Seed-stage startups, cleantech “two biggest winners” amid slowdown.
Canadian venture capital (VC) investment continued to decline in Q3, as investors and startups across the country weather strong economic headwinds.
In the third quarter, Canada saw $896 million CAD invested across 144 VC deals, according to the Canadian Venture Capital and Private Equity Association (CVCA)’s latest report. On both fronts, these numbers represent a steep year-over-year decline compared to what was an especially hot Q3 2021 and Q3 2019 for Canadian VC funding.
VC investment value and deal count also dropped during Q3 2022 on a quarterly basis, falling by 50 and 25 percent, respectively. These latest third-quarter results more closely resemble what was then a two-year low for Canadian tech VC investment in the third quarter of 2020, during the early days of the COVID-19 pandemic.
“Investors continue to monitor market conditions in anticipation of an inflection point, while founders hold off fundraising at decreased valuations.”
-Kim Furlong, CVCA
Last year’s VC funding boom has given way to a broader economic downturn fuelled by high interest rates and inflation concerns, as startups and investors alike prep for what could be a prolonged slump. Amid market uncertainty, many Canadian tech VCs and entrepreneurs have taken a more cautious approach to spending and securing capital.
“Investors continue to monitor market conditions in anticipation of an inflection point, while founders hold off fundraising at decreased valuations,” wrote CVCA CEO Kim Furlong in the report.
Furlong noted that these trends mirror what is taking place south of the border in the United States, as investment firms and tech startups around the world contend with tough macroeconomic conditions.
Average deal size also declined quarter-over-quarter, which the CVCA said “may be attributed to founders opting to raise smaller amounts in an effort to preserve equity until the market conditions improve.”
One signal of that desire to preserve equity: venture debt investment in 2022 has also already surpassed 2021’s record and is currently on pace to reach a new high this year, with $214 million across 29 deals closed this quarter. Rising demand for venture debt indicates that in an environment where valuations have taken a hit, more founders have turned to non-dilutive capital.
Growth-stage companies bore the brunt of the public market slowdown in Q3, as Canadian tech firms in this segment navigate an investment slump that the CVCA anticipates “will likely persist well into 2023.”
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In the midst of a continued slowdown in the third quarter, Furlong noted that “the biggest winners” on the VC front were the cleantech sector and seed-stage companies. “Q3 shows two positive trends, first an uninterrupted growth at the seed stage and second, a higher than historical average allocation to cleantech,” said Furlong.
Seed-stage startups accounted for 43 percent of all transactions, with $152 million invested across 62 deals. Seed-stage investment in 2022 is nearly double 2020 levels and on pace to match 2021’s record by the end of the year, reports the CVCA.
Sector-wise, information and communications technology (ICT) firms still lead the way, accounting for over half of all VC deals made in 2022 to date, followed by life sciences companies at 16 percent.
Fuelled by institutional and government net-zero targets, CVCA reported that cleantech funding surpassed 2020 levels with $459 million invested across 36 deals. Meanwhile, CVCA found that Canadian AgTech and food tech investment levels remain strong, and the vertical is currently on pace to surpass 2021.
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Over on the private equity (PE) side, investors have gravitated towards smaller deals and add-ons given macroeconomic pressures.
During Q3, $2.4 billion CAD was invested across 199 PE deals, bringing the year-to-date total to $6.5 billion across 622 deals. Though the total annual PE deal count has already surpassed 2021, there has been a notable absence of larger PE deals in 2022.
“PE investors are taking a cautious approach, prioritizing deals that require less valuation adjustments amid market conditions,” said Furlong.
Facing public market volatility, many privately-held firms have also opted to stay private. As CVCA reports, there have been no Canadian tech initial public offerings (IPO) so far in 2022.
Feature image courtesy Unsplash. Photo by Igor Kyryliuk.