VC Quarterly is The Logic’s regular series on the state of venture capital in Canada.

Some of Canada’s venture capitalists say the worst is over, as deal making slowly picks up after a prolonged period of languid investment activity amid high interest rates and turbulent public markets. 

Founders and investors started the second quarter in a panic that capital gains tax changes would chase entrepreneurship out of Canada. But venture capital deal activity actually ticked up for the three months ended June 30, compared to the slow start to the year. Last month was the busiest of the quarter, despite heading into the typically slower summer season. 

VCs who spoke to The Logic said the quality of startups vying for their money has notably improved. That’s prompted investors—who had resigned themselves to waiting on the sidelines for a market correction—to start cutting more cheques. 

Private startups and scale-ups in the country raised US$1.3 billion in the second quarter of 2024, up from US$800 million in Q1, according to PitchBook data provided to The Logic. 

The total value of investments are still below 2022 and 2023 levels, when companies raised US$2.2 billion and US$1.9 billion in the second quarter of those respective years. But VCs think it could signal the start of a measured return to more stable conditions. 

“We’re seeing really solid rounds now and an extraordinary pipeline,” said Rhiannon Davies, partner at Halifax-based Sandpiper Ventures. “That had slowed down as well,” she said. “It was worrying for a period.” 

The market is by no means humming along the way it was four years ago, said Panache Ventures managing partner Patrick Lor. But macroeconomic signals like the Bank of Canada’s first interest rate cuts since 2020 are a glimmer of light in what’s been a dismal deal-making environment, he said. “We’re starting to see signs of success,” said Lor. 

Like Davies, Lor said the latest cohort of startups seeking funding from his firm has improved. There are also fewer founders raising, he said. “Because there’s an overall macroeconomic shift away from private equity, entrepreneurs have sensed this, and after just a few conversations, they’re just not going and asking for money,” he said. “Founders have adjusted their expectations around what gets funded,” which Lor said is contributing to the improved deal quality. 

Both investors said a clear path to profitability and revenue—which Lor said is harder to come by but stickier in this market—are important indicators of quality. Davies, who invests at the seed stage, said deep-tech companies can still raise venture capital prior to generating sales, but they need to have a credible plan for running a profitable business. 

Davies said the uptick in quality startups looking to raise could present new challenges for investors who may be running low on cash. Many venture capital funds are nearing the end of their life cycles. That means they, too, have to go back to their investors for more money. But the market downturn—which has chipped away at many tech firms’ valuations and blocked their exit routes—has restricted returns for the limited partners that invest in venture funds. That’s left those LPs with fewer dollars to reinvest. 

“So many funds are raising at the moment that it’s really tough to find people who are actually actively in investment mode,” Davies said. “It’s taking everybody a bit longer to close their funds.” 

Beatrice Couture, a principal at Montreal-based Teralys Capital, which invests in VC funds, acknowledged that funds are generally taking longer to raise money and are in some cases raising less than initially planned. But that isn’t stopping strong companies from closing deals, she said. “There is capital for great businesses in the market,” she said. 

No one sector is monopolizing VC dollars. Investors told The Logic there’s still lots of interest in backing AI companies. AI funding in Canada rose about 35 per cent from the last quarter, but it continued to be muted relative to the 2023 boom, PitchBook data shows. 

While there’s plenty of money flowing into AI, according to PitchBook analyses, much of it is going to a handful of large companies, including Big Tech incumbents like Google and Apple, and early entrants like French large language model training firm Mistral AI and Canada’s Cohere. A US$500-million Series D for Cohere that closed in July has already eclipsed the total capital invested in Canadian AI firms in the second quarter. 

Electric and autonomous vehicle companies clinched two of the second quarter’s five largest deals—with Toronto’s Waabi raising US$200 million and Quebec City’s Flo clinching US$102 million. Companies in the cleantech, healthtech and fintech sectors rounded out the top five. 

At the later stages, the market for secondary shares appears to be cracking open, offering liquidity to longtime shareholders by selling some or all of their equity to new investors. Secondaries accounted for a “substantial” portion of legal-tech firm Clio’s record-breaking US$900-million Series F announced last week, CEO Jack Newton told The Logic. 

It’s a departure from the slow secondary market that retracted along with tech company valuations, as existing shareholders were reluctant to sell their equity at a discount. But demand to buy secondary shares is growing again, and discounts aren’t as steep, said Mike Evans, senior vice-president at Setter Capital, a Toronto-based secondary advisory firm. “Plus,” he said, “sellers’ willingness to transact and accept discounts” has created a “very busy marketplace.” 

Investors said it’ll still be a slog for companies and VCs raising money through the rest of the year. But there’s a sense the market is turning a corner. “We’re optimistic on the macro,” said Lor. “Part of VC is telling the future,” he said. “I don’t think we’d get into this if we weren’t optimistic about the future.” 

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Methodology

The numbers in this article are based on data provided by PitchBook, a research and analytics platform. PitchBook gathers information on the public and private markets from publicly available sources, including news reports, regulatory filings and press releases. Its research team conducts manual reviews to vet the data.

While the quarterly VC data is current as of publication, PitchBook may update it retroactively as more information on past deals becomes public later.