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Canada’s tech sector is entering the survival-of-the-fittest part of the cycle. Many startups won’t make it

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Illustration by Rob Dobi

Andrew Graham didn’t know it yet, but the swift collapse of a bank 4,300 kilometres away in Santa Clara, Calif., was about to mess with his Toronto-based fintech, Borrowell Inc. It was early March, and the company was days away from closing a $30-million financing that would help the company – which provides consumers with online credit scores and then matches them with lenders – continue to expand. The legals and due diligence were done. Virtually all that was left were the final signatures.

The cash infusion wasn’t a matter of life or death; Borrowell was close to breaking even, putting it in much better shape than most startups. But the funding would provide a cushion of financial comfort during what was proving to be a prolonged tech downturn with no end in sight.

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The collapse of Silicon Valley Bank – one of the world’s largest tech financiers – in early March not only rattled it's customers, it also sent shockwaves throughout the financial sector.Steven Senne/The Associated Press

Then Silicon Valley Bank – one of the world’s largest tech financiers – failed after a run on deposits by the very founders and venture capitalists it had supported for decades. Its collapse rattled the entire sector. Within days, the lead investor on the Borrowell funding, a U.S. private capital firm, pulled out. The deal was dead.

“It was a punch to the gut” and prompted Borrowell to scale back growth initiatives and lay off some staff, says Mr. Graham. He’s since talked to other founders who had recent financing deals fall apart late in the process – but few came as late as Borrowell’s. “I know we’re not alone out there.”

He’s right. He’s also one of the luckier ones.

After an 18-month slump that has seen tech companies cut more than 360,000 jobs globally and slash costs to preserve cash, the tech sector is entering the survival-of-the-fittest part of the cycle. The grim news is likely to get grimmer for some time. Many startups won’t make it. The failure of SVB (which is now owned by First Citizens Bank) hasn’t helped.

Already this year, VC-backed startups including RenoRun Inc., Canada Drives Ltd. and Tehama Inc. have filed for creditor protection. Fintechs Pillar Financial Technologies Inc. and Billi Labs Inc. have closed their doors. Others have sold for fire-sale prices, including small-business lender Nuula and logistics platform provider Swyft Technologies Inc., which raised US$17.5-million from investors including Inovia Capital and Shopify Inc. This spring it was sold for $300,000.

Financially struggling Canadian public companies such as D-Wave Quantum Inc. and Lifespeak Inc., meanwhile, recently agreed to costly debt financings as their stocks traded for pennies. As Lifespeak’s chief financial officer, Mike McKenna – whose mental health and well-being platform has $81-million in net debt, $6.5-million in cash and a market capitalization of $27-million – told an investor conference in Toronto last month, “Our balance sheet needs some focus.”

And this is just the start of the Great Tech Shakeout. The next year will be a death zone for many young companies as “you’ll see a bunch of businesses shut down or sold for next to nothing,” says Chad Bayne, co-chair of Osler, Hoskin & Harcourt LLP’s emerging and high-growth companies practice.

As for companies in need of financing, there’s definitely still money to be had – but it’s going mainly to the strongest performers, and financiers aren’t willing to pay anywhere close to the vastly inflated prices seen during the pandemic. Those with challenges such as tempering growth, weak unit economics or lack of product-market fit are getting funding offers that slash their valuations to a fraction of previous levels – if they get them at all.

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After an 18-month slump that has seen tech companies cut more than 360,000 jobs globally and slash costs to preserve cash, the tech sector is entering the survival-of-the-fittest part of the cycle.Illustration by Rob Dobi

Online merchant financier CFT Clear Finance Technology Corp. is the perfect example: at its peak, it was valued at more than US$2-billion. But beset by rising interest rates, economic uncertainty and a slew of management changes, it’s been trying this year to raise US$20-million at less than one-tenth its former valuation.

According to the Canadian Venture Capital and Private Equity Association, the value of VC deals in Canada in the first quarter dropped 71 per cent year-over-year as deal volume fell by 24.3 per cent. And that decline still likely has a way to go. VC funding took 10 quarters to bottom out after the dot-com bubble burst more than two decades ago and nine quarters after the Great Recession of 2008-09. We’re five quarters into this downturn, and Crunchbase says global dollar volumes invested crashed by 59 per cent in the first quarter of 2023, to US$76-billion, compared to the fourth quarter of 2021.

Venture capital investment in Canada since 2019

Quarter over quarter, in millions of dollars and number of deals

Year

Investment activity

No. deals

125

2019 Q1

153

Q2

132

Q3

148

Q4

111

2020 Q1

144

Q2

123

Q3

129

Q4

177

2021 Q1

233

Q2

210

Q3

206

Q4

202

2022 Q1

Q2

205

Q3

151

Q4

171

154

2023 Q1

0

1,000

2,000

3,000

4,000

5,000

$6,000

john sopinski/the globe and mail, Source: cvca

Venture capital investment in Canada since 2019

Quarter over quarter, in millions of dollars and number of deals

Year

Investment activity

No. deals

125

2019 Q1

153

Q2

132

Q3

148

Q4

111

2020 Q1

144

Q2

123

Q3

129

Q4

177

2021 Q1

233

Q2

210

Q3

206

Q4

202

2022 Q1

Q2

205

Q3

151

Q4

171

154

2023 Q1

0

1,000

2,000

3,000

4,000

5,000

$6,000

john sopinski/the globe and mail, Source: cvca

Venture capital investment in Canada since 2019

Quarter over quarter, in millions of dollars and number of deals

Year

Investment activity

No. of deals

125

2019 Q1

153

Q2

132

Q3

148

Q4

111

2020 Q1

144

Q2

123

Q3

129

Q4

177

2021 Q1

233

Q2

210

Q3

206

Q4

202

2022 Q1

Q2

205

Q3

151

Q4

171

154

2023 Q1

0

1,000

2,000

3,000

4,000

5,000

$6,000

john sopinski/the globe and mail, Source: cvca

So what does all this mean for Canada’s tech sector? It finally seemed to be on a sustained roll after significant retreats following the dot-com bust and Great Recession. Well, with the economy in no hurry to rebound, a wide swath of once-high-flyers are looking more like the walking near-dead.

Many entrepreneurs – particularly those who got a taste for high valuations and big fundraises during the pandemic – still believe that if they can hold off for a few months, valuations will rebound, says Peter Misek, managing partner with Framework Venture Partners. They could be entering a trap. “My belief is that north of 1,000 later-stage North American companies will be looking for financing in the second half,” he says. “Almost all of them have put it off. If you’re not the best of the best, you won’t get financed.”

After the bubble burst

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Victoria-based Certn, which operates an online background-check service, is one of Canada’s fastest-growing companies.Courtesy of Certn/Durrell Communications

It’s a vastly different landscape than what existed 18 months ago, when giant investors such as Tiger Global and Softbank were aggressively throwing huge sums at young companies with relatively little forethought and cheering them on to spend, spend, spend.

In early 2022, Andrew McLeod, CEO of Certn (Canada) Inc., got a term sheet from one fund that told him, “You have 18 months to spend $150-million,” he says. Victoria-based Certn, which operates an online background-check service, is one of Canada’s fastest-growing companies, and the valuation was rich; it would have established the company as Canada’s latest “unicorn,” valued at north of US$1-billion. Nonetheless, Mr. McLeod said no. “There was no way we could efficiently spend $150-million in this business with our fundamentals in 18 months,” he says. “I live in Victoria and drive a minivan. We would have been a unicorn, but we would also be in a position that could arguably be unrecoverable.” Certn instead raised US$80-million in two tranches last year at more modest terms, valuing the company at US$450-million including funds received. “But I think there were certain founders that got caught in the unicorn trap.”

RenoRun CEO Eamonn O’Rourke was one of them. The Montreal-based startup ran an online delivery service for general contractors, and it was one of many backed by Tiger in Canada. From the time it received its first venture cheque right up to June, 2022, Mr. O’Rourke told The Globe in March, investors and board members kept telling him to grow faster.

Then the downturn hit, starting with a steep drop in publicly traded tech stocks in late 2021. Soon after, it spread to private companies as interest rates rose and demand cooled. The “grow at all costs” mantra went out of fashion quickly. Reaching profitability – or just plain surviving – was the new goal.

As companies sought to preserve cash, they laid off waves of employees – and the carnage has continued. So far in 2023, job losses in the sector have topped 197,000 globally, compared to 164,500-plus in all of 2022, according to Layoffs.fyi. A slew of Canadian tech companies have also made senior executive changes, including Shopify, Lightspeed Commerce, Hootsuite, ApplyBoard and GoodFood.

As for RenoRun, it tripled revenues annually for three years before doubling them in 2022. But investors got cold feet, starting with Tiger, which retreated last year from the tech market it helped to inflate. RenoRun failed to attract new backers, and its existing ones couldn’t agree on new financing. The company filed for bankruptcy in late March and is being carved up by creditors, and Mr. O’Rourke is bitter and disillusioned. “We always had unwavering belief in what we built and the path we were on,” he told The Globe days before the company filed. “I think it’s an absolute shame that this is how the story potentially ends. It just leaves me scratching my head.”

Structure, the new dirty word

One thing is clear these days: the balance of power has returned to those with dollars to spend. And they’re increasingly asking for tougher terms in exchange for their investment.

A growing number of VCs are now proposing to add “structure” to financing deals – terms that ensure they get a much bigger bite of the ownership and ultimate proceeds when a company is sold. That can include warrants for incoming investors giving them the right to pick up extra shares, or “liquidation preferences” that ensure they get a higher guaranteed multiple on their investment before others get their share. In some cases, past investors who aren’t willing or able to participate in a new financing are seeing their holdings crammed down to a fraction of their former stakes in what’s called a “pay-to-play” deal.

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Siblings Martin and Meti Basiri, co-founders of ApplyBoard, at the University of Waterloo in May 2019. A slew of Canadian tech companies have also made senior executive changes, including ApplyBoard.Tijana Martin/The Globe and Mail

Since the end of 2022, “terms have started to tighten significantly,” says Hans Knapp, a partner with Vancouver VC firm Yaletown Partners, while some financiers have pulled offers well into the funding process. Toronto online car seller Clutch Canada Inc. was forced to cut 65 per cent of its staff in January and retreat from several markets after an eight-figure financing fell through.

It doesn’t matter that many of the companies seeking cash raised vast sums during the market peak of 2020-21. Many are finding it exceedingly difficult to find the capital they need at palatable terms, even if they’ve cut staff, squelched expansion plans and otherwise reined in their ambitions. “If they don’t have the right unit economics or sustainable business models,” says Laura Lenz, a partner with OMERS Ventures in Toronto, “investors are just turning away.”

So far, Osler’s Mr. Bayne says many companies and boards are turning down proposed financings with structure “because the urgency is not there yet” to take money with onerous strings attached. As valuations fell last year, many startups raised bridge rounds from existing investors. Those inside deals were often in unpriced convertible notes, which allowed the companies to maintain their previous lofty valuations. That was supposed to buy time until things turned up so investors didn’t have to mark down their portfolios. But conditions haven’t changed. “Everyone is trying to kick this down the road as far as they can,” says Mr. Bayne.

Joe Canavan, a financial-industry veteran and startup investor in Toronto, puts it bluntly: “If these companies want to survive, they’ll have to do things that are unpalatable or won’t be particularly well received. It’s either you do that, or you die.”

For some it’s too late. Ed Bryant, CEO of Ottawa-based Sampford Advisors, a midmarket tech-focused mergers and acquisitions advisory firm, says he’s turning away a growing number of small venture capital-backed companies with less than six months of cash that are looking to sell. “We feel quite strongly we can’t sell them – there’s too much risk for us to take,” he says. “They don’t have options. There’s a lot of junk that no one wants to buy.”

It’s a financier’s market

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Kurtis McBride, CEO of Miovision, one of the Canadian companies that has raised nine-figure growth financings this year.Glenn Lowson/The Globe and Mail

Despite the sector’s woes, there’s still plenty of money held by risk-capital investors who are keen to plow it into good tech companies. As of December, private investors globally were sitting on close to US$2-trillion in “dry powder,” or undeployed capital, according to market research firm Preqin.

But they’re pickier than ever (except, apparently, when it comes to buzzy generative AI companies such as OpenAI or Cohere Inc., which are still commanding valuations in the billions of dollars despite having scant revenues). Solid, growing companies at historically normal valuations are what they want.

That’s what drew investors to Odaia Intelligence Inc. As the tech sector went sideways last year, CEO Philip Poulidis made sure his Toronto-based startup did the right things: it slowed hiring, expanded within existing accounts rather than chasing new clients and ensured customers were being well served. Odaia would “do more with less, with the people we had,” says Mr. Poulidis. The idea of raising money was a non-starter.

Then he went to the J.P. Morgan Healthcare Conference in January and realized Odaia was thriving compared to other companies. The five-year-old startup – which uses artificial intelligence to help pharmaceutical companies more effectively target new drug sales to health care practitioners – was producing a meaningful bump in sales for clients, and its revenue jumped by 646 per cent in 2022. Mr. Poulidis, a seasoned tech and telecom executive, returned to Canada with a different view: now was actually the perfect time to raise money and accelerate growth. “If you’ve got product-market fit, it’s always a great time to build and focus on scaling a company when everyone is doing the opposite,” he says.

He was right: this month, Odaia announced it had raised US$25-million in an oversubscribed round co-led by two new investors, Monograph Capital and Threshold Ventures, and backed by a third newcomer, the Weston family’s Wittington Ventures. The financing came 15 months after Odaia raised US$13.8-million and at a higher valuation – a big win for any startup in 2023.

“Odaia didn’t sell on sizzle – it sold on finding product-market fit and delivering value to customers,” says Michele McBane, managing director with StandUp Ventures, an Odaia investor. “The company raised the right amount, did the right things with it, were very capital-efficient and delivered on what they said they’d do.”

Other Canadian companies, including Jobber, Miovision, E2IP, Super.com (formerly known as SnapCommerce), Blockstream, LayerZero Labs and Kepler Communications, have raised nine-figure growth financings this year. Giant private equity firms have also bought up several publicly traded tech companies trading at well below their peaks, including Waterloo, Ont.-based Magnet Forensics, which was taken private by Thoma Bravo last month.

Several Canadian VC firms have also raised funds in the past year, including Brightspark Ventures, Kensington Capital Partners, Framework Venture Partners, Radical Ventures, Yaletown Partners, Diagram Ventures, Pender Ventures, The51 and Staircase Ventures.

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Janet Bannister, Managing Partner, Staircase Ventures in her Toronto home on, Mar 30.Fred Lum/the Globe and Mail

That said, fundraising is never easy in Canada, and it has gotten tougher in emerging areas such as new consumer packaged goods, says Dragons’ Den star Arlene Dickinson. She struggled this year to hit the first close of $65-million for the second fund of District Ventures, which invests in innovative companies in the food, beverage, health and wellness sectors. She likely won’t reach the original $175-million goal. “Every meeting with investors is a different tone” than in the past, she says. “You can almost feel the fear on the investor side. If it doesn’t look like something they’re familiar with, which in my case it doesn’t, it’s tightened even more. It’s a real struggle.”

Sophie Forest, a partner with Brightspark – one of Canada’s oldest active VC firms – says terms on its new $120-million fund have been “a bit harder for us.” That means Brightspark has had to offer investors a 7-per-cent minimum return on their capital before the fund managers can get any share of the investment upside; usually, funds charge a 2-per-cent management fee and keep 20 per cent of investment profits.

Government-backed funders are also stepping up support for startups, including Business Development Bank of Canada, which launched a $150-million venture fund last month to start investing in software companies that help improve environmental sustainability.

Export Development Canada has poured money into globally minded later-stage startups with export potential since last summer, part of its mandate to increase Canadian trade. The strategy makes more sense because liquidity for companies has dried up, says EDC’s senior vice-president, Guillermo Freire, whose Crown corporation has made a string of recent big investments in Canadian companies including Certn, Miovision, Attabotics, Raven.AI, GoBolt and Sanctuary.

Janet Bannister, a veteran tech executive and VC who recently launched Staircase Ventures, says there are two reasons this is a great time to deploy early-stage capital. “Valuations are down significantly, which means it’s an ideal time to be investing,” she says, “and the types of entrepreneurs that are starting a business right now are more resilient and focused.”

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Marie Chevrier, CEO and founder of Sampler in Hudson, Que. in July 2020. As other companies struggle, Sampler – whose revenues exceed $10-million – is set to break even this year.Christinne Muschi/Christinne Muschi/The Globe and

Boldness when others turn fearful

Marie Chevrier has raised just $13-million in venture capital during the 10 years of Sampler App Inc.’s existence. She runs a conservative, capital-efficient business, whose online platform matches packaged-goods giants with consumers who want to receive samples by mail. Last month, Toronto-based Sampler bought another similar company called Abeo from Arcade Beauty, a major sample manufacturer. The deal gives Sampler access to premium beauty clients such as Dior and Chanel, and expands its team to Europe. Arcade also took a stake in the company.

It wasn’t a big deal by size. But it’s big for a company with 45 people that has flirted with profitability and has been given plenty of breathing room by friendly, patient investors to develop the digital sampling space. Now, as other companies struggle, Sampler – whose revenues exceed $10-million – is set to break even this year. Not only that, but Ms. Chevrier is ready to step up the pace, to be brave while others are fearful.

“This is the time where Sampler needs to be bolder about how we grow. I think through this acquisition I’m showing it doesn’t need to come from venture capital,” she says. She’s relied on receivables financing to fund much of her growth, given her clients are giants such as Unilever, Henkel and L’Oreal. And she’s open to taking on new investors. “There is capital out there for companies that are in control of their financing strategy,” she says.

And that’s the good news in all this: Canada still has lots of stable – and even growing – tech companies with market-leading products and real customers. Even if the shakeout is particularly brutal and many startups disappear, we’ll be left with a much broader, deeper set of quality companies poised to grow and acquire flagging competitors than we did after the dot-com bust and Great Recession.

Despite the poor performance of the 20 tech companies that IPOed on the TSX early in the pandemic, several other private companies are also biding their time until markets open up again and they can go public. This crop of bigger, more mature and well-managed companies includes Vancouver-based Clio, Trulioo and GeoComply.

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Adrian Schauer, the CEO of AlayaCare in June 2019. This past August, the company laid off 13.6 per cent of staff and halted acquisitions.Andrej Ivanov/The Globe and Mail

Some players that were struggling last year seem to have made the turn, too. Montreal-based AlayaCare, which provides software for home-care providers, raised $225-million near the peak of the bubble in 2021, with $150-million going to the balance sheet and the rest to early investors. But then revenue growth fell short of target for three quarters. This past August, the company laid off 13.6 per cent of staff and halted acquisitions.

AlayaCare, which generates $77-million in annual revenues in Canada, the U.S. and Australia, has since kept a lid on expenses and expects to reach operating profitability in 2024. When the markets improve, it plans to go public. “We have more than three years of cash,” says CEO and co-founder Adrian Schauer. “For us, it’s just a phase of ignoring the capital markets and growing our business the old-fashioned way. The weirdness of the bubble is behind us, and we’re running our business.”

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