Canadian venture capital funding bucks trend, holds steady in 2016

Globally, VC investment down 23% last year FINANCE

• The dollar investment in venture capitalbacked Canadian companies was stable in 2016, totalling US$ 1.7 billion, virtually matching the previous year with only a 0.3 per cent decrease and bucking a global trend that saw total venture capital funding fall 23 per cent.

According to a new report by PwC Canada, the number of VC deals with Canadian companies fell slightly to 244 from 266 or seven per cent, but that, too, outperformed the world at large, where deals fell 10 per cent. Global venture capital- backed dollars and deals registered at US$ 21 billion across 1,971 investments, with particular declines in the United States and Asia.

“Globally, we’re still bullish on tech overall, but this speaks to the strength of innovation in this country,” PwC Canada national technology sector leader Chris Dulny said in an interview. “And there are also added benefits in our market: the government does a lot of work supporting the ecosystem through tax credits and also uses its own purchasing power, and the lower Canadian currency coupled with our proximity to the world’s biggest market in the U. S. help to enhance investment opportunities.”

The year- over- year stability in the Canadian market was saved by a fourth- quarter 2016 rush, when investors poured US$ 527 million to venture capital- backed Canadian startups, a 49 per cent increase over the previous quarter. That amount was spread over 71 deals, a 27 per cent improvement over the third quarter.

Toronto and Montreal were the engines of the stability over the course of the year, with total dollars invested rising 10 per cent to US$ 578 million and eight per cent to US$ 334 million, respectively.

Major deals in Toronto included a US$ 61- million growth equity round by digital flyer company Flipp, a US$25 million series A round by health benefits startup League, and a US$ 22 million series B round by fintech company Q4. Montreal saw a boost to its market with a US$61-million series C round by travel-tech startup Hopper.

The dollar performance in Canada’s two largest cities mitigated a 22 per cent decline in funding in the thirdlargest, Vancouver, which ended the year with $ 250 million invested.

However, Dulny said the total dollar decline in Vancouver masks underlying positive signs. The number of deals in the city increased 17 per cent year-over-year to 42, and a significant number of those were small or early stage investments.

“There’s nothing structural to the negative number in Vancouver,” said Dulny. “It’s a timing thing and with more deals at the startup phase as opposed to the midtier, we could very well see dollar increases in the years to come.”

Early- stage financings also attracted a larger percentage of domestic investors, with 60 per cent of investors involved in seed- funding deals in Canada being Canadian and 57 per cent of investors in early- stage company deals being Canadian.

That number falls to less than half, or 48 per cent, of venture capital investors on mature rounds, where U. S. firms featured more prominently in deals.

Ontario’s Waterloo region saw a 65 per cent increase in total dollars invested in venture capital deals, largely on the back of a US$120 million deal completed by wearable computing startup Thalmic Labs.

“If you look at the themes underlying t he market trends, you see in particular that data is something of interest to every organization we talk to in and out of the tech sector,” added Dulny. “When you talk about data you talk about the impact of machines, which means there is an emerging interest in artificial intelligence as a burgeoning sector within the larger umbrella of Internet investment.”

The Internet sector saw the most venture capital investment in Canada in 2016, at US$ 731 million or up three per cent year- overyear, followed by mobile and telecommunications at US$ 242 million, which was up five per cent year over year. Telecoms surpassed health care, which saw a 34 per cent year- over- year decline to US$228 million, into the second spot.