Canada’s venture capital (VC) market is seeing a more cautious funding landscape, which is expected to continue for the next 12-18 months. VC funding activity cooled significantly in the third quarter with US$1.4 billion in investments across 141 deals, down from US$2.5 billion across 285 deals in the same period a year earlier, according to latest KPMG Private Enterprise Venture Pulse Q3 2022 report. This is the lowest quarter in nearly two years as we continue to see quarter-over-quarter declines in 2022.
Albeit the decline over the past three quarters follows some of the most-elevated venture financing activity ever recorded in Canada’s VC ecosystem. What we are seeing now is a return to normal as investors brace for a possible recession and are beginning to slow their investments as they wait to see how the market plays out.
Investors are more cautious as they brace for a possible recession amid significant market volatility and economic uncertainty. That’s led them to be highly selective. They are spending more time in the due diligence process doing scenario analysis, which means deals are taking longer to complete. As a result, startups are finding it increasingly difficult to raise new rounds of funding. But, while the number of deals have decreased significantly, the average value per deal has increased by 28 per cent from last quarter (Q3 average deal value US$9.9 million vs. Q2 average deal value US$7.7 million.) This is an indication that investors are funding companies that are more likely to provide a return on investment in this uncertain environment.
Broken down by deal type, there were 27 seed-round deals, 33 early-stage investments, 41 late-stage and 10 angel investments. Interestingly, we are seeing a significant number of grant and accelerator/incubator investments with 40 occurring this quarter compared to 21 in the last quarter.
Artificial intelligence (AI) and machine learning remain the most prominent area of VC investment in Canada with 23 deals this quarter, followed by fintech with 17 deals and cleantech with 13 deals.
Corporate venture capital (CVC) investment dropped significantly in the third quarter with only 34 deal valued at US$453.9 million, compared to 55 deals valued at US$9 million in the second quarter of 2022.
Exits also continue to fall this quarter with only 22 exits valued at US$1.8 billion. Of the total exits in the third quarter, 10 were mergers/acquisitions, three buyouts/leveraged buyout (LBO), one reverse merger and one initial public offering (IPO).
Canada was not alone in declining VC activity. Globally, VC-backed companies raised US$87 billion across 7,817 deals, compared to US$120.8 billion across 8,421 deals in the previous quarter.
For more information on Canadian and global VC trends, see KPMG Private Enterprise’s quarterly Venture Pulse report.
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