Canadian venture capital is growing up

It seems to me the old adage, "quality over quantity," is the perfect description of the current state of Canada's venture capital ecosystem. After a record year in 2021, investment in Canadian venture capital in the first quarter remains strong, but with a clearly emerging trend: fewer, but bigger, deals.

Canadian VC firms raised US$824 million in the first quarter of 2022, according to the latest KPMG Private Enterprise Venture Pulse Q1 2022 report. While the amount raised by Canadian companies was up over the previous two quarters, it was largely dominated by one substantial Series C raise.

In terms of total VC investment, Canada saw US$3.5B in the first three months of the year, up from $3B over the same period last year and $2.8B in Q4 2021. This comprises only 213 inked deals, a significant drop over the past year. But while deal count may be down, deal values are swelling, a trend I've been watching play out over the last two years.

Slowing IPO and CVC activity
While deal and fundraising amounts are growing, corporate venture capital investment and IPO activity are slowing. The decline in corporate venture capital activity that started in the last three months of 2021 continued in Q1 2022, with, again, fewer deals than the previous quarter and last year. Deal value was also much lower than the previous three quarters, albeit still higher than last year.

There were only 27 exits in Q1, worth $77.5M, down significantly over the previous quarter (Q4 2021 saw 34 exits worth $3.4B) and last year (34 exits worth $1.2B). Of the 25 exits in the quarter, only two were IPOs. So, what gives? My guess is because last year's IPO market was very frothy, that excitement is now waning, as many companies that went public last year haven't lived up to investors' expectations. Concerns about war, geopolitical instability, disrupted supply chains, rising inflation and interest rates are also playing into dampened expectations and lower valuations, which make going public less appealing. It remains to be seen how this trend will play out over the next several quarters.

Tech still top of mind
Similar to the global and U.S. VC landscape, technology still reigns supreme for Canadian investors. Half of all deals in the quarter (105) were in information technology, fully 96 of which in software. Drilling down further, the hot areas for investment include artificial intelligence and machine learning (30 deals), fintech (28 deals) and crypto assets/blockchain (17 deals).

Healthcare is also a strong area of investment, with 34 deals, the bulk of which were in, you guessed it, healthcare technology. The COVID-19 pandemic has helped drive significant innovation in healthtech, and that trend is likely here to stay post-pandemic.

Cleantech or climate tech is also a sector of interest, with 16 deals in the quarter. Given the billions in financing for cleantech firms recently announced by the Federal Government is its recent budget, this will be a sector to watch.

Canadian VC and the road ahead
The amount of money going into Canadian VC over the last couple of years is astronomical, with lots of secondary raises and later stage deals (in Q1 alone, later stage VC deals accounted for more than one third of all deals in the quarter). This is a sign of a maturing venture capital ecosystem. Simply put, Canadian venture capital is growing up, as are both its domestic and foreign investors.

The mountains of dry powder that are being deployed (and waiting to be deployed) should ensure the Canadian VC ecosystem continues to attract sizeable investment for the next few quarters. We're seeing this first-hand in our corporate advisory practice, with Q3 and Q4 already extremely busy. Beyond that, it's possible we could see some softening by the end of the year if the previously mentioned headwinds such as geopolitical instability, inflation and rising rates persist. Watch this space for updates as the year progresses.