Venture capitalists had a record-breaking year in 2021. According to the Canadian Venture Capital & Private Equity Association’s latest report, by the third quarter of 2021 venture capital investment was already at a record annual high with $11.8 billion spread across 568 deals, almost double the previous high of $6.2 billion from 539 deals in all of 2019. With money pouring into the crypto and cleantech sectors, the upward trend in investment isn’t likely to slow down in 2022.

The Logic spoke to nine leading Canadian venture capitalists about emerging sectors, valuation levels and other trends in the world of VC. Here’s what they expect in 2022:

Crypto and Web3: Decentralized dollars

2021 was the year digital assets went mainstream, with venture capital funds pouring a record US$30 billion into crypto investment globally, nearly four times the previous record of about US$8 billion in 2018. Almost all the Canadian investors The Logic talked to expect continued growth in 2022.

“Enterprise [software-as-a-service] has traditionally been strong for Canada, but the most interesting sectors in 2022 will probably be crypto and climate or energy,” said Boris Wertz, founding partner at Version One, which made an early bet on Vancouver NFT platform Dapper Labs.

Maple VC founder Andre Charoo echoed Wertz’s prediction on the crypto sector. 

“I aim to spend my time where the smartest founders are spending their time, and without a doubt that seems to be in crypto, NFTs and the creator and ownership economy, all of which can now be summed up these days as Web3,” said Charoo. 

Climate tech’s green rush

A December report from financial-services firm PwC found that investment in climate tech-focused companies reached US$87.5 billion globally between the second half of 2020 and the first half of 2021, up 210 per cent from the same period the year before.

Several VCs told The Logic even more firms that focus on climate-change solutions would see funding next year. 

Panache Ventures managing partner Patrick Lor said cleantech has high potential because the business models are known and massive operational capabilities are expected in the near future. 

“We already know what those numbers need to look like; we already know that we need to reduce carbon; we need to increase energy output; we need to increase food output,” Lor told The Logic, adding that there has been investment in software that addresses climate-tech issues. 

Lor expects to see more businesses integrating cleantech software.

“There’s got to be a way to combine the two [software and operations]. And then all of a sudden, it makes it a better investment for the software players because you’ve got something that’s a tangible business model behind it. And then you’re giving a lift to the people that actually know how to actually deal with carbon. It’s not just software, not just the marketplace.”

Canadian investors are starting to compete for the most promising firms. CIBC committed to investing $100 million as a limited partner in funds dedicated to key climate tech and energy-transition firms, the latest vote of confidence in the sector from a major financial institution. 

Other sectors to watch

Healthtech: 

The pandemic has been a catalyst for investment in healthtech firms. Venture capital funding for healthtech innovators reached a record US$14 billion globally in 2020. The U.S. has been a global leader with US$31.9 billion in venture capital investment for the past six years, followed by China at US$4.1 billion, and the U.K., at US$3.8 billion. 

“Anything with healthtech is obviously a very, very hot sector,” Plaza Ventures managing general partner Matthew Leibowitz told The Logic, “Anything around health data, access to health, distribution of health care and products. I think it’s really, really interesting.”

Sanjana Basu, an investor at Radical Ventures, believes Canadian companies lying at the intersection of AI and health care will see more investment in 2022, thanks to the concentration of leading artificial intelligence talent. 

“We will see more Canadian companies build leading solutions with their unique position at the nexus of world-class health and machine learning researchers, as well as health data controlled by a single source,” said Basu. 

Marina Cortes, venture partner at Hike Ventures, said healthtech startups integrating remote testing are particularly well positioned to receive funding and exits. 

“I see a lot of great ideas being near commercialization. Although still early in the process, I’m convinced that 2022 will allow these startups to show their potential to [commercialize] and generate revenue,” Cortes told The Logic. 

Semiconductors: 

Canada’s Semiconductor Council, a new industry lobby group, released a report in November that argued startups in the sector require a large amount of initial capital, and venture capital and angel investors alone cannot provide sufficient funding. 

“To kickstart the industry, Canada should rely on a mix of public and private funding, as well as more incentives, to grow its semiconductor industry,” it reads. 

“Canada historically had strength in semiconductors on the global scene, and we lost that. And now there’s a big push to get that global leadership back,” Real Ventures managing partner Janet Bannister told The Logic. 

Bannister said her firm has invested in a couple of semiconductor companies including Toronto-based Tentstorrent and Montreal-based Spark Microsystems. 

“I think we’ll continue to see more great companies in that space,” said Bannister.

Valuations will remain high—at least for a while

The median post-valuation across all deal sizes (the value of a company immediately after a fundraising round) is now US$10.5 million, compared to US$3.25 million last year, according to PitchBook.

“There has never been more enthusiasm about the opportunity in tech,” Wertz told The Logic. 

“There has never been more capital looking to invest, and there have never been more interesting founders and opportunities to invest in—so while valuations may appear high already we might see further increases in 2022.” 

However, Lor said valuations might come down over time. He said that because valuations are typically multiple times a company’s revenue, it’s very unlikely that revenues will match that significant discrepancy. 

“But as long as there’s all of this money flooding into the system, then it’s not going to come down because there’s more demand than supply. So there’s not a clear answer,” said Lor, “but long term, no, valuations can’t be sustained. Short term: the party keeps on going.” 

“Recycled talent” in the ecosystem as exits grow

Jim Orlando, managing partner of Wittington Ventures, told The Logic he’s expecting more and larger exits from strategic acquisitions, growth equity buyouts, initial public offerings and special purpose acquisition companies. 

“Over time those entrepreneurs and that exit capital will be coming back to fuel continued growth into the early-stage ecosystem,” said Orlando. 

A shift from traditional financing

“The more traditional rules of cross-investing [investing across funds] are being thrown out the window,” said Manica Blain, BrandProject venture partner, in an interview with The Logic.

Blain said while traditionally companies would seek follow-up investment within the same fund, most seed funds are not big enough for the opportunity. 

“So rather than raising special purpose vehicles to take advantage of pro rata, I think you’ll see successor funds taking those allocations,” said Blain. 

Cortes said she’s seeing hybrid fund structures with venture capital and private equity, long fund-maturity terms, as well as aggressive PE funds investing in early-stage deals. 

“This should make for an interesting diversity of capital in 2022,” said Cortes. 

With files from Aleksandra Sagan, Anita Balakrishnan and Catherine McIntyre