Buoyed by surge in ‘megadeals,’ Canadian venture-capital activity up sharply across the board

Canadian venture-capital financing is off to a strong start in 2018, buoyed by strength at all stages of the funding cycle, as VC veterans point to continued signs of maturation in the domestic market.

Over the first half of the year, Canada saw five “megadeals” in excess of $50-million, the most since at least 2013, including a $90-million raise for the meal-ordering app Ritual Technologies Inc. and a pair of investments in the smart-thermostat maker ecobee Inc. totalling $127-million.

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But younger companies are getting in on the action, too, signalling that VC firms are finding opportunity in both homegrown startups and scale-ups.

The average value for early-stage deals was $6.3-million over the first six months of 2018, 18 per cent higher than the previous five-year average, according to data provided to The Globe and Mail by the Canadian Venture Capital & Private Equity Association (CVCA).

The increase was even steeper at the initial seed stage. The average deal was valued at $1.3-million, more than 50 per cent higher than the previous five-year average.

Over all, VC firms funded 308 deals valued at $1.66-billion in the first six months of 2018, compared with 260 deals valued at $1.63-billion for the 2017 period. While the CVCA issued its half-year market-overview report last week, The Globe asked the organization for a deeper analysis of first-half VC trends, which found strong performances across funding-round sizes.

The average later-stage VC deal value was in line with historical averages, though the number of deals was 50 per cent higher than the five-year average, CVCA said.

Taken all together, these trends present “indications that the Canadian VC ecosystem is healthy across the entire spectrum,” said Darrell Pinto, the CVCA’s research director, who conducted the analysis for The Globe.

VC fund partners and managers said the trends demonstrate the asset class’s increasing maturity as more funds emerge, and experienced fund managers attract more investors and develop greater sophistication.

Strong returns, especially over the past three years, have attracted “significantly” more capital into VC funds, said Janet Bannister, partner at Real Ventures, which has raised more than $300-million across five early-stage funds. But even with more money pooling into their funds, “partners can only do so many deals,” thereby increasing the size of early-stage deals this year, Ms. Bannister said.

Whereas a seed round would generally be worth around $250,000 to $500,000 just a few years ago, it’s now not uncommon for a seed round to bring a startup $1-million or more. Similarly, early-stage Series A rounds have risen from a few million to sometimes more than $10-million.

Barry Gekiere, who manages the seed-focused Investment Accelerator Fund for MaRS, said he believed that seed rounds' accessibility for both funds and angel investors have helped the massive investment growth for that stage this year – especially given the rising investment-round size at further stages. “Valuations at the seed stage have increased but are still more attractive on a relative basis versus Series A valuations,” he said.

Early-stage funds themselves are seeing great interest. ScaleUP Ventures, for instance, had a target of raising $50-million for its first fund after launching in 2016, but closed last year with a commitment of double that amount. Matt Roberts, a partner with the fund, said this means expectations from startups are higher. With more businesses getting more runway, “it means we’re expecting more from them once they come back to the trough for more capital,” he said.

It can also mean a competitive edge. Jim Orlando, managing partner with OMERS Ventures, said Canadian companies are “raising the money it takes to succeed against their competitors from the U.S.” At the same time, members of the VC community such as Ms. Bannister are noticing more U.S. fund interest in Canada, thanks to this country’s “reasonably priced” valuations.

However, the smaller number of Canadian VC deals prompts some warnings about reading too much into a half-year’s findings. As an example, the five-year average of later-stage deal values is skewed high by $100-million-plus deals in the first half of 2016, including by Real Matters and DalCor Pharmaceuticals.

“I’m not going to shift strategy … based on what I see in one quarter, or even one half, over another,” Karl Reckziegel, the Business Development Bank of Canada’s vice-president of funds and co-investments, said in an interview.

CVCA’s Mr. Pinto suggested more good news for venture capital is still to come, though. Ottawa’s startup-stimulating $350-million Venture Capital Catalyst Initiative, he said, “will be a further catalyst to maintain this momentum going forward.”