Investments in private Canadian companies increased about 60 per cent in the second quarter from the previous three-month period, bringing fundraising back up above pre-pandemic levels after nearly a year of venture capitalist investors hoarding their cash. 

Startups and scaleups in the country raised about US$2.24 billion from April through June, up from US$1.4 billion in the first quarter of the year, according to PitchBook data provided to The Logic. Canadian VC investments had been fluctuating between US$1.1 billion and US$1.9 billion in the year leading up to the pandemic. 

Two sectors in particular are largely responsible for rousing VCs back into action this spring: artificial intelligence and cleantech. 

Investors piled about US$546 million into Canadian AI companies in the last quarter, up from about US$462 million a year earlier, PitchBook’s data shows—despite the overall drop in venture capital dollars during that period. The activity comes on the heels of OpenAI’s ChatGPT launch in late 2022, which triggered a mass obsession with generative AI. Canadian AI firms didn’t immediately cash in on the hype, however, and investments in the sector actually slowed in the first quarter of 2023. 

But by spring, VCs had begun fuelling what’s become an AI hype cycle. In Canada, several massive deals have bolstered the outsized funding in the sector. Toronto-based AI firm Cohere raised US$270 million in June led by Montreal-based Inovia Capital. The deal valued the firm, which allows clients to add machine-made text to their products, at US$2 billion. BenchSci—another Toronto-based firm, which uses AI to guide drug discovery—raised $95 million in May in a deal led by London-headquartered Generation Investment Management. 

Overall, AI companies captured about 24.4 per cent of all venture capital dollars in the last quarter, up from about 20 per cent the previous quarter and 18.5 per cent a year earlier.

Cleantech and climate tech companies have also benefited. Canadian companies in the sector attracted about 31 per cent of all investments last quarter, amounting to nearly US$691 million. That’s up from roughly US$432 million, or 17.3 per cent, of all VC dollars going into clean and climate tech a year earlier. 

“Climate tech [in Canada] seems to be weathering what I’d call a slowdown in the whole VC market,” said Susan Rohac, managing partner of BDC Capital’s climate tech fund. 

She said she’s seeing more generalist and strategic investors wade into the space. Some firms may be motivated to invest in a cleantech company whose technologies may help them reach their own sustainability or net-zero goals. 

Canada’s cleantech market seems to be bucking the global trend, which shows a drop in investments reflecting the broader venture capital slowdown. 

Policies like the U.S.’s Inflation Reduction Act and, in Canada, a string of tax credits worth nearly $17 billion are expected to incentivize private investment in areas like clean electricity, clean manufacturing, and carbon capture and storage. But Rohac said investors are likely waiting for details before deploying capital that might benefit from new government initiatives.  

Investors in the sector are more cautious than during the 2021 boom cycle, Rohac said. While valuations are starting to come down from their 2021-2022 highs, she said it’s possible they may reduce more, creating “a little bit of a challenge” for investors—many of whom are taking longer on due diligence before closing a deal. 

Still, Canadian companies managed to raise several large rounds in the space, increasing its share of overall VC dollars. Burnaby, B.C.-based carbon capture firm Svante clinched US$318 million in a Series E in April, the quarter’s largest deal. And Calgary-based geothermal tech company Eavor raised US$80 million in June. 

While total venture capital investments were up across sectors compared to the previous three quarters, they were US$0.26 billion shy of where they were a year ago, and down 55.2 per cent from the US$5 billion in record venture capital Canadian startups raised in Q2 2021. 

The number of deals that closed, meanwhile, was the lowest it’s been in any quarter over the past three years, suggesting that fewer large transactions drove the uptick in VC dollars this spring. Indeed, investors participated in five deals over US$100 million in the last quarter. 

Rhiannon Davies, managing partner at Halifax-based Sandpiper Ventures, said the data reflects the oft-stated belief that strong companies will continue getting funded, even in a slow market. “We are all sort of backing larger, faster horses,” said Davies. “And that’s one of the benefits of a market like this, is that the [companies] that demonstrate resilience are going to be sustainable. 

But she said there’s also potential that investing larger cheques in fewer companies will disadvantage diverse founders. “There will be a tendency—and we saw it at the beginning of COVID—to invest in the patterns that you know, and the patterns that you know tend to be white-men-led companies,” she said. “Smart VCs should still be looking for the untapped opportunities and not just jumping on the pile that everybody else is jumping on.” 

The lower deal count may also reflect startups continuing to delay new funding rounds—opting instead to raise small sums from existing investors through bridge rounds—to avoid taking a hit to their valuation. 

Shawn Chance, a partner at Toronto-based OMERS Ventures, expects the VC market to be relatively slow for the next quarter—in part because there’s usually less activity in summer—but agrees with Davies’s assessment that it may pick up by year’s end. “What you’re seeing is companies that really don’t want to be raising, but eventually, you’re out of options,” he said. 

As many startups deplete their cash, Davies said there may just be a quarter or two left before those firms have to do a proper raise. “You can’t keep going back for bridge rounds,” she said. ”At a certain point you lose your legitimacy and it’s almost as bad as a down round.” 

Correction: This story has been updated to correct the total amount invested in Canadian AI, cleantech and climate tech in Q2 2023 and Q2 2022. Data on the total venture dollars invested across all sectors in Q2 2023 was also revised to reflect updated PitchBook figures after publication.