Canadian VC deal-making tracks 2013’s high-water mark

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Canada’s venture capital market had a pretty good year in 2013. VC fund investments in innovative companies totaled close to $2 billion, up 31 percent from 2012. It was also the highest level of domestic market activity in six years.

Will the market show similar momentum in 2014? Might deal-making this year match 2013’s achievement or even surpass it?

Things were looking hopeful in the first quarter, when Canada’s Venture Capital & Private Equity Association (CVCA) and research partner Thomson Reuters, the publisher of peHUB Canada, reported dollar flows totaling $378 million, up 2 percent from the year before. The number of financing rounds rose even more sharply. In the second quarter, the auspices also appear to be favourable.

Relative to the first quarter, there were more large-sized deals announced between April and June. These engaged such up-and-coming Canadian technology companies as Verafin, Wattpad and SHOP.CA Network, to name only a few.

According to Thomson Reuters’ data, disclosed financings in this period accounted for $323 million in VC disbursements. (See Thomson Reuters’ preliminary list of top VC deals in Q2 2014.) Of course, we won’t know the whole story until August, when the CVCA releases a final cut of Thomson Reuters’ data. That’s because over the coming weeks Thomson Reuters will continue to collect proprietary investment reports from Canadian and U.S. venture capital firms. Confidential deals obtained in this process tend to add substantially to quarter-end statistics.

However, if history repeats itself, a combination of disclosed and non-disclosed VC financings should put Canadian market activity in Q2 2014 within reach of the $454 million invested one year ago. If that happens, Canadian dealmaking in the first half of the year will also approximate the $823 million deployed at the end of June 2013.

Powered by IT

Significant year-over-year growth in Canadian VC investments in 2013 owed mostly to strongly funded IT companies, such as HootSuite Media and Shopify. Due to related deals, software, Internet and other IT sectors absorbed 54 percent of total VC invested. So far in 2014, IT again appears to be powering trends. Domestic market activity reported in Q1 2014 and preliminary results for Q2 2014 show IT sectors capturing 64 percent of all disbursements. Dealmaking between April and June, engaging Verafin, Wattpad and SHOP.CA, not to mention Visier, theScore, Tasktop Technologies, OMsignal and other companies, was primarily responsible.

In contrast with trends in 2013, the life sciences sector also is making headway in this year’s market. Preliminary stats indicate that since January more than $150 million has been invested in companies focused on biopharmaceuticals, medical devices and other life sciences. That is already roughly 60 percent of the $250 million invested in the whole of last year. Viewed from another perspective, life sciences so far in 2014 is taking 22 percent of dollar flows versus only 13 percent in 2013.

VC shifts West – and East

VC fund investments in Canada have historically been weighted to urban technology hubs in Ontario and Québec. This was generally the case in 2013, when Ontario garnered 35 percent of the cash, and Québec 30 percent. The pattern was stood on its head in 2014’s early months. In the first quarter, British Columbia led dealmaking with 30 percent of VC invested, while Alberta also secured an above-par 25 percent share.

Preliminary results for Q2 2014 suggest some reinforcement of this trend. For example, the $60 million invested in Verafin, of St. John’s, Newfoundland – so far, this year’s largest deal – will ensure that Atlantic Canada takes a larger piece of the VC pie.

Will deals be big enough?

One factor that distinguished activity in Canada’s venture capital market in 2013 was deal sizes. They were large. 2013 was one of only two recent years in which Canadian innovative companies captured on average more than 50 percent of the dollars injected on average in U.S. companies. That is important because Canadian high-growth companies have grappled for years with financing rounds that were too small.

So far in 2014, we have seen five disclosed deals of a size comparable to the very largest reported last year. Three of these financings were announced in the second quarter. Does this portend a happy result for well-capitalized VC deals this year? For the moment, the answer is probably no. In the first quarter, Canadian companies accounted for only 28 percent of the cash going to their U.S. counterparts. This share might be improved by dealmaking in Q2 2014, but probably not enough to match last year’s stellar result.

But let’s stay positive. After all, 2013’s two largest VC financings – HootSuite’s US$165 million Series B round and Shopify’s $100 million Series C round – were both announced in the year’s second half.

Photo courtesy of Shutterstock

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