Venture funding for early-stage Canadian startups is finally set to leave a dismal period behind, according to new data gathered by early-stage funder Panache Ventures.
Panache partner Prashant Matta, writing on startup news site Betakit, declared “a market bottom” for the investment space, which saw grim investment numbers for the first half of 2024, especially when compared with COVID-era venture capital (VC) activity.
“From the pandemic highs to the recent lows, the sentiment has been stubbornly defensive,” Matta wrote. But the new data suggest a surge in new startups in their early stages, he says. “It is time to play offence or get left behind.”
That surge, combined with the “declining cost of capital due to falling interest rates, improving macro and liquidity conditions, accelerating technical advancements, and thriving entrepreneurial ambition,” creates the conditions for the venture market to recover, Matta writes.
Panache says it has been using artificial intelligence to comb through information on the web for signs of new startups emerging in Canada. Matta writes that where most VC data are “supply side,” counting the number of investments and the size of deals, the Panache data on startups coming to the market are “demand side” — and therefore a potential predictor of future demand for VC investment.
The data suggest a little over 800 technology and software startups were launched in Canada in the first half of 2024, a notable increase from the same period in 2023, when there were 625. “After a relatively slower 2023, the surge in startup creation indicates that founders are gearing up to build,” Matta wrote. “Investors who have been cautious in recent years may become more active due to the uptick in deal flow in the coming quarters.”
Tech talent regroups
Alison Nankivell, CEO of MaRS Discovery District, an innovation hub that works with tech startups, says they have seen a pickup in startups in the applied technology and biotech sectors in recent months.
“If you think about it, the labour market has freed up a lot of tech talent,” she said. “A lot of that tech talent regroups into new companies, which makes perfect sense. People feel they’ve got nothing to lose to start a new business … some of the greatest companies we know in the tech world were created in downturns, and that’s because entrepreneurial talent is available to put together interesting teams and start ambitious new businesses.”
The situation has been particularly gloomy in 2024. A July report from RBCx, Royal Bank’s technology and innovation division, found that “Canada’s VCs are on track to raise the least amount of money in a decade,” with total investment at around $500 million — far off the $7.4 billion raised in 2022.
Benjamin Bergen, president of the Canadian Council of Innovators, says falling interest rates were clearly a positive development in the funding space, with around two-thirds of the council’s member companies saying access to capital was their top issue. But he also says other factors — changes to capital gains tax policy chief among them — had kept sentiment fairly negative in 2024.
“I would caution that there are some headwinds in terms of public policy that the government has put out that is going to make it hard for our market to rebound as quickly as the U.S.,” he said.
Some funds are still contending with valuation issues dating back to the pandemic era, Nankivell says, which have tied up capital and which may mean 2024 doesn’t show immediate signs of improvement for Canadian VC.
“I think, personally, the way you’re going to be able to judge this is in a year from now,” she said.
“What does the first half of 2025 look like? Because if things haven’t started to bounce back, then I would be concerned. But I do think the market tends to stagger between extremes. It pulls back, it kind of recoils quite strongly, and then it slowly tries to go back to a more regular cadence.”
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf.
Download the Yahoo Finance app, available for Apple and Android.