Canada's venture capital market proved its resiliency in 2020.
Despite uncertainty from the COVID-19 pandemic, the U.S. presidential election, Brexit, and geopolitical trade tensions, Canada closed out 2020 with its second-highest level of venture capital investment ever. The latest KPMG Private Enterprise Venture Pulse quarterly report found that US$3.8 billion was invested in Canada in 2020, a 22 per cent decline from the record-smashing US$4.9 billion in 2019, but strikingly 15 per cent above US$3.3 billion in 2018.
The initial pandemic lockdown last year prompted many VC and private equity funds to focus primarily on late-stage deals and supporting companies already in their existing portfolios. As the year unfolded, however, funds began flowing into firms developing technologies to combat the impacts of the coronavirus, a trend seen around the world.
Business-to-business (B2B) solutions were suddenly in high demand to meet the needs of companies looking for ways to better connect their remote workforces and improve or provide online sales or digital service capabilities. Fintechs, especially in payments and lending services, gained even more traction when consumers and businesses wanted to avoid handling cash and shifted to e-commerce. The sudden shift to remote teaching and online learning also sparked interest in edtech firms.
But, hands down, the biotechnology and life sciences sector not surprisingly had its moment in the sun. Funds poured into this previously underappreciated asset class. Although risky by nature, the rewards can be large as we've seen in the past year with one Canadian company nearly tripling in value on the first day of trading when it made its debut.
In 2020, VC and private equity-backed initial public offerings (IPOs) accounted for 73 per cent of the year's 43 non-capital pool company (CPC) and special purpose acquisition corporation (SPAC) IPOs, valued at $4.85 billion in gross proceeds, according to CPE Analytics. This level of IPO activity is a testament to the diversity of the Canadian market.
Investor confidence in the public markets provided an opportunity for VCs and PE funds to divest some of their investments. Exit activity topped US$6.8 billion in Canada last year, 74 per cent of which occurred in the fourth quarter. By comparison, exits tallied just $1.5 billion in 2019.
VC funds flow where opportunity exists
VC and PE firms will take hard second looks at biotech and life sciences firms. Meanwhile, fintech, insurtech, wealthtech, and e-commerce will remain robust. Corporates, looking for tuck-in opportunities to take advantage of existing technologies, will keep deal activity strong in 2021.
To be sure, financial services companies are striving to digitize their operations and implement new technologies to better collect and collate data on their customers, identify and monitor for fraud and money laundering, and make their operations more efficient. This trend will persist into this year and the next.
The economic outlook this year is very much tied to how quickly coronavirus vaccines are distributed, and venture capitalists are currently scouring the landscape for companies, industries, and sectors that are positioned for a comeback if most of the population is inoculated by mid-year.
Low interest rates combined with ample dry powder sitting on the sidelines from recent exit activity will more than keep the Canadian market robust.