Canada’s venture capital funds accumulated record amounts of cash during the COVID-19 pandemic. But with VCs now struggling to raise new funds, those cash reserves have started to shrink—which could mean another difficult year ahead for startups trying to raise money. 

The global venture capital sector’s strong returns over the last decade led ever more investors to put money into VC funds, boosting the amount of available capital for startups, said Kyle Stanford, lead VC analyst at PitchBook, a U.S.-based research and analytics firm. The trend accelerated during the pandemic. “We started to see dry powder stack up because it couldn’t get spent fast enough,” Stanford said. In Canada, that trend has started to reverse. “Now, everyone’s becoming much more cautious,” he said.  

PitchBook estimates that the amount of dry powder in the Canadian market—the difference between how much money domestic venture capital funds have raised and how much they have deployed—peaked in 2022, with an estimated US$6.1 billion in unspent capital available to startups that year, up from US$3 billion in 2018. Those reserves began to decline early last year, however, leaving an estimated US$5.7 billion in unspent venture capital in the market by mid-2023, according to PitchBook. 

Sumita Banerjee, director of insights and strategic initiatives at the Business Development Bank of Canada, is working on a forthcoming report for BDC that analyzes the country’s venture capital dry powder. She said she’s observed a trend similar to the one PitchBook found. “You definitely saw an [increase] leading up to 2021,” she said. That trend has since reversed, she said. 

BDC—a federally backed Crown corporation whose venture capital arm is the most active startup investor in Canada—estimated there was $13.2 billion in dry powder in the VC market in 2022, which is about $5 billion more, converted to Canadian dollars, than PitchBook’s estimate for that year. The bank used a different methodology than PitchBook to arrive at its number, including data from Canadian institutional investors, private VC firms and corporations, not all of it publicly available. 

BDC is still analyzing its data for 2023 and Banerjee would not provide an estimate of how much dry powder VC funds have, but confirmed PitchBook’s analysis that the cash available for startups has declined since 2022.  

The amount of dry powder in the market can give founders insight into investors’ capacity to write cheques. Large cash reserves could mean VCs are in position to spend. If VCs are drawing down that cash, it could be a sign that deals are picking up—but, Banerjee said, that doesn’t appear to be the case here.

Investment in Canadian startups slowed dramatically in the last year, according to the 2023 report from the Canadian Venture Capital and Private Equity Association, a lobby group for the private investment sector. Startups in Canada raised $6.9 billion last year, 34 per cent less than in the year before. It was the second year in a row in which the overall value of deals dropped.

That dry powder has declined at a time when VCs are investing less money speaks to how challenging it has been for venture capital firms to raise new money, said Banerjee.  

“It was a slow fundraising year compared to 2022, and even compared to pre-COVID levels,” Banerjee said. “Funds are having difficulty getting to their target numbers,” she said. “That’s contributing to a decline in dry powder.” 

One reason for the decline, she said, is that the 2021 spike in startup valuations meant some institutional investors suddenly had a higher proportion of venture investments in their portfolio than intended. A pension fund, for example, that found itself in this situation might temporarily pull back from venture investing. High interest rates are likely keeping VCs and their backers idle as well, Banerjee said. “We are at the point where people are going to wait and see and try to get into their comfort zone.” 

The relatively slow market for exits in 2022 and 2023—fewer startups have gone public, and mergers and acquisitions are down—also means venture investments haven’t returned as much capital as had become customary, leaving limited partners with fewer dollars to reinvest into venture capital funds. 

“A lot of [VC firms] are going to move out of the market because the returns have been pretty bad these past couple of years,” said Stanford. “They won’t be able to raise that next fund.” 

Banerjee said the dry powder numbers, coupled with the challenging fundraising market for VCs, doesn’t bode well for startups trying to raise money in 2024. “There’s a lot of companies that raised in 2021, and they’ll be coming back probably to market now,” she said. Instead, she urged companies to focus on “stretching that last dollar” since the ability to raise new capital isn’t a given. “It’s going to be tough out there,” she said. 

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Some numbers in this article are based on data provided by PitchBook, a U.S.-based research and analytics platform. PitchBook gathers information on the public and private markets from publicly available sources, including news reports, regulatory filings and press releases. Its research team conducts manual reviews to vet the data.

PitchBook’s dry powder estimates are based on the amount of capital a sample of limited partners has committed to Canadian VC funds relative to how much of that capital has been deployed. 

While the data is current as of publication, PitchBook may update it retroactively as more information on past deals becomes public later.