Venture capital funding in Canada dropped seven per cent year over year in the first quarter of 2020, with $834 million raised—but that likely reflects only part of the COVID-19 pandemic’s impact on Canadian venture deals.
“We expect to see a significant drop in the second quarter and potentially the third as members have increased their reserve funding for existing portfolio companies,” said Kim Furlong, CEO of the Canadian Venture Capital and Private Equity Association, which compiled the data. “We expect time to close to increase given the additional caution in the market and the difficulties of conducting due diligence with social distancing.”
So far, the number of deals is actually up from 116 in the first quarter of last year to 125 in the first quarter of this year. The deal number is down 22 per cent quarter over quarter. That’s a sharper drop than the global VC trend, which was projected to fall about five per cent over the first quarter of 2020 and see the close of 7,600 rounds, the lowest point in five quarters, according to Crunchbase. The Canadian year-over-year funding drop of seven per cent is slightly below the projected global drop of eight per cent. However, the quarter-over-quarter Canadian funding drop of 44 per cent is more than double the projected global quarter drop of 17 per cent.
The numbers reflect deals where due diligence was conducted in 2019, but weren’t announced until this year, Furlong said. The data shows VC fundraising was on track for a strong quarter, with over $400 million raised in January, before the widespread economic effects of the pandemic were felt. Funding has dropped precipitously since then, with around $150 million raised monthly from February to April.
The decline comes off 2019’s record year for VC funding, which saw over $6 billion raised, about double the year before and the largest annual haul since 2000.
Funding dropped 44 per cent from the $1.5 billion raised in the fourth quarter of last year. While VC funding is typically weakest in the first quarter, this is the largest percentage drop in at least seven years.
So far, the number of deals is actually up year over year, from 116 in the first quarter of last year to 125 in the first quarter of this year, but down 22 per cent quarter over quarter. That’s a sharper drop than the global VC trend, which was projected to fall about five per cent over the first quarter of 2020 and see the close of 7,600 rounds, the lowest point in five quarters, according to Crunchbase. The Canadian year-over-year funding drop of seven per cent is slightly below the projected global drop of eight per cent. However, the quarter-over-quarter Canadian funding drop of 44 per cent is more than double the projected global quarter drop of 17 per cent.
“We have seen and heard of some bizarre behaviors from fellow VCs that have decided to freeze all investments until the dust of COVID settles,” said Maor Amar, managing partner of Toronto-based Impression Ventures, which The Logic reported last week closed a $36-million fund, with plans to invest in fintechs thriving despite COVID-19.
“Many startups will not be able to secure the necessary capital in this environment to achieve escape velocity and will fail because they run out of time. This is the worst way for founders to fail and investors will lose money and risk appetite because of this.”
There are a number of other factors that could lead to firms holding off on investing, including that some VCs were raising new funds—during which they typically don’t commit money—when the pandemic hit.
Another potential delay comes from the Business Development Bank of Canada (BDC)’s $150-million matching program, designed to help tech firms weather the pandemic. Many VCs were initially hopeful the government backstop would allow them to deploy capital quickly. However, BDC has since faced pushback over its interest rates, and the Crown corporation has said it’s open to negotiating the terms. BDC is also exploring matching angel investments, which could free up more capital.
So far, the investments being made have been comparatively small. The average venture deal size dropped year over year from $7.7 million to $6.7 million, and by 28 per cent from $9.3 million in the previous quarter. The data, which only includes announced deals, does not contain investments that a company has decided not to make public.
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Private equity data for the quarter is faring better, with a smaller number of deals but more money raised. Average deal size is at $38 million for the quarter, with $4.5 billion raised across 119 deals. The first quarter of 2019 saw 130 deals, with an average size of $15.1 million, and $2 billion raised. Private equity fundraising tends to be heavily concentrated in the fourth quarter, and the first quarter of 2020 is riding high off the $12.3 billion raised in the fourth quarter of 2019, which was the most raised in a quarter for five years.
With files from Catherine McIntyre