Venture capital soared to new heights in Canada in the first full year of the pandemic. By Q3, deal activity—both number of deals and dollars invested—had already surpassed 2020 levels. By mid-December, venture funding reached US$12.3 billion across 1,027 deals, according to PitchBook data provided to The Logic, nearly double the amount invested in 2019, the previous record year.

While global investment activity was high generally in 2021, Canada’s VC market was particularly hot, with funding for Canadian firms jumping nearly 200 per cent compared to nearly 50 per cent in the U.S. by the end of the third quarter.

That growth is coming from both local and foreign investors. While the start of the pandemic saw investment from outside the country dip, those numbers now eclipse pre-pandemic activity, in a sign of maturity as well as the times (dealmaking has made cross-border investing accessible) for Canada’s venture capital market.

Here’s a look at the investors and market dynamics causing all the commotion in the 2021 venture capital industry. 

Big spenders: BDC Capital topped the list of most active Canadian investors based on the number of deals it backed. The venture arm of the Business Development Bank of Canada, a federal Crown corporation, participated in 51 Canadian venture capital rounds in 2021, according to PitchBook, and two deals outside Canada. Toronto-based Golden Ventures and Waterloo-based Garage Capital ranked second and third most active investors. Golden participated in 28 deals in Canada and eight outside the country, while Garage made 23 domestic and 10 foreign investments.

In terms of aggregate deal size in Canadian firms, BDC ranked second, investing in rounds worth a total of US$1.23 billion. Montreal-based Inovia Capital participated in the highest-value deals, with 21 rounds worth a combined US$1.7 billion, PitchBook data shows. 

Boris Wertz, partner of Version One Ventures—the fourth-biggest investor in the Canadian market in terms of aggregate deal size—said his firm invested at twice the pace in 2021 compared to previous years. “We’re no exception. I think every fund has invested faster. There’s more opportunities, it seems, that you want to fund,” said Wertz. “And because the size of funding rounds has increased, right now feels like a funding environment and innovation economy in overdrive.” 

Big rounds: Canadian companies closed more mega-deals—those worth over $50 million—in 2021 than any other year, according to the Canada Venture Capital & Private Equity Association (CVCA). PitchBook data shows 76 mega deals, as of Dec. 15. Wealthsimple landed the largest funding round, raising a $750-million Series D in May co-led by U.S. investors Greylock Partners and Meritech Capital. The deal valued the company at $4.3 billion. 

Vancouver’s Trulioo logged the second-largest deal with a US$394-million raise. 

Real Ventures’ managing partner Janet Bannister said the large funding rounds stem in part from investors simply having more capital than ever to deploy. “If you look at the first nine months of 2021, VCs raised $96 billion. In all of 2020, they raised $86 billion.” That, combined with the pandemic accelerating digital adoption, has created a startup environment ripe for fundraising, said Bannister. She cautioned companies, however, against letting big funding opportunities distract them from their fundamentals. “Fundraising is good and it should be celebrated, because that means that company has the capital to continue to grow,” she said, “but it’s only a means to an end.”

Record valuations: The average valuation for venture-backed companies in Canada jumped from just US$3.25 million in 2020 to US$10.22 million in 2021, PitchBook data shows. “I believe the official scientific term for what we’re seeing is ‘bananas,’” said Plaza Ventures’ managing general partner Matthew Leibowitz. The 215 per cent increase is both a factor of and a reason for investors writing larger cheques for Canadian startups, said venture capital investors who spoke to The Logic. 

“There’s a lot of competitive pressure,” said Panache Ventures managing partner Patrick Lor. “Very late last year, we looked at the deals we missed and the reasons why. Part of it was valuation sensitivity—being concerned that companies were overvalued.” Lor said his firm adjusted its risk tolerance to participate in deals that in earlier years he would have thought priced the company higher than it was worth. “We decided we had to be in the market. We’ve got money to deploy, and it’s our responsibility. At this point, it’s not for certain that we’re right or wrong,” he said, acknowledging that high-valued companies may never generate the returns investors are banking on. “But we’re still long-term optimistic on technology. We think even in a short-term dip, if we invest in the right founders and the right companies it’ll still be fine, because we’re a 10-year fund.” 

Bannister said high valuations are also a sign of Canada’s maturing technology and venture capital space. “We’re seeing a flywheel effect of having repeat founders, angel investors, experienced scale-up executives in a startup ecosystem,” she said. “The more success you have, the easier it is to create more success, and we’re definitely seeing that take off in Canada.” 

Foreign affairs: Canadian investors spent the vast majority of their VC dollars at home in 2021. But many foreign investors placed bets on Canada’s startups. Non-Canadian investors participated in 526 deals in Canada worth a combined US$10.05 billion, according to PitchBook. That’s up from 405 deals worth US$3.14 billion in 2020. And they were big bets: Canadian firms accounted for just five of the 19 most active investors by aggregate deal size in 2021. 

U.S. firms featured prominently in Wealthsimple’s $750-million raise, a deal that alone was responsible for seven firms ranking among the top investors in Canadian companies in 2021. Munich-based Allianz X ranked fifth in terms of deal value, participating in Canadian funding rounds worth a combined US$642.6 million. Seven Bay Area investors cracked the top 19 most active funders in Canada, including Andreessen Horowitz, Greylock Partners and Redpoint Ventures. Two firms from Germany, one each from Beijing and Hong Kong, and two from New York were among the biggest investors in the market, including U.S. firm Tiger Global Management, which participated in seven Canadian deals worth US$496.12 million. 

“One thing that the pandemic has certainly driven, it’s just this whole notion of … geography doesn’t matter as much anymore,” said Wertz. “It doesn’t matter as much for investing and it doesn’t matter as much anymore for building a company, because you can hire a distributed team.” 

Hot sectors: Technology, media and telecom attracted the most venture capital in 2021, clinching nearly 15 per cent of all funding, up from about 11.3 per cent in 2020. Software-as-a-service landed nearly 12.2 per cent of venture capital for the year, compared to 6.3 per cent the year before. Fintech jumped from about two per cent to 9.7 per cent in 2021, while cryptocurrency investments accounted for about 5.5 per cent of all funding for the year, up from just 1.3 per cent in 2020. And while companies in manufacturing and lifestyle and wellness got a boost at the start of the pandemic, both verticals saw funding decline in 2021. 

Lor noted that the funding for companies in the “Web3” space, including blockchain and cryptocurrency, speaks to investors’ willingness to put big money behind founders and their vision. “That trend of just massive over-investment in a very hot sector basically says that we’re investing in business models that we don’t understand yet,” he said. “We’re investing in people that we think are brilliant. And we’re investing directionally in a sector that we think has high potential.” 

IPO ebb and flow: Canadian firms started the year with a flurry of initial public offerings. Twelve venture-backed companies went public in the first half of the year, returning about US$1.35 billion to investors, according to PitchBook’s analysis of the companies’ pre-money valuations. IPOs dipped in the third quarter before surging over the last three months. (None of the four companies that went public in the third quarter disclosed their pre-money valuations.) As of Dec. 17, investors had generated about US$2.6 billion from public listings in the last quarter, bringing total returns from 2021 IPOs to at least US$3.92 billion. Public listings were the biggest liquidity source for investors, followed by mergers and acquisitions and reverse mergers, which generated US$2.77 billion and US$1.1 billion, respectively. 

Leibowitz said the exits in 2021 are the real markers of a strong venture capital ecosystem in Canada. “It’s one thing to write a cheque at a certain valuation. The question is, can I get my money out for 10 times the value that’s invested?” he said. “If the IPO markets stay hot and productive, I think that is a very good thing for our ecosystem. It’s an additional liquidity outlet that wasn’t really available to Canadian tech companies, aside from a handful here or there, over the last eight, nine, 10 years.”