Outlook for Canada’s venture capital market remains robust: KPMG in Canada

Canada’s venture capital (VC) market crossed the US$1-billion threshold in the fourth quarter for the second time in a row to finish 2019 at an all-time record of US$4.6 billion, according to KPMG Private Enterprise’s quarterly Venture Pulse report, a global analysis of venture funding.

“It is really a testament to the growing maturity of Canada’s venture capital ecosystem,” says Sunil Mistry, partner, KPMG in Canada. “The tech ecosystem in Canada is now more independent and self-sustaining than ever before. I don’t anticipate deal activity slowing down anytime soon.”

Canadian VC investment totalled US$1.17 billion in the fourth quarter, up 30 per cent from the year-earlier period and down 34 per cent from a record high of US$1.77 billion in the third quarter. The number of closed deals were lower at 109, compared to 151 in the previous quarter, but were bigger in size.

The fourth quarter was powered by sizeable deals from 1Password, a Toronto-based password manager, Coveo, a Quebec City-based artificial intelligence startup, and Nuvei, a Montreal-based payment processing company.

“The Coveo funding round highlights the strength of Canada’s AI innovation ecosystem, which has spread well beyond its traditional innovation hubs of Toronto, Vancouver, Montreal, and Waterloo,” says Mr. Mistry. “At a sector level, fintech continues to be a dominant area of interest for investors – both from an investment perspective and from an M&A perspective – in part due to the strength of Canada’s banking and financial services sectors.”

Family offices continue to play a key role in Canada’s VC market, particularly in early-stage deals between US$1 million and US$5 million, he says.

Despite global economic headwinds, trade disputes, and potential uncertainty from this year’s U.S. Presidential election, the outlook for VC investment remains positive. “I don’t see much changing going into at least the first half of this year,” says Mr. Mistry. “A lot of funds already have their next fund monetized. They need to spend the money, and they’re looking to stay away from any volatility in the public markets.”

The U.S. remains the epicenter of VC activity, accounting for more than half of global VC investment in 2019, the report says. As 2020 unfolds, deal activity is expected to remain relatively steady, with areas like artificial intelligence, biotech, and fintech remaining very hot. According to the report, private valuations in the U.S. remain near-unprecedented highs, similar to if not eclipsing those seen during the dot-com era, driven in part by availability of capital.

While there are no signs of activity slowing, U.S. investors are becoming more discerning about where they put their money after mixed results from last year’s debuts of newly public companies. “We’re already starting to see investors pay a lot more scrutiny on the unit economics and business models,” says Mr. Mistry.

Unlike in the U.S., valuations in Canada continue to be competitively priced, which is helping to attract U.S. investment and fuelled later-stage funding. “Investors will keep investing where the economic climate makes the most sense, where the deal sizes are more reasonable, and where the venture ecosystem is reliable, and Canada checks off all of those boxes,” says Mr. Mistry.

SOURCE KPMG LLP