TORONTO — Funding for Canadian startups is scarce and likely to get scarcer, according to a new report from the Business Development Bank of Canada (BDC), which paints a dire picture of the country’s venture capital market that’s been stifled by a trade war with the U.S. 

In its 2025 market report, BDC—a federal Crown corporation and the largest venture capital investor in Canada—describes weakening investment returns and companies running out of cash as deal making dwindles and VC investors struggle to raise new funds. The bank expects more unpredictability throughout 2025—which is off to a slow start—as trade tensions with the U.S. and general economic uncertainty continue.

Deal-making activity reveals a skittish VC market that’s become increasingly risk-averse. There were 592 transactions last year, down 13.6 per cent from 2023. Average cheque size was up, however, even after excluding a US$900-million mega deal from B.C. legal-tech firm Clio. That suggests “investors targeted higher-quality deals to cautiously maximize returns and minimize risks,” according to the report. 

That shift to less risky investments has made it harder for companies to raise money at the earliest stages, when returns are less certain. Investments in seed-stage startups dropped 45 per cent last year, BDC found, while early-stage startup funding fell eight per cent and late-stage rounds dropped 11 per cent. Companies raising growth equity, meanwhile, saw investments surge more than 1,500 per cent from a year earlier. 

Those later-stage companies still aren’t finding exit windows, however. No venture-backed companies had an initial public offering in 2024. The value of merger and acquisition deals, meanwhile, was slashed in half, with 74 per cent of that value coming from one transaction—Astra Zeneca’s $3.3-billion acquisition of Fusion Pharma. 

The dearth of exits means VCs haven’t collected much in the way of returns, preventing them from making new investments. Even on paper, returns don’t look good. The 10-year internal rate of return (IRR)—the estimated amount VCs expect to eventually collect on their investments—fell to 10 per cent on average in 2024. That’s down from 12.1 per cent in 2023 and 18.6 per cent in 2021, with the gap between Canadian and U.S. returns widening.

The drop in returns poses an existential threat to Canada’s venture capital ecosystem, the report claims, warning that institutional investors may flee the asset class if returns fall into the single digits.

The slow investment market has put a dent in companies’ cash reserves. For later-stage companies, the median runway—the amount of time a company has before it runs out of money—has plummeted from 24 months in 2022 to 16 months in 2024. Seed- and early-stage companies have just 10 and 12 months of runway, respectively, which is two months less than the year before.

BDC flagged Canada’s dependence on foreign capital as a severe threat to the country’s VC market. Deals involving only Canadian investors accounted for 61 per cent of all transactions in 2024, but only 22 per cent of dollars invested, BDC found. U.S. investors contributed to a third of all deals. That’s down from the previous year and could drop further given the weak returns in Canada and trade tensions with the U.S.

“We have celebrated foreign investment in Canadian companies, but at this point in time, we also need to think carefully about our Canadian champions and our ability to support them going forward if the willingness to invest by others changes,” said Paula Cruickshank, senior vice-president of fund investments at BDC Capital. “We are really putting out a call to action [to] all Canadian investors to support innovation and productivity in Canada through venture capital,” she said. 

The onus to step up is especially high for BDC. The bank has a mandate to fill financing gaps for Canadian entrepreneurs when they can’t raise equity or debt from other sources. 

Joseph Regan, BDC Capital senior managing partner, said the bank will commit about the same amount of capital this year as last, but it may take the lead on more investments, or “catalyze rounds” to help spur activity. 

With so many gaps in the VC market, prioritizing which ones to fill is a challenge. For instance, BDC Capital recently allocated nearly $1 billion in new capital to two growth-stage funds in response to dwindling funding for scaleups in 2023. The bank’s more recent report shows early-stage firms are now hurting the most. “Last year’s winner, which was seed, had a bit of a harder time this year, but we continue to be in that space,” said Cruickshank. 

BDC noted a couple of bright spots in an otherwise dismal VC market. Valuations increased, particularly for seed- and early-stage companies. The number of down rounds—where a company raises money at a lower valuation than its previous investment round—decreased from 31 per cent of all deals in 2023 to 18 per cent in 2024. 

There’s also a healthy amount of dry powder in the market, BDC found, with $11.5 billion in venture capital that hasn’t been deployed. “There continues to be opportunity to support companies,” said Cruickshank, “we’ll just have to manage the challenges.”