Canadian climate tech companies face critical pre-seed and seed stage funding gap: MaRS report

Canadian climate tech ventures lack funding at the critical pre-seed and seed stages and this represents a “formidable” funding gap to commercialization, according to a report from Toronto-based innovation hub MaRS Discovery District.

“Canadian early-stage climate tech is woefully underfunded,” says the report, written by freelance journalist and author John Lorinc (photo at right) with research, analysis and editorial support from MaRS staff.

While Canadian cleantech investment overall has remained stable, seed-scale deals plummeted by 69 percent between the second quarter of 2023 and the second quarter of 2024, the report says.

This reduced deal flow means that if fledgling “hard-tech” ventures aren’t supported at the earliest stages, there will be fewer firms that ever reach the crucial commercialization stage and Canada will miss out on reaping the benefits from these solutions.

New devices, materials, infrastructure and other hard tech often involve long development and testing timelines that extend well beyond the typical 10-year fund timeline of traditional angel or venture investors, the report notes.

However, many venture capital funds lack the deep technical knowledge to understand competitive advantages and make confident bets. 

“If you’re going to need to build large-scale commercial plants, you’re going to need a lot of capital and not just dilutive capital,” said Leah Perry (photo at right), senior manager, cleantech, at MaRS.

“Without a solution, Canada risks losing not just groundbreaking innovations and the IP we worked so hard to create, but also the economic and environmental benefits they could deliver globally,” she said in an email to Research Money. 

MaRS’ report quantifies the scale of the early-stage capital gap and highlights the structural incentives that discourage Canadian investment, Perry said.

The report makes the case for “patient capital” – with timelines extending beyond the 10-year fund lifecycle – and people with technical know-how to underwrite these “incredibly transformative innovations,” she said.

To mobilize private capital – whether from family offices, foundations or mission-driven investors –  the government could play a catalytic role by seeding early-stage funds with this specific mandate, Perry said. “Government capital can act as a de-risking mechanism, attracting additional private investment and accelerating the growth of high-potential Canadian climate ventures.” 

Global demand for climate-related technology is skyrocketing. In 2023, the sector was estimated to be worth about US$1.8 trillion, up 23 percent from the year prior, the report notes.

For its report, MaRS surveyed 52 cleantech ventures (receiving responses from 27) and conducted in-depth interviews with founders and investors to explore the underlying issues causing the early-stage funding gap, the impact this has on startups’ growth plans, and what solutions could help reverse this shortfall.

Given Canada’s relatively small investment pool, hard-tech entrepreneurs find themselves in direct competition with software-based ventures, according to the report. Software startups require less capital, don’t face the same kinds of production and scaling obstacles, and rely on well-established business models (for instance, software-as-a-service) that yield healthy dividends over time.

Pre-seed and seed funds, moreover, typically use the same metrics to evaluate both hard-tech and software solutions – a practice that tends to favour software startups.

Perry said it is very difficult for climate tech startups to find a lead investor. ‟But what we find is that as soon as they do find a lead investor, they’re able to close their round relatively quickly. A lot of VCs are looking to a lead investor not only to set the terms but to really understand the technical and scale-up risks.”

But finding a lead investor in Canada is nearly impossible, one founder told MaRS. ‟The metrics expected by Canadian investors at [the] seed stage are not fair to deep-tech companies. We are often far from revenue, deep in R&D and still high-risk.”

Venture capital investment in Canadian climate tech companies peaked in 2023

Canadian climate tech deals peaked in 2023 with $108 million raised from 36 deals, according to data released last fall by the Canadian Venture Capital Association.

There was a slowdown in both life sciences and environmental and climate technology deals, with more funding flowing to software-oriented ventures and capital-light climate ventures.

The International Energy Agency estimates that more than one-third of the carbon dioxide reductions needed by 2050 will be derived from technologies that are currently in development. ‟If we do not build scale in these emerging domains, we’re not going to meet our climate objectives,” said Babatunde Olateju (photo at left) director of sustainability at the Conference Board of Canada.

‟These technologies have a global reach,” he said. ‟They can open up links to markets and opportunities that we need to enable us to climb out of this economic malaise.”

The MaRS report pointed out that funding from Sustainable Development Technology Canada (SDTC) was seen to be highly significant by 93 percent of funding recipients, helping them move their climate tech ventures through the development and demonstration phases of the pre-commercialization stage of growth.

Eighty-five percent of SDTC funding recipients reported that their projects wouldn’t have proceeded without these capital infusions.

“After a year of turbulence for SDTC, the federal organization is being integrated into the National Research Council and is still not accepting new applications for funding. Without this crucial early-stage capital, Canada’s seed-stage gap will only grow wider,” the MaRS report says.

The report provides the example of Montreal-based food tech venture Opalia, which is developing a cow-free milk product generated from bovine mammary cells. The technology has the potential to significantly reduce the global emissions and land use associated with the US$900-billion dairy sector.

The development and testing of a biological process in a private sector lab is highly capital intensive, said Opalia co-founder and CEO Jennifer Côté (photo at right).

‟Inventing a technology from scratch takes a lot of capital for foundational R&D, scale-up and manufacturing, obtaining regulatory approval prior to commercialization, plus sustaining the daily operations throughout the eight- to 10-year timeline from idea to commercialization,” she said.

In 2021, Opalia raised US$1 million from a majority of American VCs, as well as a few hundred thousand dollars in non-dilutive funding from the Quebec government (through Investissement Québec) and Canadian governments that sustained the business for several years.

‟Non-dilutive funding to de-risk a startup is so important at every stage – not just pre-seed and seed but also to help companies move forward with testing and building pilots,” Côté said.

But as Opalia began raising funds for its seed round, securing VC capital was still very difficult. Through extensive networking, Côté met with Hoogwegt Group, a dairy ingredient provider based in the Netherlands that eventually led the round (which closed early last year) along with participation from the U.S.–based Ahimsa Foundation, Montreal’s Box One Ventures and others.

Côté stressed the importance of relentless networking – attending conferences, connecting with investors and stakeholders, taking part in accelerator programs – well before raising capital.

‟When you need money, you’ll have people in your corner who have followed you and have seen you successfully reach your milestones,” she said.

New creative approaches to funding ventures are needed

Close to 70 percent of the ventures that responded to the MaRS survey reported that the length of time it took to raise a seed round affected the growth of the business and time to market.

Another challenge for hard-tech firms is that a large proportion of companies are founded by scientists and engineers whose grasp of the technical minutiae of their ventures far exceeds the knowledge resident in many funding entities.

For investors, confidence in the abilities of the technical lead in a prospective firm is a critical factor in whether or not to write a cheque.

Having a roster of experts, such as academics and founders they’ve already invested in, as well as other leaders in the sector, can help small investor firms evaluate potential promising technologies, the report says.

For example, when Good & Well was considering a prospective investment in Dispersa, a Laval, Quebec-based startup developing a sustainable biosurfactant to be used in consumer cleaning products, Good & Well leveraged the technical due diligence that an investor was conducting and spoke with a technical advisor of the company to help them gauge the solution.

With those endorsements, Good & Well partnered with another family office interested in the company, and together with Invest Nova Scotia and Fondaction they created a syndicate of investors. Dispersa was able to raise a total of $3 million, a mix of non-dilutive grants and dilutive capital.

To catalyze the most promising hard-tech solutions, new creative approaches to funding ventures are needed, the MaRS report says. It points to funds such as Azolla Ventures, a prime coalition fund (a nonprofit organization that uses philanthropic capital) in the U.S., and UCeed, a University of Calgary-based Canadian philanthropic fund, which illustrate the importance for philanthropy and family offices to play a critical role in investing in early-stage funds.

Ottawa-based Growcer, which offers modular vertical farming solutions, developed an infrastructure fund to help the company scale. Since the cost to buy vertical farms can be a barrier, the company created an investment vehicle wherein Growcer provides customers with the initial capital cost and then the startup and customer share revenues.

According to the MaRS report, there are also opportunities for public-sector agencies providing non-dilutive funding to do more when it comes to sharing the technical insights and due diligence that their in-house experts have carried out when ventures apply for grants and tax credits.

Lead investors, in turn, should be more willing to share their own due diligence with other backers, the report says.

Canada alone needs to spend $2 trillion by 2050 in order to meet its net-zero target, according to an RBC assessment. Much of that investment will be in hard tech: energy-efficient industrial machinery, abatement systems, sequestration technologies and low-carbon energy systems. Canadian investors and policymakers have to choose whether to foster and grow the firms that make these technologies or import them, the MaRS report says.

“The more we drift toward the latter approach, the greater the likelihood that Canadian hard-tech ventures will move out of Canada, to be closer to their investors and core customers.”

American VCs tend to move more quickly and deploy larger amounts, because they tend to bring on more corporate LPs, and these in turn become important early customers – a self-reinforcing dynamic that serves to accelerate the time-to-revenue window, the report says.

“The takeaway is that Canadian [corporations], through investing in early-stage VC funds, may not only reap the return benefits of participating in this ecosystem but may find their next partnership – fast-tracking their net-zero journey and putting them above the competition.”

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