KPMG Venture Pulse reported signs of optimism coming back to Canada’s tech VC market in Q2 2024, as per its latest quarterly report. Although positive signs are there, report says VC activity is still relatively subdued compared to historical highs and comparable quarter in 2023. The Tech Factor dives deeper into the report and its analysis.
The Q2 2024 report by KPMG Venture Pulse has reported some positivity coming back to Canada’s tech VC market. As per the report, total VC investment in Canada grew to US$1.3B in Q2 2024, up from US$0.8B in Q1. This represents over a 60% growth quarter over quarter in VC investment in Canada.
However, when compared to the US$1.9B investment in Q2 2023, the subdued nature of the market sentiment seems to persist. In fact, Q2 2024 remains the most-subdued Q2 of investment activity over the past four years. Moreover, H1 2024 has seen total US$2.1 billion VC investment in Canada. This makes it the weakest first half of the year for at least the past six years. Yet, despite the historical comparisons, there are reasons for this sense that market sentiment may be taking a positive turn.
Fiscal policy’s impact on Canada’s tech VC market
In June, the Bank of Canada cut its key interest rate by 0.25% for the first time since Q1 2020. It has been a long wait for interest rates to top out and cuts to begin. The report said that it may be a positive sign that market conditions may be improving. But it added that more rates cuts would probably occur in a very measured way rather than with any rapidity.
However, since the report came out, the Bank of Canada has cut interest rates by a further 0.25% in July. At the same time, the economic growth is Canada has been very low, with 0.2% growth reported by Statistics Canada for May. Moreover, inflation has eased up in recent weeks. Even though there hasn’t been a recession, the economy hasn’t grown much, especially when accounting for population increase. Further, high borrowing prices have also had an impact on the labour market, with recent graduates and immigrants bearing the brunt of the decline in employment prospects. Over the past year, the unemployment rate in Canada has increased steadily, hitting 6.4% in June.
Therefore, speculations are rife that the central bank would need to drive more economic growth and avoid a deflationary scenario. There is a pretty good possibility of another rate cut in Bank of Canada’s September meeting. As the cost of borrowing comes down, the interest among LPs to invest in VC could return too, driving up Canada’s tech VC market.
Clean energy and AI drove VC investment in Canada in Q2 2024
KPMG Venture Pulse reported that throughout the quarter, there was significant interest in renewable energy. The US$100 million raised by the Quebec-based electric charging station business Flo demonstrated the same.
In Q2 2024, the Canadian government demonstrated a strong commitment to advancing the nation’s AI ecosystem. It announced funding for the establishment of an AI safety institute and an office of the AI and Data Commissioner to support enforcement of the proposed Artificial Intelligence and Data Act (AIDA) in April, out of a total of CA$2.4 billion in funding related to AI. Of that amount, CA$2 billion went toward a fund that aims to provide access to technical infrastructure and computing capabilities. The Federal and Quebec government-funded Scale AI program also announced in April that it will provide CA$31.3 million in funding for twenty-two projects aimed at integrating AI into various businesses.
“AI is something that Canada is known for and is really wanting to grow. I believe the government did a lot to prove its commitment this quarter, both with its CA$2.4 billion funding announcement and with its support of small companies and working to get AI into various other industries.”
Ryan Forster, Partner, KPMG in Canada
