Foreign funds help Canadian VC invested hit $4 bln in 2017

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Venture capital investment in Canadian technology companies continued at a strong pace in 2017, with $4 billion deployed to 502 financings, according to final data released by Thomson Reuters. In dollar terms, this represented a 12 percent increase from 2016. Deal-making appeared to slow in Q4 2017, when VC funds invested only $890 million in the domestic market, marking the end of a four-quarter run of values exceeding $1 billion. Foreign investors played a key role in 2017 trends, accounting for more than half of all disbursements. Canadian IT companies captured most VC investment, or $2.5 billion, the highest level of activity in the sector since 2001.

A full PDF report of 2017 Canadian venture capital market activity by Thomson Reuters is available here.

REPORT SUMMARY (reproduced courtesy of Thomson Reuters)

Canadian VC Market Trends

Venture capital investment in Canadian companies continued at a strong pace in 2017 with $4.0 billion invested in 502 rounds of financing. In dollar terms, this represented a 12% increase over 2016, but with only $890 million disbursed in Q4, Canada’s run of four consecutive quarters with over $1 billion invested came to an end. Deal volumes also fell 12% from 2016, marking a four-year low.

With dollar disbursements up and deal volumes down in 2017, the average Canadian venture capital round soared to $8.0 million, an all-time high. While this is more than double the average round size just five years ago, Canada’s average round size continues to lag behind all other top VC-attracting nations except France. Despite the highest level of direct investment by Canadian governments, Canadian companies on average continue to secure less than their counterparts across all VC-intensive regions and less than half of the average US VC-backed company.

While Canadian companies have been securing larger VC rounds, this growth could not be attributed to domestic investors. Canadian investors were responsible for approximately 47% of capital disbursed in 2017; United States-based funds accounted for an additional 38%, and the remainder was accounted for by overseas investors, mostly from Europe and East Asia. The last year in which Canadian investors accounted for such a low share of VC investment in Canadian companies was 1992, when 38% of VC investment in Canadian companies could be sourced to Canadian firms, with the remainder originating in the United States.

Canadian Fund Performance

While investment activity was on the rise, the performance of Canadian venture capital and growth equity funds had not reached the same heights. Final data provided by Cambridge Associates shows Canadian venture capital & growth equity funds with vintage years of 2000 or greater returned a since inception IRR of only 1.3% as of the end of Q3 2017, lagging far behind both US counterparts and public market equivalents. The improvement of Canadian VC fund returns over the past four years, however, has brought industry performance into positive territory.

Canadian VC Trends by Region

The increase in venture capital investment in 2017 was led by two provinces in particular. Québec-based companies raised $1.4 billion in the year, an impressive 44% increase over the year prior; while British Columbia-based companies raised $926 million, an all time high for the province and a remarkable 93% increase over 2016. Ontario companies, however, did not reach the same heights. Investment in Ontario fell by 27% to $1.4 billion, knocking the province down to 8th place in the North American state and province rankings, behind Québec, which placed 7th. British Columbia ranked 14th place while Alberta ranked 27th.

In a similarly close race, Montreal-based companies raised $1.2 billion in 2017, making it Canada’s most attractive city for venture capital and the 10th best in North America in terms of dollars invested, between San Diego and Denver. Of Canada’s ten most active private independent VC firms in 2017, five were also located in Montreal. Toronto placed 13th among North American cities, with $1.0 billion invested in 2017, behind Atlanta, GA; and ahead of Orange County, CA.

Canadian VC Trends by Sector

Canadian IT companies raised $2.5 billion in 2017, the most capital invested in the sector since 2001, and a 29% increase over the prior year. Life sciences companies followed second with $1.1 billion million invested, while Cleantech companies raised $218 million in 2017. The remainder of investment was rounded out by energy & industrial ($80 million) and consumer-related companies ($40 million).

Canada VC Fundraising Trends

Twenty one Canadian funds raised a total of $1.3 billion in 2017. While this was a comparatively poor showing as compared to 2016, when nearly $1.7 billion was raised, 2016 had represented the best year for Canadian VC fundraising since the height of the dot com era. Highlights of 2017 fundraising included OMERS Ventures Fund III at $300 million, Real Ventures Fund IV at $180 million, and the Yaletown Innovation Growth Fund at $100 million.

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