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Valuations and deal volumes and sizes hit their highest levels in years in 2021.Nathan Denette/The Canadian Press

Venture capital investment in Canada has collapsed to its lowest quarterly level since the early days of the pandemic as economic conditions continue to deteriorate and companies seeking investment struggle to find a meeting point on prices with financiers.

The Canadian Venture Capital and Private Equity Association of Canada, or CVCA, said Thursday that companies raised $896-million across 144 deals in the third quarter. That’s down 50 per cent by value and 25 per cent in deal volume from the second quarter – and off 78 per cent in deal value from the third quarter last year. This year will still rank as one of the biggest on record for VC financing in Canada, although many of those deals were actually reached last year and only announced in 2022.

Valuations and deal volumes and sizes hit their highest levels in years in 2021, and global investors such as Tiger Global Management and SoftBank Capital bid up values of companies to “unicorn” levels of USS$1-billion or more. Those two giants have since retreated from later-stage tech deals. Average deal sizes in Canada also collapsed by more than 50 per cent from the second quarter, the CVCA said.

Meanwhile, an expected wave of buyouts to capitalize on fallen tech valuations hasn’t happened yet. The CVCA said there has been a marked decline in private equity so far, with 622 transactions valued at $6.5-billion, compared with 572 deals valued at $12.8-billion over the first nine months of 2021.

Bell jump-starts venture capital investing, joining other Canadian companies despite tech downturn

The drop in the VC market was expected and consistent with trends globally, CVCA chief executive officer Kim Furlong said in an interview. She noted that the amount of venture debt companies have tapped – $543-million over 91 deals – is up sharply from $493-million in 95 deals for all of 2021. That is indicative of companies looking to avoid raising equity at lower valuations than prior financings, she said.

Ms. Furlong said “there’s two ways to look at the numbers,” noting that, compared with the outsized venture capital market in 2021, the numbers are “not bad so far and compare favourably to prior years.” Indeed, with 520 deals valued at $7.2-billion so far this year, 2022 is shaping up to be the second busiest year for deals and deal value since the dot-com era.

Federal bodies are increasing their support, as Business Development Bank of Canada’s capital division has launched new early-stage investment funds and is managing the government’s venture capital investment support program, while Export Development Canada has expanded support for later-stage “growth” companies. “The fundamentals are very different from 2001,” Ms. Furlong said. “I hope we have the ambition and risk appetite to double down and build during this period.”

This has been one of the bleakest periods for the tech sector in years, as rising inflation and interest rates and a looming recession have hit hard. For years “the whole strategy for every tech company was to just run as fast as you can, increase your sales and don’t worry about profitability because there is lots of capital available,” said Rick Nathan, managing partner with Toronto-based Kensington Capital Partners. “The market changed dramatically, the new world says you don’t have to run so fast, what’s more important is to get to cash flow break-even. It’s a hard transition for many companies to make.”

Layoffs have swept across the sector as companies aim to preserve cash and break even; according to, 853 companies have laid off more than 137,000 people in 2022, including large-scale cuts by giants Amazon, Cisco, Meta and Twitter.

Software valuations have crashed from bubble levels during the pandemic to below long-term averages. Publicly reporting companies with private tech holdings have marked down their stakes. Power Corp. of Canada and subsidiary IGM Financial Inc. have slashed the carrying value of their stakes in Wealthsimple Technologies Inc. by more than half. Fidelity and BlackRock cut valuations of private Canadian tech companies in their portfolios including Dapper Labs and Hootsuite.

Meanwhile, financings have proven tougher to close. “There’s a huge gap between what sellers want to sell for and what buyers will pay,” said Boris Wertz, Vancouver-based general partner of Version One Ventures. “We haven’t really settled on the new valuation norm and it’s tough to get deals done at the later stage.”

Venture investors are demanding tougher terms such as “multiple liquidation preferences” that would guarantee a multiple of their investment upon a sale, potentially crowding out other equity holders. It’s now considered an achievement for companies to raise money at the same valuation as their prior round.

“Investors are being very cautious,” said Mr. Nathan at Kensington. He said while the best companies “are doing fine” and can still raise money at decent terms, “there is this large middle group that is not able to raise money today from new investors” and have to lean on existing backers or accept tougher terms.

“Those the bottom group are just not getting funded and are in trouble.” That includes Toronto-based quick delivery company GoodGood, which shut this month after it couldn’t find follow-on capital after raising $6.5-million last fall.

Meanwhile, private equity firms have been actively scoping the market for bargains, including among the 20 technology companies that went public on the Toronto Stock Exchange in 2020 and 2021 and that have, for the most part, sunk well below their issue prices.

Transactions have been slow to materialize as companies hesitate to consider buyouts that would leave IPO investors under water. Still, some are considering that path. On Wednesday, TSX-listed technology services company Converge Technology Solutions Corp. said its board had launched a review of strategic alternatives.

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