TLDR: Fading 2023 VC performance underscores Canadian tech market’s “vulnerability,” BDC reports
Key Points:
- Down rounds rose from seven percent in 2022 to 31 percent in 2023.
- 10-year internal rates of return for Canadian VC funds decreased to 11.7 percent in 2023.
A study from the investment arm of the Business Development Bank of Canada (BDC) highlights the challenges faced by the Canadian venture capital (VC) market in 2023. The report showed a decline in VC funding and activity compared to the previous year, with down rounds becoming more prevalent and VC returns softening. Despite a gloomy outlook at the beginning of the year, the Canadian VC market displayed signs of resilience and fragility, indicating a point of sustainable growth, according to BDC.
The report revealed that macroeconomic headwinds led to greater caution among VC fund limited partners (LPs) and general partners (GPs). LP influence promoted discipline and improved standards among GPs, but fundraising challenges persisted, with many VC fund GPs struggling to meet their fundraising targets. The report also noted a decline in VC returns in 2023, with one-year internal rates of return falling into negative territory.
While Canadian VC experienced a slower decline in total dollars invested compared to global VC investment, late and growth-stage investments were hit hard last year. Sector-wise, the life sciences and energy and clean technology sectors demonstrated strength in 2023 and attracted increased investor interest. However, gaps remained in terms of active private Canadian VC funds backing companies at various stages.
The report also highlighted a cool IPO market in Canada in 2023, with only one Canadian VC-backed company going public. Mergers and acquisitions reached record-high exit values, driven by a few large deals, while more than half of VC transactions in Canada included foreign participation. Looking ahead to 2024, BDC believes there is potential for slight optimism in the Canadian VC market, but challenges persist, particularly in meeting new investment standards and enduring profitability.
