Despite being overshadowed by the enormity of the U.S. capital markets, Canada’s venture capital sector has seen impressive growth, with a compound annual growth rate of 22 percent in total venture dollars invested since 2014. This statistic was highlighted in a recent Business Development Bank of Canada (BDC) report.
However, the venture investment to GDP ratio in Canada did face a slight downturn, dropping from a peak of 0.67 percent in 2021 to 0.48 percent in 2022. This 28 percent contraction, though significant, was milder compared to the 37 percent pullback in the U.S. Yet, Canada’s figure aligns with the OECD country median, as per the BDC’s findings.
In the realm of institutional investment, Canada should not be overlooked. A stark comparison made in the BDC report showed that Canadian funds’ 10-year net internal rate of return (IRR) has notably improved from -7 percent in 2013 to 15 percent in 2022, while U.S. funds stood at 20 percent. The report emphasizes the long-term importance of venture capital as an asset class, even though short-term returns have seen a decline.
John Ruffolo, a veteran in the private equity scene and founder of Maverix Private Equity, expressed concerns that the reported venture capital returns might be overstated, as many funds have not promptly adjusted the valuation of their portfolios. Christopher Gillam from BDC confirmed that the upcoming report would likely reflect adjustments to the five-year and 10-year IRRs.
Canada’s growing expertise in cutting-edge fields such as artificial intelligence and quantum computing, along with more competitive tech salaries due to the exchange rate, has drawn U.S. investors into the market, particularly in Series A and B funding rounds, according to Katy Yam from Real Ventures.
In 2023, the Canadian venture capital market saw C$6.9 billion invested across 660 deals. While this was a decrease from the previous two years, it signaled a return to the strong momentum experienced pre-pandemic. The majority of this investment was directed towards early-stage funding rounds, from pre-seed through Series B, indicating a healthy future pipeline for later-stage companies.
David Kornacki from the Canadian Venture Capital and Private Equity Association (CVCA) highlighted the significant progress in the private capital markets and the role of venture capital in fostering innovation in Canada. Chris Arsenault from Inovia Capital also noted the substantial increase in investments into Canadian tech companies since 2019, emphasizing the youthful nature of the tech VC industry in Canada.
Seed-stage investments were particularly robust last year, representing 37 percent of the total deals and 12 percent of the total dollars invested. The CVCA reports that the C$834 million raised by seed-stage companies was just shy of the 2022 record, despite a slight decline in deal volume. Pre-seed stage companies also performed well, raising C$135 million across 128 transactions.
There is a noted trend of more funds targeting seed and pre-seed markets, possibly due to more attractive valuations and the emergence of companies leveraging AI and deep tech. However, Canadian emerging funds, which focus primarily on these early stages, face challenges in securing allocations, as family offices and university endowments, which are traditional limited partners (LPs) for these funds, are more active with U.S.-based managers.
Inovia Capital has been proactive in addressing the funding gap for Canadian emerging managers through its Discovery Fund. BDC has also been supportive of first-time funds, launching a new seed fund in the fall. Tech accelerators have contributed to the rapid development of Canadian tech startups, with FounderFuel being one of the few accelerators backed by a venture fund, providing substantial support to founders.
While Canadian LPs have shown some hesitance in allocating to local venture funds, government programs like the Venture Capital Catalyst Initiative (VCCI) have played a crucial role in attracting private investment and instilling confidence in the venture capital asset class. Thomas Birch from Caisse de dépôt et placement du Québec (CDPQ) mentioned the unique ecosystem of Espace CDPQ, which fosters collaboration and competition among venture funds.
The future of the Canadian venture scene hinges on increased backing by Canadian LPs, continued government support, and the country’s rich talent pool in pioneering technologies. These factors collectively strengthen the foundation for successful startups in Canada’s vibrant venture capital environment.
