-date. While this is significantly down from the funding seen in 2021 and even 2022, it is far more consistent with the results seen at these stages pre-pandemic. Kornacki characterized this performance as “robust” when compared to the CVCA’s 2019 data.

“The apparent slowdown is primarily noticeable when contrasted with the exceptional outlier years of 2021 and 2022,” Kornacki said. “We anticipate continuing along this trajectory into the foreseeable future as we gradually return to normalcy.”

At the earliest stages, Canada saw $95 million invested across 86 pre-seed deals in the third quarter, which the CVCA report noted is consistent with 2022. While seed investments slowed in Q3, over $570 million in seed financing has been raised year-to-date. The CVCA noted it will likely not match the record $837 million raised in 2022, it is on pace to match 2021’s total of $745 million.

In its report, the CVCA described pre-seed and seed-stage investments as “resilient,” which is at odds with how many Canadian VCs have described the country’s seed-stage funding landscape in recent years.

Even during Canada’s bull market year of 2021, investors like Matt Roberts, partner at ScaleUP Ventures, pointed to a striking lack of institutional capital available for seed-stage startups, and a precipitous decline in seed-stage activity compared to six years prior. Other stakeholders like Brenda Irwin, managing partner at Relentless Venture Fund, have noted a fewer active pre-seed investors in Canada and higher revenue goalposts for seed investments since the conclusion of 2021.

Institutional investors have sought to address this seed-stage gap in recent months, including BDC Capital, which launched a $50-million Seed Venture Fund last month.

However, per the CVCA’s data, pre-seed, seed, and Series A and B deals have made up 84 percent of the deal flow in 2023 thus far, indicating the country’s early-stage pipeline is managing to keep pace with years prior.

“Despite a consistent year-on-year growth in both deal count and deal value for pre-seed and seed fundings since 2013, there remains opportunity for additional investors to fund companies at these stages,” Kornacki added.

Funding records in sight for cleantech, agtech

While companies in the information, communications & technology (ICT) have picked up the lion’s share of venture capital so far this year—companies in this sector have raised $3.1 billion across 237 deals, nearly half of all deals and almost 60 percent of the total funding—the CVCA highlighted two other verticals that have made strong showings in 2023: cleantech and agribusinesses.

In the first nine months of 2023, cleantech companies raised $800 million across 55 deals. Deal volume has already matched its 2021 record and is on track to surpass the record deal value of $1.1 billion tracked in 2022.

Agribusinesses are also on pace to set new records in both deal volume and investment in 2023, according to the CVCA. So far, companies in the sector have raised $232 million across 37 deals.

RELATED: Cultivator’s AgTech accelerator startups surpass $80 million in funding since January 2022

Cleantech, in particular, saw a landmark year for venture funding in 2022, as highlighted by the CVCA and in Export Development Canada’s (EDC) annual cleantech report last month. EDC’s report also noted some of the persistent challenges faced by Canadian cleantech startups, including inadequate levels of private research and development spending per capita, as well as a lack of local investors.

Is the IPO window finally opening?

Unsurprisingly, Ontario has accounted for nearly half of all dollars raised this year, with $2.5 billion raised by 200 companies headquartered in the province. But it hasn’t been a quiet year for the other provinces.

Nova Scotia, in particular, has experienced a record-breaking 2023—the province’s startups have raised $158 million in venture funding so far, already surpassing the province’s 2022 record by nine percent. Ontario was trailed by Québec, which has recorded $1.2 billion in venture funding this year, followed by British Columbia with $888 million, and Alberta with $543 million.

Many of these provinces have also seen sizeable exits from local companies this year, such as Novartis’ $4.7-billion CAD acquisition of Vancouver-based Chinook Therapeutics and Ottawa-founded Turnstone Biologics’ $337-million IPO on the Nasdaq in the third quarter of 2023. The CVCA has identified 28 exits so far this year, which have cumulatively generated $6.8 billion.

Turnstone Biologics’ IPO is notably the first VC-backed IPO in Canada in 18 months, and comes after many Canadian tech companies chose to delay their IPO plans as public markets cooled in late 2021. While this might appear to be a hopeful sign for the IPO market, it also comes as many Canadian companies who did IPO in that window opt to go private, with Q4 Inc. this week the latest to enter into a buyout agreement that will take it off the Toronto Stock Exchange.

“While the return of IPO activity is a welcome one, we remain cautiously optimistic due to the impact of high interest rates and cautious investor sentiment on the current market,” Kornacki said. “These factors, among others, will continue to affect the market well into 2024.”

Isabelle Kirkwood

Isabelle Kirkwood

Isabelle is a Vancouver-based writer with 5+ years of experience in communications and journalism and a lifelong passion for telling stories. For over two years, she has reported on all sides of the Canadian startup ecosystem, from landmark venture deals to public policy, telling the stories of the founders putting Canadian tech on the map.

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