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Pandemic stalled growth at Canada’s most promising tech firms, analysis shows

A Ritual sign at Milk Bar in New York. Ritual | Instagram
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Funding has plummeted and hiring stalled at Canada’s top private tech firms since mid-March compared to the same period in 2019, as the COVID-19 pandemic roils all sectors of the economy. 

An analysis provided to The Logic by the Narwhal Project, which studies high-growth private tech firms in Canada, found a 25 per cent drop in funding across private tech companies for the period of March 15 to July 28 compared to a year earlier.

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Talking Point

An analysis by the Narwhal Project found a 25 per cent drop in funding for private-sector tech companies since the start of the pandemic, compared to the same period last year. Employment at the 60 fastest-growing private tech firms dropped one per cent after two years of 18 per cent annual growth rate, on average.

Health technology firms saw a 19 per cent year-over-year decline during that time, according to Crunchbase data, while information technology funding dropped 14 per cent. Companies in the “clean technology and other” category saw an 84 per cent decline in funding. 

At the same time, employee numbers across the industry stagnated. Employment at the 60 companies on the Narwhal List—tech firms deemed fastest-growing in Canada before the pandemic—dropped one per cent since the start of March, compared to an 18 per cent annual growth rate on average over the past two years. 

Kitchener-Waterloo-based smart-glasses firm North—which Alphabet acquired in June—saw the biggest drop in employment among Narwhal companies, with a 72 per cent fall since March. Employee count at Ritual, a Toronto-based takeout-app company, fell 46 per cent, and Montreal-based travel-booking firm Hopper lost 23 per cent of its staff. 

While the numbers reflect a relatively sharp contraction in the tech industry, they suggest companies in the space are faring better in some respects than the economy at large. Canada’s jobless rate was 12.3 per cent in June, up from 5.5 per cent unemployment in June 2019. And nearly 8.5 million Canadians—more than 22 per cent of the population—have applied for the Canada Emergency Response Benefit, a proxy for those who have lost their jobs during the pandemic. 

“I was surprised it hadn’t declined more,” said Charles Plant, an adviser to firms and policymakers in the innovation economy and Narwhal Project founder. “I’m hearing from organizations like MaRS and Communitech that when they’re talking to clients, they’re being told of a 10 per cent decline in employment, so I was expecting something more than what I saw.” 

That’s not to say the pandemic hasn’t been a significant setback for many of Canada’s most promising tech firms, said Plant. “While the industry is holding its own, it has stopped growing and its future growth is in jeopardy as a result of the large decline in investment activity.” 

Plant’s analysis highlighted some bright spots in the sector since the start of the pandemic. Biotech companies saw a six per cent increase in hiring since March and cleantech firms grew their workforces by two per cent, despite steep declines in funding for the category. 

Two healthtech companies went public during the pandemic, the only firms on the Narwhal List to do so, and one biotech firm merged with a public U.S. company.

Those IPOs also brought down the private-sector fundraising in the sector, by shifting capital to the public market. Repare Therapeutics, for example, raised US$253 million for its IPO, among the largest of any Canadian biotech firm ever, and Fusion Pharmaceuticals raised US$213 million to go public. Chinook Therapeutics, meanwhile, gained access to about US$200 million when it merged with U.S. drug developer Aduro Biotech. “That is [funding]  that would have to have been raised in private markets but was raised in public ones,” said Plant.  

Funding rounds during the pandemic have also increased, with the deal sizes averaging $8.9 million compared to $6.9 million in 2019.

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Plant’s findings largely square with funding strategies investors shared with The Logic early in the pandemic—namely, that they were taking a cautious approach, scaling back investing generally and focusing on existing portfolio companies rather than new startups. 

“I think we’ll see that continue through the year at least. [Investors] are going to have a difficult time raising funding, so they’ve got to reserve money for future rounds of existing clients rather than investing in new ones,” said Plant. “There will be fewer brand new startups getting investment.”