Venture capital funding in Canada fell to pre-pandemic levels in the second quarter of this year as the tech downturn hit private companies, according to the Canadian Venture Capital and Private Equity Association, and financiers warn that the sector’s sudden caution could continue.
The CVCA said in a new report Thursday that $1.65 billion in venture capital (VC) was deployed in 182 deals in the second quarter of 2022. It was the lowest quarter since the pandemic caused an outflow of funds to digital service companies, down 67%. of $5.1 billion in the same quarter of 2021. But that was roughly on par with the $1 investment. 66 billion in the second quarter of 2019.
However, investment figures released by the association for the first half of 2022 suggest that the true impact of the recession will be revealed more clearly in the coming quarters, as data closes the gap between when deals are negotiated for the first time and concluded. then announced.
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In its report, the CVCA said the $4.5 billion in investments announced in the first quarter — the nation’s highest second quarter on record — largely consisted of 25 “mega-deals” worth over $50 million. which were “largely remnants”. operations” from 2021.
Particularly with later-stage businesses, “we will see a downturn that may continue,” Christiane Wherry, vice president of research and products at HVAC, said in an interview. While some of the institutional investors her association works with are “able to stay on track” when it comes to funding, she said she has become much more cautious with smaller venture capitalists, funds and venture capitalists. family offices.
There may now be a “more realistic vibe” in the venture capital ecosystem as venture capitalists spend time “dealing with the end of the pandemic and where we go from here”, a said Matt Golden of Golden Ventures. Michael Hyatt, entrepreneur, investor and adviser to Northleaf Capital Partners, said financiers are “very discriminating in what they’re getting into.”
Sean O’Connor, managing director of Conexus Venture Capital in Regina and chair of the CVCA’s data committee, said “founders and VCs disagree as we find out what the new world looks like,” which could lead to tensions. . when calculating business valuations.
“We’ve seen the VC space revert to something more normalized from before the pandemic, but it’s hard to tell how much of that regression will show up in valuations.”
The surge in public and private market valuations during the first two calendar years of the pandemic has been widely recognized in retrospect as a unique moment when a global transition to digital services coincided with historically low interest rates.
The timing was also precarious. Ms Wherry acknowledged that the record levels of venture capital investment in Canada in 2021, which stood at $14.2 billion according to the CVCA, was an “outlier year – with record levels that we are unlikely to return to. not so soon”.
The tech sector has struggled since last fall, when a series of macroeconomic events, including the pandemic and the Russian invasion of Ukraine, began to cause supply chain delays and widespread uncertainty. The high inflation that followed prompted central banks to raise interest rates, making capital more expensive and drying up the reservoir of investor money that has flooded the market for tech companies since the Great Recession.
Not all segments of the tech sector are facing the same headwinds in Canada, according to CVCA figures. Early-stage companies are not exposed to the same pressures from investors and economic factors as large, cash-hungry companies. They recorded $263 million in funding across 104 deals, making the second quarter the highest ever in terms of total investment and number of deals.
Environmentally friendly or sustainability-focused companies categorized as “cleantech” saw investment levels surpass 2020 levels in the first half of 2022, and the CVCA said the sector could hit 2020 levels. investment of 2021 by the end of the year. “As investors turn their attention away from the pandemic, which was an emergency, they are now focusing on something just as urgent,” Ms Wherry said.
But overall, the public market crash was a shock to later-stage companies that might hope to access public markets: CVCA had no IPOs in the last quarter, she said. .
After many massive deals in the first quarter, such as a $775 million round for password security firm 1Password (AgileBits Inc.), the biggest deals in the quarter were much smaller. They include $185 million for Calgary challenger bank Neo Financial Technologies Inc., $101 million for “unbreakable” pantyhose maker Sheertex Holdings Corp., US$100 million for biotech start-up Ventus Therapeutics Inc. .and $100 million for Toronto-based virtual private network company Tailscale Inc.
The CVCA also reported on Thursday that Canada saw $3.3 billion in private equity deals in the second quarter — down 32% — in 202 deals.
With reporting by Sean Silcoff
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