Canadian fintech investment in first half falls to pandemic-era levels

Investment in Canadian fintech firms saw a three-fold drop in H1 2023, falling to the lowest point since H1 2020, according to data compiled by PitchBook for KPMG Canada.

In the first six months of 2023, investment (including venture capital, private equity, and mergers and acquisitions) fell to US$353.7 million across 57 deals – down from US$1.09 billion across 87 deals in H2 2022 and US$834.1 million across 109 deals in H1 2022.

Investors in Canada held back amid recession fears, dropping investment to the lowest level since H1 2020, when the Covid-19 pandemic shocked global markets.

"Investors are still quite concerned about the state of the global economy, with fears of a recession, elevated inflation, and interest rates continuing to put a significant strain on valuations, and that's causing them to pause and reflect on their current investments and strategies," said Geoff Rush, partner and national industry leader for financial services at KPMG Canada.Canadian fintech investment in Q1 2023 reached US$297.3 million across 30 deals, while Q2 2023 only saw US$56.5 million across 27 deals. The second quarter was the weakest for fintech valuations since Q3 2016.

Although Rush expects investment will continue to be weak in the second half, there will likely be pockets of activity around firms specializing in blockchain, AI, and machine learning.

The majority of deals in H1 2023 were early-stage and seed round, indicating that investors are interested in funding promising, young companies at reasonable valuations. There were no IPOs in the first half.

Amid tightening capital, George Pigeon, a partner in KPMG’s deal advisory practice, said fintechs that need to raise funds in the near-term may face flat valuations, down-rounds, or even shuttering.

Relief may be on the horizon, however. "Fintechs that have been able to hold off from raising cash might find a better funding environment towards the end of the year as investors' fears of a recession abate as they anticipate the eventual plateauing of interest rate increases,” Pigeon said. “We could see some stability coming back to financing markets by the end of 2023 or early 2024.”

The international context

The first half was challenging for the global fintech market, with investment falling to US$52.4 billion across 2,153 deals, down from US$63.2 billion across 2,885 deals in H2 2022.

The US fintech market was a bright spot, however, with US$34.9 billion invested in 809 deals in H1 2023 – accounting for over two-third of the global total.