Canada's venture capital (VC) market posted a solid second quarter in a challenging environment.
Funding activity reached nearly US$2 billion, the second-highest second quarter on record, according to the latest KPMG Private Enterprise Venture Pulse Q2 2022 report. Deal activity slowed significantly in the quarter as soaring inflation and rising interest rates fanned concerns about a possible recession and stressed investors.
The second quarter had 197 deals in total, 80 fewer than in the prior quarter and 120 less than in the year-earlier period when surging equity markets, a hearty supply of pent-up dry powder, and optimism surrounding a recovery out of the pandemic helped the Canadian VC market reach a historic quarterly high of US$4.91 billion.
As in the first quarter, we continued to see a significant number of large follow-on financings, in part due to the global volatility in the public capital markets. As evidenced by the slowdown of initial prospectus offerings (IPOs) during the second quarter, many companies delayed plans to go public until conditions become more favourable. Importantly, the bigger deals signal that companies with strong prospects are closing fundraising rounds to position themselves to achieve the scale they need to compete globally and attract talent.
Even with fewer deals overall, our venture capital ecosystem is clearly more self-sustaining than it's ever been, a sign of strength in these current difficult times. Broken down by deal type, there were 56 seed-round deals, 62 early-stage investments, 72 late-stage and seven angel investments.
Artificial intelligence (AI) and machine learning (29 deals), fintech (19) and cleantech (19) remained the most-prominent areas of VC investment in Canada.
Corporate venture capital (CVC) investment in Canada also declined, with 43 CVC deals worth US$809.5 million, compared to 60 CVC deals worth US$1.77 billion in the first quarter. Given the current environment, it's more than likely corporates will remain focused on strategic VC investments that compliment their core business.
Globally, venture capital activity dropped to a six-quarter low with 8,421 deals worth US$120.8 billion in the second quarter. Ongoing geopolitical challenges, high levels of inflation, and rising interest rates likely contributed to a slowdown in deal-making activity. We could continue to see record low activity going into the third quarter.
For more information on Canadian and global VC trends, see KPMG Private Enterprise's quarterly Venture Pulse report.