Canadian corporate venture capital (CVC) funds “punch below [their] weight” compared to their counterparts in the United States, according to a new report published Tuesday by Deloitte Ventures and the Business Development Bank of Canada (BDC).
“When compared to countries like the United States, Canadian corporates exhibit lower activity in VC and tend to direct their investments primarily towards foreign companies,” said BDC Capital executive vice president Jérôme Nycz.
“However, we stand to gain significantly by fostering closer collaboration between technology startups and Canada’s corporate sector.”
Of the 214 Canadian public companies that generated more than $1 billion in annual revenue, only six percent directly participated in a venture capital (VC) deal in 2023, the report stated. By comparison, that figure rises to 40 percent for equivalent US companies.
Canadian CVCs also mostly invest abroad, the report found. 2020 featured a fairly even split in Canadian CVC funds investment by geography, with 49 percent of activity in the domestic market and 51 percent in foreign markets. During the bull run of 2021, participation in domestic deals dropped to 36 percent while increasing to 64 percent in foreign deals. In 2022, the split between domestic and foreign deal participation was 40 percent and 60 percent, respectively. Last year, domestic participation in VC deals grew to 47 percent while foreign deals activity was 53 percent.
“Canadian tech startups represent a very small percentage of the overall global startup ecosystem, which means that from a Canadian CVC perspective you need to have a global focus if you want to be on top of the latest technologies and products,” Deloitte Ventures managing partner Talia Abramowitz said in an email.
Deloitte and BDC argue that increased startup investment by CVCs is essential to growing the innovation economy, with Nycz calling Canadian corporate investors “a missing piece.”
According to the report, big corporates benefit from access to new technologies, insights into new markets, exposure to potential future partners, financial upside from their investments and a safe space to take on risk. Startups get access to capital, commercial partnership, introductions to potential customers, mentoring, strategic support from industry experts, and credibility through association with a trusted brand. Meanwhile, the economy benefits from tech clusters boosting job growth and economic productivity and providing competitive pricing on innovative solutions.
“It’s our belief that this value can breed success, which stimulates our innovators to produce more,” Abramowitz said.
Overall, the number of CVC deals were highest during 2021 and 2022, with Canadian CVC funds completing 136 and 141 deals, respectively. In 2023, corporate funds completed 68 deals, higher than the 54 completed in 2019. However, Canadian CVCs invested in 32 Canadian-based companies in 2023 compared to 38 in 2019.
“The first half of 2024 has continued to be soft for venture deals and we believe that corporate venture capital deals will mirror the trend, but are hopeful for a slight rebound in the last quarter of 2024,” Abramowitz said.
The report identified only 30 Canadian companies that have completed and reported at least one VC deal since 2019. For the technology sector, these include BlackBerry, Constellation Software, Dapper Labs, Index Exchange, Maropost, Shopify, Thomson Reuters and WELL Health Technologies.
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The majority of active Canadian CVC funds’ parent companies are in the financial services, media and telecommunications, or technology industries, while other industries, such as energy and industrial and manufacturing, are largely absent in the CVC space. The energy sector, for example, represented 22 percent of Canadian companies earning more than $1 billion in annual revenue but participated in two percent of CVC deals between 2019 and 2023.
“Part of the reason CVCs in Canada are concentrated among financial, technology, media, communications and telecom companies because these companies are typically more leveraged to software and the volume of software deals are approximately 10x the volume of hardware deals,” Abramowitz said.
“With the strong focus on clean energy and the rapid acceleration of innovation in this sector, we do hope and expect the energy, resource and mining industries to accelerate adoption in the coming years.”
Foreign CVC deals fell to their lowest level in five years during 2023, with foreign firms participating in 12 percent of Canadian startups’ VC raises. It was highest in 2019 at 18 percent, dipping to 14 percent in 2021 and nearly reaching the peak at 17 percent in 2022.
Between 2022 and 2023, the number of Canadian startup VC deals fell 13 percent from 760 660. During the same period, foreign CVC deals in Canadian startups declined 40 percent from 128 to 77.
“This suggests that foreign investors, who have traditionally been responsible for most CVC participation in Canadian VC deals, have been reducing their investment activities or focusing their attention on other markets,” the report said.
Images courtesy Deloitte.