Canadian venture capital investment continues to drop in third quarter

Canadian venture capital investment was $895 million in Q3 2020, according to a recent report from research firm CPE Media. That represents a decline of 58% from Q3 2019.

The Q3 2020 VC disbursement of $895 million was the second lowest since 2017, just above the $847 million registered in Q3 2018. There were 138 financing rounds in the quarter, with 13 large deals (over $50 million) accounting for 34% of the total.

The first nine months saw $3.59 billion of VC investment in Canada across 426 financing rounds, with Covid-19 depressing activity.

The first three quarters of 2020 have all registered year-over-year decreases for financing activity: Q1 (-2%), Q2 (-30%), Q3 (-58%).

The CPE report noted two worrisome trends from the first three quarters of 2020. The first is that US investors, typically an important source of funds for Canadian startups, have retreated this year. US investor share of VC has exceeded 40% in the previous three years: 46% in 2017, 41% in 2018, and 46% in 2019. US funding share dropped to 30% of total disbursements in H1 2020, and remained flat at 31% in the first three quarters of 2020. Meanwhile, US investors would have to return in substantial numbers to match the funding levels of 2019.

The other concerning trend is that Canadian VC funds have not been raising as much capital. 18 VC funds raised $2.75 billion in the first three quarters of 2020, compared to $3.62 billion raised by 49 funds in the same period in 2019.

"Many are questioning whether these worrisome developments will disappear once Covid-19 has been tamed or whether they reflect more disturbing trends that could result in another Canadian venture capital Ice Age. It is time to review the entire panoply of support mechanisms for the Canadian venture capital industry before it's too late," said Richard Rémillard, president of Rémillard Consulting Group, a financial services advisory firm.

The CPE report stated that governments in Canada have been injecting additional capital to support startups, but those efforts alone may not be enough.

Canada was the top source for venture capital funding in the first nine months of 2020, at $2.02 billion of the $3.59 billion total. This was made up of Canadian private VCs ($455 million), Canadian corporate VCs ($405 million), Canadian institutional VCs ($300 million), Canadian governments ($262 million).

US investors accounted for $1.01 billion of total funding, with $700 million coming from US private VCs.

ICT and biotech firms remained the top targets, attracting 61% and 26% of funding, respectively. Early-stage companies attracted 58% of total funding in the first nine months of 2020.