Global contender: venture capital in Canada

May 2022 | FEATURE | PRIVATE EQUITY

Financier Worldwide Magazine

May 2022 Issue

As the Canadian economy continues to rebound from the coronavirus (COVID-19) crisis, venture capital (VC) in Canada is on an upward trend, with the market recording historic growth figures.

Outside of Canada, VC funds worldwide have enjoyed a period of historic growth. According to a 2021 Pitchbook report, VC funds recorded the strongest performance among all private capital strategies over the last 12 months.

In the early days of the pandemic, many VC and private equity (PE) funds shifted their focus to late-stage deals and providing support to companies in their existing portfolios, as COVID-19 caused unprecedented damage to economies and reshaped markets.

However, as time wore on, funds began flowing into firms developing technologies to combat the impacts of COVID-19. This trend was seen around the world and continued through 2021 and into 2022. In particular, VC and PE firms have taken an interest in biotech and life sciences firms. Fintech, insurtech, wealthtech and e-commerce have also been areas of focus.

Canadian VC investment hit a high of CA$11.8bn across 568 deals by the end of Q3 2021, topping the previous 2019 record of CA$6.2bn in 560 deals during the same period, according to the Canadian Venture Capital and Private Equity Association (CVCA). Alongside domestic activity, this upward trajectory is increasingly fuelled by international players looking to tap into Canada’s expanding ecosystem of investors and start-ups. With the global spotlight shining brightly on Canada, the pressure is on VCs to sustain and boost interest, and ensure the upward trend in investment does not slow in 2022 and beyond.

“Cities such as Toronto and Vancouver broke VC funding records last year, while megadeals and unicorn designations abound. And this activity has continued into 2022.”

In a bumper year for VC in Canada, by year end 2021 saw $14.7bn invested across 751 deals – more than double the previous record of $6.2bn invested across 539 deals in 2019, according to the CVCA’s year-end market overview. A record 71 of these deals were valued at more than $50m, which accounted for 72 percent of the VC deployed last year. Meanwhile, there were 72 VC-backed exits valued at $10.6bn, and a record eight initial public offerings (IPOs) valued at $3.9bn in total.

According to KPMG, the high levels of Canadian VC investment in the first half of 2021 were due, in part, to pent-up demand, significant amounts of dry powder, and a sense of excitement in the market.

Companies from a wide range of sectors and locations attracted VC investment, including Deep Genomics, Hopper, Blockstream Corporation, Freshbooks, Flinks and 1Password. Indeed, following their Q3 funding rounds, Blockstream, Freshbooks, and 1Password became Canada’s newest unicorn companies.

Perhaps unsurprisingly, the sector which attracted the highest level of VC investment was information, communications and technology, which raised $9bn over 430 deals – more than doubling the previous record of $4bn in 2019. The tech space accounted for approximately 60 percent of all venture deals last year. Meanwhile, the life sciences sector raised $1.8bn over 102 deals – a 50 percent increase over the $1.2bn raised in 2020.

Canadian companies have been attracting VC and PE investors despite ongoing turbulence in the global economy. Cities such as Toronto and Vancouver broke VC funding records last year, while megadeals and unicorn designations abound. And this activity has continued into 2022. Rising numbers of foreign VCs have invested in Canadian companies over the last year, according to the CVCA.

The COVID-19 pandemic has been transformative in many respects. A greatly increased appetite for tech-based solutions, driven by the emergence of remote and hybrid working, as well as the abundance of dry powder in the venture market, have created strong demand for new tech sector investments this year.

There have also been many exits to public markets, with the largest disclosed deals including Verafin’s sale to the Nasdaq, the IPOs of Coveo, Dialogue and Q4 Inc., and Redlen’s sale to Canon. Exits recorded in 2021 amounted to a 92 percent increase in volume, but a 15 percent decrease in total value.

Despite optimism in the sector, there are headwinds for Canada’s VC industry, particularly in the tech space where new ecosystems are emerging in diverse locations and challenging existing hubs. Growth in these locations is intensifying the battle to attract and retain talent – the pandemic has alerted companies to the fact that people can live and work from anywhere, allowing start-ups easier access to a global talent pool. There is also a clamour for early-stage support, and ongoing post-pandemic uncertainty.

Furthermore, though VC investment in Canada has grown over the last two years, the Canadian market still lags behind the US. There is, according to Kim Furlong, chief executive of the CVCA, still “significant room for growth” in the Canadian VC market. “We’re not even five percent of the US venture market; we represent about 4.5 of the US market,” she said. “So, our ambition should not be to only celebrate this year, which was a fabulous year and I will celebrate it, but I’m also applying some perspective in terms of our trajectory and the work that remains to be done.”

Nevertheless, the Canadian VC market has made great strides during the pandemic era. As Canadian start-ups continue to mature and grow, VC investment in the country looks set to remain strong.

Richard Summerfield