Experts are worried that Quebec’s faltering seed-stage funding performance in 2024 could have long-term impacts on the province’s tech sector.
Seed-stage venture deals in Québec dropped by more than half year-over-year, with dollars invested dropping by a sharp two-thirds.
A recent report led by Réseau Capital indicates that seed-stage venture deals in the province dropped by more than half year-over-year, with dollars invested dropping by a sharp two-thirds. The report, which uses data from the Canadian Venture Capital Association (CVCA), recorded only 39 seed deals totalling $112 million. The early-stage slowdown reflects a national trend that CVCA CEO Kim Furlong said “presents concerns about the long-term pipeline of high-growth startups.”
Despite the dramatic downturn, ecosystem players BetaKit spoke with are not aligned on what the seed-stage performance indicates for the future of the province’s funding landscape.
“Admittedly, the low number of seed-stage transactions is concerning,” Olivier Quenneville, CEO of Réseau Capital, told BetaKit. “This could signal a weakening pipeline of companies that would otherwise progress to the early stage and beyond.”
Montréal-based VC David Dufresne, who recently halted fundraising for his shuttered early-stage fund, CMD Capital, said the numbers are “disappointing but not surprising” and did not indicate a healthy ecosystem.
“It’s a burden on future deal flow,” Dufresne told BetaKit. “If you don’t have a healthy number of pre-seed and seed rounds, it’s going to be hard to get a healthy number of later-stage rounds.”
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There were also zero growth-stage VC transactions in Québec last year, according to the report, with nearly the entirety of Québec later-stage investment in Q4 represented by Blockstream’s $289-million convertible financing round.
Part of the problem, Dufresne said, is a dearth of capital available at the earliest stages. Réseau Capital has tracked a weakening pre-seed and seed-stage landscape for entrepreneurs in Québec since Q1 2023. In November, the Québec government quietly shuttered an investment-matching program for startups raising their first rounds, which some entrepreneurs said directly affected their fundraising efforts.
The ecosystem doesn’t just need more money, it needs more private money—particularly at the seed stage, both Dufresne and Quenneville said. Québec tech has long been reliant on public and quasi-public funds for venture funding. That trend continued in this latest report, which listed government-backed institutional funds as the top four most active investors.
Though Quenneville said he began the year with “cautious optimism,” the ongoing trade war between Canada and the US has quashed it. “It is still too early to draw conclusions, but the current uncertainty is never good for business,” he told BetaKit.
While some say the numbers reflect a crisis requiring action, other VCs see a blip that will right itself. Hugues Lalancette, partner at Inovia Capital, said he thinks the “health of the ecosystem is strong” and that a tough 2024 represents a temporary dip due to overlapping global and economic factors, including the trade war.
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But Lalancette did acknowledge that capital is scarce on the deployment side. He attributed it to a slowdown in the liquidity path in 2024, such as through exits and other levers like secondary issuances.
Lalancette said that he expects more US acquisitions of Canadian companies over the coming year, which would create an influx of cash in the market that will flow up to limited partners (LPs) and, he said, be reinvested in early-stage companies.
Inovia was one of the most active private investors in Québec in 2024 besides Anges Québec, a network of angel investors. Despite the ecosystem-wide decline in deals and low seed-stage activity, Lalancette said Inovia hasn’t seen a slowdown in its venture funds.
“What we’re seeing in our portfolio is actually reacceleration, especially at the venture stage, and more capital-efficient businesses, because entrepreneurs know that capital is not unlimited like it was in 2021,” Lalancette said.
Artificial intelligence (AI) integration, coupled with low capital availability, is allowing Canadian startups to do more with less, Lalancette said.
In Québec, AI adoption drove investor interest in 2024, according to Inovia’s recent State of software-as-a-service (SaaS) 2024 report. The report ranks Québec first among Canadian provinces for VC investments in AI. The province accounted for 24 percent of AI-related deals, and 23 percent of AI companies with VC backing between 2019 and 2024, the report says.
But despite an encouraging push from the emerging technology, Inovia’s report also noted a key factor impacting seed-stage funding opportunities: dwindling funds for emerging managers. VCs and LPs BetaKit spoke with last summer noted that emerging managers were struggling, and cited economic headwinds and rising caution from LPs.
“No one right now is taking responsibility for rebuilding the early-stage ecosystem.”
Dufresne’s firm, CMD Capital, stopped raising its early-stage fund last month and paused operations. The firm, comprised of experienced early-stage investors, cited “little to no appetite” to invest in first-time funds from institutional LPs, due to factors including low LP liquidity and existing portfolio VC funds returning for re-ups.
Emerging managers tend to invest more at the pre-seed and seed stages compared to more established VCs, according to the Inovia report. But those newer players are struggling to close funds from LPs: fundraising for emerging managers dropped from $1.2 billion across 28 funds in 2022 to $172 million across eight funds in 2024, accounting for only seven percent of VC fundraising overall.
Some support levers, such as Inovia’s Discovery Fund I, are targeted at emerging managers investing at the earliest stages. But in Dufresne’s view, the 2024 funding numbers reflect an early-stage ecosystem in need of significantly more support.
“No one right now is taking responsibility for rebuilding the early-stage ecosystem, in Québec specifically and in Canada,” Dufresne said. “I would love to see more people that have gained from this ecosystem take responsibility [for] building the next generation.”
Feature image courtesy Snap Shoot via Unsplash.