Fundraising among private Canadian companies has dropped to its lowest level since early pandemic jitters put a chill on the venture capital market in 2020. 

Startups and scale-ups in the country raised about US$1.3 billion in the first three months of the year, according to PitchBook data provided to The Logic. That’s down nearly threefold compared to the US$3.7 billion invested during the same period a year earlier. 

The decline follows a slight uptick in investing in the last quarter of 2022, before the banking crisis triggered by Silicon Valley Bank’s collapse last month delivered another shock to the VC market. Nearly every sector has been affected by the slowdown—including artificial intelligence, which has attracted a surge of public interest in recent months. 

“Broadly, a pretty negative quarter,” said Rick Nathan, managing director at Kensington Capital Partners in Toronto. “We’re reverting to the historical levels of activity.” 

Deal making over the latest quarter reflects similar investment activity in the last nine months of 2020, when economic uncertainty triggered by COVID-19 lockdowns and supply chain crunches weighed on venture fundraising. 

While investing quickly rebounded following the 2020 slowdown—reaching a record US$5 billion in the second quarter of 2021 in a market that’s now widely viewed as having been overheated—the current pullback could be longer lasting. 

“You’ve got to clean that excess out of the system,” said Nathan, “and that really just takes some time.” 

The number and dollar value of investments has already been trending downwards since the second quarter of last year, as investors and companies waited for more stability before diving back into deal making. Some VCs had predicted that the market would settle down at some point in 2023 and more dollars would start to flow.

Nathan said that despite the challenging economy, there were early signs of improvement at the start of the year. But SVB’s failure throttled the market once more. 

“It kind of felt like things had stabilized. Then we saw the bank failures and that was a real shock to the system,” he said. “It was another strong negative event that psychologically caused everyone to pull back.”

The drop in VC dollars stems from a decline in the number of deals coupled with smaller funding rounds. 

PitchBook’s data shows companies completed just 168 venture capital deals in the first quarter of 2023, the lowest level since Q2 2017. Those that have opted to fundraise are pulling smaller cheques, the data shows. 

The share of funding rounds worth more than US$25 million fell to less than 65 per cent in the most recent quarter, down from about 70 per cent the previous quarter and nearly 74 per cent a year earlier. 

The decline in capital coincides with some large U.S. investors, including Tiger Global and SoftBank, retreating from Canada after driving big deals during the 2021 funding boom. “That has caused our markets to tighten up,” said Nathan, adding that SVB’s exit has exacerbated the impact. “It’s another departure, it’s capital being taken out of the system,” he said. 

Aaron Brindle, a partner at Toronto-based AI investment firm Radical Ventures, said even deals in artificial intelligence—a sector that’s having a moment in the spotlight thanks to high-profile technologies like ChatGPT—are smaller and happening slower than a year or two ago. 

Radical, which is in the midst of raising a new US$550-million fund, is getting “a tremendous amount of interest” from limited partners, said Brindle, including from new investors who are trying to better understand the sector. That’s a testament to the unique market dynamics at play in the AI space, he said, but it doesn’t immunize it from broader economic factors. “Given the macro environment, Radical, like every other fund out there, is going to be super careful and deliberate about how it deploys capital.” 

One sector that has bucked the downward trend, pulling in more funding than a year ago, is clean and climate-related technology, PitchBook shows. 

Those companies accounted for roughly 34 per cent of all venture capital raised in the first quarter of this year, amounting to about US$447 million. That’s up over 60 per cent year over year—from about US$278 million—even with total VC dollars down substantially across the Canadian ecosystem.

Mainstream investors had previously shied away from cleantech, which had long struggled to generate returns. But a deluge of expected government support through the U.S. Inflation Reduction Act (IRA) and the Canada Growth Fund—Ottawa’s response to the IRA—has spurred funding in the space.  

Beyond cleantech, Nathan said he’s cautiously anticipating an uptick in deal making across the VC ecosystem. One reason is that federal government money from the Venture Capital Catalyst Initiative (VCCI) is finally starting to flow. His firm Kensington announced last week that it raised $150 million for its third fund, which is being launched under the latest VCCI program. The firm is aiming to raise $290 million in total for the fund.

Investor confidence may also rise as companies that started implementing strategies last year to reach profitability—whether through layoffs or other cash-conserving measures—begin achieving those goals, Nathan added.

Still, he’s wary of saying the industry is out of the woods. “What’s going to happen next quarter? We’ll have to wait and see—keep hoping that we’ve finished with the major seismic events in the market,” he said. “But every time you start to think that, something else happens.” 

Editor’s note: This story originally contained inaccurate data about the volume of cleantech and climate tech investments in this quarter. It has been corrected.