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It is impossible to talk about business and funding in 2021 without addressing the impact of COVID-19. While strict lockdowns have enabled Canada to prevent the pandemic from getting out of hand, the economic impact has also been quite painful.
But it is not all doom and gloom in the Canadian startup scene, thanks to a quite mature and well-developed VC ecosystem. This article will take an early look at the state of the Canadian VC landscape in 2021, coming on the heels of a year unlike any in living memory.
Before the pandemic, the Canadian VC funding ecosystem was on a steady upward trend. The numbers peaked in 2019, with total investments reaching an impressive C$6.2 billion across 539 deals. It represented a staggering 69% increase in YoY compared to 2018.
Quite unsurprisingly, the virus turned that curve upside down in 2020. While things remained more or less stable in Q1 and Q2, the funding flows decreased by a whopping 58% over the next two quarters as lockdowns made their impact on the ecosystem.
Q2 did witness a surprising spike –investments increased by 23% compared to 2019, with 145 deals taking home $1.66 billion. But this was largely due to two factors – increased stimulus packages from the Federal government and follow-on funding from VCs doubling down on their previous investments and in key sectors like IT and health.
While it had a severe impact on the quantum of financial flows, the pandemic has not yet shown any major impact on the geographic distribution of the VC ecosystem in Canada. Powered by Toronto and to a lesser extent, Ottawa, the province of Ontario is the main hub of VC funding in Canada.
In H1 2020, the province received $1.04 billion, which was roughly 40% of the total VC funding in Canada for that period. Toronto-based startups accounted for half of that amount, making the city home to the biggest VC ecosystem in Canada.
After Toronto, the city of Kitchener emerged as the top VC hotspot in Ontario ahead of Ottawa. This was largely due to the performance of two local startups in 2020 – Miovision Technology ($120 million Series C) and ApplyBoard ($70 million Series C).
After Ontario, Quebec is the favoured destination for VC fund managers in Canada, reeling in $700 million in H1 2020. Montreal and Quebec City have strong VC networks, bringing in $400 million and $280 million in capital inflows.
Third on the list of best provinces for VC funding in Canada is British Columbia (BC). Startups in the province attracted half a billion dollars from investors, which is 21% of the national total in H1 2020. Vancouver is the second biggest city in terms of VC flows after Toronto, getting $471 million.
The one major province outside the top 3 for VC activity is Alberta, largely thanks to the startup scene in Calgary. VCs invested more than $100 million in the city in the early months of 2020.
The investment trends in Canada are largely in line with other booming startup hubs around the globe. The Information and Communication Technology (ICT) sector has hogged the lion’s share of funding for the last few years.
In 2020, the sector accounted for more than 60% of venture capital funding, receiving more than $1.6 billion in the first two quarters. The virus has had a significant impact here in 2020 – subsectors dealing with telehealth/telemedicine, for instance, received increased interest given their implications in handling COVID.
Outside ICT, biotech has been a hot sector for investors even before the pandemic. The rise of COVID and the efforts to develop a vaccine has drastically increased the profile of the sector, which accounted for more than $600 million in the early half of 2020 (23% of total VC funding).
Given the current state of the pandemic and its impact on the economy/consumer spending, it is reasonable to expect ICT and biotech to dominate the funding ecosystem for the foreseeable future. The other major sector would be renewable energy/sustainability, thanks to the increased impact of global warming and the climate crisis.
One major sign of a mature and stable VC ecosystem is the presence of home-grown capital. And Canada has shown this in abundance in recent years, accounting for nearly 60% in 2020. That peak came at the cost of US investors, however, which is indeed somewhat of a concern.
For years, VC funds from south of the border have hovered around the 40% mark, reaching a high of 46% in 2019. At present, it is somewhere close to 30%, representing a 10% decrease thanks to the pandemic-induced slowdown.
In 2020, US investors added $1 billion, while Canadian sources accounted for $2 billion (Q1 – Q3). While the private sector remains the key source, the Federal and provincial governments have played a bigger part with stimulus packages adding $260 million to the startup scene.
That is way more than what VCs from other countries (outside North America) invested. South Korea, UK, and Denmark are other sources of VC capital in Canada, accounting for more than $125 million in the early half of 2020.
Across the globe, the VC sector has shown a lot of resilience in the face of COVID. In fact, there are no concerns regarding the scarcity of funds – major VCs have largely seen their investments perform reasonably well, compared to stocks and other investments.
A lot of this can be attributed to the increased importance of sectors like ICT and biotech that attract most VC funding – companies here have better prospects than traditional sectors like manufacturing, retail (offline), others.
The main issue facing VC funding in Canada (and the rest of the world), is the restriction on interactions and networking – thanks to quarantines and social distancing. VC funding requires a lot of networking, which is hard to do in a work from home context.
So, until the vaccines take effect and some normalcy is achieved, which may not happen in 2021, the cooldown in the Canadian VC funding can be expected to hold. Series A startups might feel the pinch a lot more, as investors become extra cautious.
Toronto, in particular the Greater Toronto Area (GTA), is widely considered as one of the hotspots in North America for startups receiving VC funding. It is second only to Silicon Valley in terms of investment inflows.
In terms of investment capabilities and portfolio distribution in the private sector, it is hard to look beyond OMERS Ventures and Georgian Partners (both based in Toronto). But in terms number of deals, the Business Development Bank of Canada (BDC), is the top VC in the country, owned by the Government.
As of 2020, small deals less than $5 million in value accounted for 60% of all VC deals in Canada. On the other end of the spectrum, deals above $50 million numbered around 13 (H1 2020) and accounted for 33% of the money disbursed.
A Labour-sponsored Venture Capital Corporation (LSVCC) a special type of mutual fund found in many Canadian provinces. It is sponsored by major labour unions. They usually finance SMEs and do not actively participate in the VC scene. The Fonds de solidarité FTQ in Quebec is a notable exception, actively investing in small Canadian startups.
