After years of flooding Canada’s startup ecosystem with capital, big companies that launched venture capital arms are pulling back the pace of their spending as the market cools.

The dollar value of investments in Canadian startups and scale-ups that included money from corporate VCs fell from US$1.8 billion in the first quarter of 2022 to just US$838 million in the second quarter, according to data PitchBook provided to The Logic. That’s down from about US$2.5 billion in the second quarter of 2021. 

Corporations participated in 44 deals in the most recent quarter, compared to 74 the same period a year earlier.

Corporate venture capital involves large companies dedicating pools of capital to invest in smaller firms, often in exchange for equity. It can also include corporations participating in one-off venture deals without having specific funds devoted to the asset class. 

It’s part of a category PitchBook calls “tourist investors,” a classification that includes private equity firms and asset managers—investors that typically focus on larger, later-stage companies. 

RBC, Shopify, Thomson Reuters and Telus are among the reams of Canadian corporations that have waded deeper into venture investing in recent years. Foreign corporations have also taken an interest in the Canadian market. U.S. firms Salesforce Ventures, Coinbase Ventures and Alexandria Venture Investments were among the most active corporate VCs in Canada in the past year, according to PitchBook. 

“A lot of investors … get caught up in the frothiness of the markets,” said senior PitchBook analyst Kyle Stanford. The upswing in corporate VC in particular, he said, was “partly because of the frothy market, but also because that corporate growth strategy has changed.” Stanford said the rapid growth of many tech startups in recent years has pushed corporations to invest in third-party technologies—as a source for possible returns and to access useful innovations. “The ability for corporates to build on their ecosystem is very important, and now startup investment is the best way to do that,” he said. 

Corporate interest in VC had been ticking up since 2017 amid steady growth in the country’s startup ecosystem and the public markets more broadly, PitchBook data shows. It dropped in the first quarter of 2020, as uncertainty over the COVID-19 pandemic triggered a brief market slowdown; deal participation stagnated around US$430 million for the rest of the year. By Q1 of 2021, however, deals involving corporate venture capital had surged to US$1.2 billion before topping out at nearly US$2.5 billion the following quarter. 

The retreat coincides with a broader slowdown in venture capital investing in recent months, as rising interest rates and inflation, and Russia’s war in Ukraine drag on global economies. 

The chill in corporate deal-making, however, is particularly pronounced. For example, participation from corporate VCs peaked in the second quarter of 2021, when they invested in nearly 50 per cent of all venture capital deals in Canada. In the most recent quarter, which ended June 30, corporate VCs were involved in about 44 per cent of all deals.

Thomson Reuters Ventures is one of the more recent corporate VCs on the market. Its US$100-million fund launched in October 2021, focusing on startups in the tax, legal and fraud, and risk spaces—firms whose technologies the company could integrate into its own business through acquisitions or other strategic partnerships. So far, it’s made three investments. 

Tamara Steffens, managing director of the fund, said the team is comfortable with its investment pace. “We’re going to be slow and steady,” she said of the fund’s deal-making for at least the rest of the year. “We have an opportunity to get into some other well-priced deals,” she said.

PitchBook’s data tracks the total value of individual deals, and not the precise amount of funding each investor contributes to those deals. (Investors often do not disclose how much they invest in private companies.) For that reason, Stanford said it can be hard to determine just how much corporate VC dollars have shifted. 

However, deal values involving corporate VCs and other non-traditional investors have contracted disproportionately to the overall drop in venture capital invested in Canada. 

While total VC dollars invested in Canada shrank by about 61 per cent from Q2 2021 to Q2 2022, deals involving corporate VC, private equity and asset-management firms retracted by about 66 per cent, 72 per cent and 81 per cent, respectively. 

“There’s not as much oversubscribing of a deal,” said Steffens. As an example, she cited $10-million Series A rounds last year that could easily snowball to $20 million or more. Now, investors have returned to taking more time on due diligence, which can prolong the deal-making process. “That’s really a win-win, right?” she said, adding that investors get a better deal for their money and founders don’t lock in unrealistic valuations they can’t grow into. 

PitchBook also counts government and sovereign wealth funds as non-traditional VCs. While government funds are consistent and typically large sources of capital for startups and scale-ups in Canada, deals involving them also declined disproportionately to the overall venture capital slowdown. Deal values involving governments fell almost 50 per cent from their peak of US$400 million at the end of last year to US$204 million in Q2 2022. Overall VC investments in Canadian companies retracted about 35 per cent over that same period. 

Stanford said the drop in deal values involving corporate capital stems in part from hedge funds and mutual funds—which “have really boosted that deal value over the past couple years”—leaving the venture market, as most companies pause their plans to go public.

“Those investors are very tied to the IPO market and the public markets in general,” he said. “The slowdown at the late stages occurred because many companies are looking at how they’re going to exit, how are they going to create a return, or how are they going to get to the next step of their growth when the IPO market is all dried up.

“If hedge funds and mutual funds pull back from their investment in the largest deals,” he said, “[corporate VCs] aren’t going to have those deals to participate in.” 

Corporate venture capital has a history of ebbing and flowing along with economic booms and busts. “Recall the mad dash to invest in new ventures in the late 1990s—and then the hasty retreat as the economy turned,” wrote Henry Chesbrough, faculty director of the Garwood Center for Corporate Innovation at UC Berkeley, in a Harvard Business Review article in 2002 in the wake of the dot-com bust. Between September 2000 and 2001, corporate investments in startups fell by 80 per cent, Chesbrough noted. 

Stanford said corporate VC likewise retreated following the 2008 financial crisis, but that it began returning shortly thereafter. “It’s indicative of how many corporates felt that they actually ended up losing out on a lot of good investments by pulling out of the market in those downturns,” he said.