VC funding in Canada: Decoding the past decade of growth

 VC funding in Canada: Decoding the past decade of growth

Today, Canada has a thriving startup ecosystem and investors have poured significant VC funding in Canada in recent years. The country has become an attractive destination for founders looking to start, raise capital and grow their businesses.

In terms of funding peak till date, 2021 was the record year till date for venture funding in Canada with nearly CA$15.1 billion invested. This mirrored the exponential trend in other startup hubs across the globe. 2021 was also the record-setting VC funding year in the US, China, India, UK, Germany and other countries.

Overall, Canada has consistently been 6th-7th biggest in funding dollars in each of the past 5 years, as per In global funding dollars based on 2022, Canada ranks behind US, China, UK, India, France & Germany. However, Canada has seen one of the fastest growth in dollars invested among top 10 countries. Over the past 5 years till 2022, VC funding in Canada grew by 4.3x, behind only Germany & South Korea (5.1x each). Canada’s growth on the metric beat that of India, Israel, France, Singapore, UK, China & US. Clearly, Canada is already a strong player in the global tech startup ecosystem. And it is poised to become a bigger player on the global startup stage.

Here we take stock of the past ten years of VC funding in Canada, and look at the current status at the end of Q1 2023.

Pre-pandemic steady growth of VC funding in Canada (2012-19)

Till early 2020, venture financing in Canada demonstrated a steady growth curve for at least 7-straight years. Based on regular data published by the Canadian Venture Capital & Private Equity Association (CVCA), venture financing in Canada grew by 4.3 times between 2012 and 2019. This was a strong growth period, showcasing an annual growth CAGR of over 23%.

Yet, this was slightly below the overall growth of global venture financing trend over the same period. Based on regular data published by KPMG Venture Pulse, global venture financing grew by nearly 5.1 times between 2012 and 2019. This represented an overall 26% CAGR growth for the worldwide ecosystem.

VC funding in Canada Vs Global, Annual Trends

Two growth spurts between 2012 and 2019

Between 2012 and 2019, the global venture financing jump primarily happened in two spurts. Canada experienced the same jumps with a delay & with lesser intensity.

The first large jump was in 2014-15, when global VC funding grew 2.4 times within a couple of years. The primary trends across the globe then were the rise of mega-rounds (>US$50M), surge in unicorns and high IPO exits. While Canada missed the bus in 2014-15, it demonstrated 40% growth in venture financing in 2016. As a result, it partly caught up on the growth curve as global activity plateaued with only 8% increase in the year. The country got its due of mega-rounds, with 11 such rounds totalling over CA$1B. This helped Canada reach its highest VC activity on record since 2001. Key Canadian tech startups that raised a lot of funding then included Lightspeed POS, Thalmic Labs, Real Matters, and Blockstream.

The second global pre-pandemic jump was in 2018, when global venture financing grew by 67% in a single year. The key trends in 2018 were the rise of mega-funds (>US$1B) and another flurry of global mega-deals (>US$100M). With the inception of Softbank’s US$100B Vision Fund in 2017, many US$1B+ funds were created in 2018. These included Sequoia (US$8B), Tiger Global (US$3.75B), Bessemer (US$1.85B), and GGV (US$1.36B). At the same time, there were an extraordinary number of mega-deals in 2018. These included Ant Financial (US$14B), Juul (US$12.8B), ByteDance (US$3B), Grab (US$2.8B), and more. Canada missed the bull party again and had very muted 2017 and 2018.

Also read: Reverse mortgage tech startup Bloom gets CA$7M funding now

2019 a big breakout year for VC funding in Canada

However, 2019 was the breakout year for VC funding in Canada prior to the pandemic, where it bucked the global trend in a major way. It experienced nearly 80% growth in venture financing in 2019, while the global VC funding contracted by 10%. The country witnessed 28 mega rounds, with five of them of over CA$200M. As a result, the country largely caught up on the pre-pandemic growth curve in VC funding. The Canadian tech startups that raised high funding then included Verafin, Clio, 1Password, Coveo, and Element AI.

Overall, VC funding in Canada reached a lifetime peak till that year in 2019 with CA$6.5B invested. And there were signs of the growth continuing, but then Covid-19 pandemic hit.

Bust and mega boom of pandemic years (2020-21)

Covid-19 pandemic put a hard brake on the Canadian venture funding ecosystem. 2020 saw a big drop of over 30% in the amount of funding poured in Canadian startups, compared to 2019. Canada was hit much harder than the total global venture ecosystem, which actually grew slightly. Globally, investors focused on supporting their portfolio through the uncertainty and placing bets largely on pandemic-proof sectors or late-stage rounds.

The US, EU and Asia had already had a dampened 2019, in which some frenzy of 2018 was rebalanced. So these regions had a start of the bullishness come back by Q4 2020. The EU especially witnessed a big jump in overall VC funding in 2020. This was primarily driven by low interest rates in many jurisdictions combined with large amounts of dry powder available. Even though Canada witnessed a big drop in VC activity, 2020 saw the second-highest level of annual VC investment ever in the country. Investors invested in 507 deals in Canada an deployed nearly CA$4.4B, second only to 2019, which was an outlier year.

Unprecedented boom of 2021

And then came 2021. This was almost a logic-defying year and without precedence by far in the frenzy of VC activity across the globe. The global VC financing grew by a whopping 100% in a single year. And Canada splendidly outdid the global trend by growing 3.4 times in 2021!

The easy access to capital, the high gains realized on exits throughout the year, and the growing involvement of corporates, family offices, and a variety of other non-traditional investors increased the market’s allure significantly. Investors across industries had the pressure to improve digital offerings and hybrid work environments firmly on their radar. The rise of the Omicron variant, the return of work-from-home mandates in some jurisdictions, or the delay of return-to-office plans in others, primarily drove these trends. The combination of a favourable investment climate and the ongoing push towards faster digitization contributed to the extraordinary level of VC investment.

This was the year of mega-rounds globally. In Canada, 72 mega-deals (>CA$50M) were done, valued collectively at CA$10.6B. These accounted for almost 75% of all investment in the year, including 12 deals valued over CA$200M that led the unprecedented year. The average round size also reflected the same, as it more than doubled to CA$18.3M compared to CA$8.7M in 2020.

VC funding in Canada, Average Round Size & Number of Deals

Cumulatively in the pandemic years of 2020-21, VC funding in Canada and the globe both grew by 2.3 times. With the superlative jump in 2021, Canada finally caught up to the global growth trend of past decade.

Decade-long surge in VC funding in Canada driven by several factors

The investment boom in Canadian startups between 2012-21 has been a result of multiple factors. These include government action, maturity of local VC ecosystem, as well as increased foreign investor interest in Canadian tech startups.

The Canadian government has implemented various programs and initiatives aimed at supporting the growth of startups in the country. These are proving to be beneficial and the country continues to attract top talent and investment dollars. The welcoming immigration policies, in stark contrast to recent sentiment in the US, are leading to growing concentration of tech founders here. Moreover, better-accessible government funds, a focus on innovation, available & cost-effective talent pool, and easy access to the North American market, have all contributed.

The VC ecosystem has also matured in recent years and there are hundreds of venture capital funds in Canada now. Among the most active investors in Canada are BDC Capital, Export Development Canada (EDC), Real Ventures, Relay Ventures, Versant Ventures, Inovia Capital, Golden Triangle Angel Network (GTAN), among others.

In addition, foreign VCs are investing more frequently in Canadian businesses now. In 2021, foreign investors participated in 32% of all VC deals in the country, which represents a notable increase from the previous year’s figure of 23%. Investors are participating in Canadian deals from the US, Germany, Singapore, Switzerland, Singapore, Australia, etc. Recently, a slew of Corporate Venture Capital (CVC) funds have been closed too, demonstrating the growing corporate interest in the Canadian venture asset class. A few of these CVC funds include Deloitte Ventures, Emmertech, and Spin Master Ventures.

Also read: Binance exits Canada amid new crypto regulatory challenges

Post-pandemic funding winter ongoing now, but it’s a global trend (2022-23)

Since the 2021 surge, a deep funding winter has set in Canada. 2022 saw a drop of over one-third in terms of amount invested, while deal volume was more resilient on an annual basis. However, the intensity of the freeze is really evident in the quarterly trends. The conservative sentiment has really hit hard by Q1 2023, during which only CA$1.2B were invested in Canadian startups in just 57 deals. If the same level of activity continues as Q1 2023, 2023 will see a further steep drop of over 50% in amount invested and deal volume over 2022.

VC funding in Canada Vs Global, Quarterly Trends

However, this freeze is in line with the global funding winter that has set in globally. Till 2019, there seems to have been a lag in Canadian ecosystem to catch up to annual global trends. However, that usual annual lag seems to be lesser noticeable now since 2020.

The global winter is ongoing due to several macroeconomic and geopolitical issues. These include the Russia-Ukraine war, post-pandemic cooling of digital economies, high inflation rates, and resultant interest rate hikes across geographies. And in the past couple of months, the demise of SVB & ensuing banking crisis has brought further macroeconomic uncertainty globally. On an annual & quarterly basis, Canada seems to be moving much more in sync with the global trends now.

The road ahead

Looking ahead, it will be another 2-3 quarters at the least before any bullishness in the VC activity comes back to Canada or globally.

“There are so many things happening at once right now that it’s difficult to even try to predict where the world is going. It’s not only the geopolitical challenges. It’s also the way the world reacted to those, to rising gas prices, and to the impact of inflation on everything. For the VC market, the rise in interest rates is also an enormous factor. Cash is quickly becoming more expensive.”

Jonathan Lavender, Global Head, KPMG Private Enterprise

The broader feeling in the startup ecosystem is that the current recessionary trend has brought a reversion to the pre-pandemic growth curve.

“Despite rocky macroeconomic conditions, Canadian VC is forging ahead on a positive trajectory, a return to pre-pandemic levels. This is evident with the CAD $1.17B invested across 153 VC deals this quarter, placing us on par with levels achieved in Q2 2020. In Q1, we observed VC investors prioritizing higher quality companies and adopting a cautious approach. These strategies are in response to current market conditions, where investors are staying the course and keeping companies private until values and public markets have rebounded.

While challenges exist, the Canadian VC market is resilient and continues to demonstrate its potential.”

Kim Furlong, CEO, CVCA

It remains to be seen whether 2020-21 can be considered outlier years for VC funding in Canada. And whether Canada can join the global ecosystem in the recovery that is expected in 2024, if not earlier. Two things are certain though: First, investment cycles are a recurring economic phenomenon and we expect a recovery eventually; And second, there is a lot of dry powder globally that needs to be deployed. Keep watching this space!


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