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VC funds invest $3.2 bln in Canadian tech companies YTD

Venture capital (VC) investment in Canadian technology companies slowed slightly in the third quarter of 2018, with $694 million deployed to 105 financings, according to final data released by Refinitiv.

This marked only the second time in the past two years when quarterly dollar flows fell below $1 billion.

However, since January, technology companies have raised $3.2 billion from VC funds, which represents the most active first nine months in dollar terms in 17 years.

U.S. VC funds played a key role in year-to-date trends, accounting for 43 percent of the total invested. Canadian funds accounted for a 48 percent share.

Information technology sectors remained the main driver of VC investment, securing $2.2 billion at the end of September, while clean technology sectors took $491 million, largely thanks to Enerkem, 2018’s top deal.

A full PDF report of Q3 2018 Canadian venture capital market activity by Refinitiv is available here.

REPORT SUMMARY (reproduced courtesy of Refinitiv)

Canadian VC Market Trends

Canadian venture capital activity slowed somewhat in the third quarter of 2018, with $694 million invested in 105 rounds of financing. While the third quarter is traditionally the weakest for Canadian dealmaking, the three month period from July to September saw the least capital invested in a single quarter since Q2 2015, and the fewest deals completed since Q3 2012. However, this marked only the second time in the past two years when quarterly Canadian investment volumes fell below $1 billion. In year-to-date terms, Canadian companies raised $3.2 billion in the first nine months, the strongest first three quarters since 2001. Deal volumes were also up 4% from the same period last year.

Leading the Top Deals list for the first nine months of the year was the $280 million February round into Montréal-based Enerkem, a company that turns solid waste into biofuels and renewable chemical products. The round, which was Canada’s largest cleantech deal ever, included a consortium of Canadian investors including Cycle Capital, Fondaction, Investissement Québec, and Fonds de Solidarité FTQ. Other top deals for the first nine months included cloud-based medical care platform PointClickCare’s $187 million investment by Dragoneer Investment Group, and AI-powered search technologies company Coveo Solutions, which secured a $100 million investment by Evergreen Coast Capital in April.

Canadian investors slightly outpaced United States-based investors in the first nine months of 2018, accounting for 48% of invested capital, a share that has been consistently declining since 2014 when Canadian investors accounted for 57% of invested capital. United States-based investors accounted for 43% of venture capital invested in Canadian companies in the first three quarters, while other overseas investors mostly from Asia and Western Europe accounted for the remaining 10% of capital invested.

Canada VC Fundraising Trends

Though the third quarter saw only $392 million in fund closings, it came off the heels of a wildly successful second quarter, which saw $1.6 billion in venture capital funds raised. Leading the way was the $715 million close of Georgian Partners Growth Fund IV, which will be used to expand the firm’s presence across the entirety of North America. Other substantial closings during the year include the $257 million closing of Brookfield Ventures, White Star Capital’s oversubscribed Fund II at $233 million, and BDC’s Women In Technology Fund at $200 million.

Canadian VC Trends by Region

Ontario-based companies received $1.6 billion, or half of all disclosed investment dollars during the first nine months. The represented a 45% increase from the same period last year and landed Ontario in fifth place in North American rankings, behind Washington and ahead of Texas. Québec-based companies raised $940 million during the same period, a decrease of 9% from the prior year. This earned Québec an eleventh place ranking overall, behind New Jersey and ahead of Florida. British Columbia also made the top twenty with $539 million, earning it the 18th spot, between Connecticut and Minnesota, although this was a 27% decrease from the investment level in the region during the first nine months of 2017.

Toronto-based companies were the reason behind Ontario’s surge, as they raised $1.4 billion during the first nine months, a solid 60% increase from the same period in 2017. Three quarters of all Ontario financings took place in the greater Toronto area, and this earned the city a 9th place finish in the North American rankings, ahead of Denver and behind the Washington metro area. Montréal ranked 14th with $724 million invested in 97 deals, ahead of the Research Triangle but behind Orange County.

Canadian VC Trends by Sector

Canadian information technology companies continued to be the main driving force behind VC investment, raising $2.2 billion in the first nine months, representing a 17% increase year-over-year. Information technology companies also accounted for a 70% share of overall VC in the period, a share that has consistently risen from a 50% share in 2009.

The life sciences sector on the other hand saw its seventh straight quarter of declines, with only $71 million invested, the worst quarter for the sector since Q4 2015. Cleantech companies raised $491 million during the first nine months, up 149% year-over-year, largely led by the $280 million Enerkem investment.

Canadian Fund Performance

Although investment activity continues to reach new heights, the performance of Canadian venture capital and growth equity funds had not quite attained the same levels. Published 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 4.6% as of the end of Q2 2018, lagging behind both US counterparts and public market equivalents. The improvement of Canadian VC fund returns from 2014 through 2016 has not maintained momentum, and returns since have held flat.