Canada: Q3 2018 Review: Venture Capital Financing And Deal Activity Decline After Record-Setting H1

Last Updated: November 20 2018
Article by Amanda Ferriss

Most Read Contributor in Canada, November 2018

PwC and CB Insights recently released their Q3'18 "MoneyTree Canada report" (the Report), which provides an overview of investments in Canadian venture-backed companies. According to the Report, after an exceptional H1'18 (which we've covered in an earlier post), Q3'18 has seen a decrease in the number of deals, as well as in dollars invested.

General overview

According to the Report, Canadian venture capital (VC) funding has decreased for the second quarter this year, falling 42% to USD $541M in Q3'18 (from USD $927M in Q2'18). Similarly, despite a record-high of 127 deals in Q2, Canadian companies only completed 87 deals in Q3'18.

Despite these falling numbers, corporate VC investment in Canadian start-ups increased to 39% of all deals in Q3'18, which marks a significant increase from 32% in Q2. This is an area that has seen a lot of growth in recent years, rising from 17% of all deals in Q4'16.

Canadian investors continue to make up the majority of investors across the various funding stages, especially in the seed and later stages, followed by US investors.

Sector trends

Consistent with the past few years, the Internet sector witnessed the highest number of deals and investments, with 42% of all Q3'18 deals in this sector and approximately USD $256M invested across 37 deals. The sector, however, continues to experience a decline in activity for the second straight quarter, falling from 46 deals and USD $357M invested in Q1'18.

The healthcare sector is the second highest sector in terms of deal flow, with 12 deals in Q3'18. While healthcare has experienced a slight increase from 12% of deals completed in Q2'18 to 13% in Q3'18, Canadian healthcare companies only raised USD $45M in Q3'18 – the lowest across seven quarters, falling from USD $341M in Q4'16.

Thematic areas

After a record Q2'18, investments in artificial intelligence companies fell from 14 deals and USD $163M to nine deals and USD $106M in investments in Q3'18. Funding for Canadian Financial Technology (FinTech) companies, on the other hand, is on the rise, hitting a high for 2018 of 12 deals and USD $115M in Q3'18. Interestingly, five out of the 12 FinTech companies funded in Q3'18 are headquartered in British Columbia, demonstrating that the province is a Canadian hub for FinTech.

While the Canadian healthcare sector may be at a low for now, investment in the Canadian digital health space increased 170%, with USD $83M raised in Q3'18, compared to USD $31M in Q2. This is the third-straight quarterly increase in Canadian digital health investments.

Canadian markets

The Toronto market continues to lead, both in terms of the number and size of deals (30 deals, USD $248M raised), followed by Vancouver (21 deals, USD $104M raised), and Montreal (16 deals, USD $95M raised). Both the Toronto and Vancouver markets experienced a significant decline this quarter, with total investments falling from USD $301M in Toronto last quarter, and USD $120M in Vancouver last quarter.

Despite the downward trends in Q3'18, the Report suggests that there is little reason for concern, especially given the high bar set by H1'18. The Canadian VC landscape remains exciting as it continues to evolve, and we will be keenly following the trends in the last quarter of 2018.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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