Reports: Q1 2018 records strong VC interest, but PE growth ‘slow’

Investments in innovative companies were up in the first quarter of 2018 (Q1/18) across several sectors with venture capital funds leading the way, according to two new reports on Canadian activity. However, when it comes to private equity investments, one report indicates that investments were relatively slow although bigger in value.

According to the report of the Canadian Venture Capital and Private Equity Association (CVCA), VC investments were up 6% to $690 million for 139 deals compared to $649 million the same period last year. And with Q1/18 following two consecutive billion-dollar quarters in Q3 and Q4/17, CVCA said prospects for the rest of the year are “healthy”.

There were three “mega deals” in Q1/18, which account for 34% of the total VC investments for the period. These include $100 million in series C financing for Toronto’s ecobee Inc, $67 million in a new investment round for Toronto’s WealthSimple Financial Inc and $65 million for Vancouver’s Hootsuite Media.

Companies in the information and communication technology (ICT) sector remain the most attractive to VC investors, capturing 61% of the quarterly total, representing $423 million for 87 deals. Cleantech companies ranked a distant second, with 19% of the total, or $132 million for 16 deals.

The cities and provinces that attracted the most VC funds remain the same – Toronto, Montreal, and Vancouver. Ontario companies received 55% of the total with $379 million, up from 38% last year. BC received 19%, or $131 million while Quebec companies got 18% or $125 million.

Toronto companies received almost half of the deals at $337 million for 45 deals. Eighteen Vancouver companies cornered 18% of the investments valued at $127 million. The same number of deals netted Montreal companies only $83 million.

CVCA CEO Mike Woollatt noted the gains made during the period but said there’s much work to be done to maintain momentum. “In order for this trend to continue, we will be working hard with government and other stakeholders to ensure Canadian regulation and taxes are competitive to help foster an ongoing competitive edge,” he said in a statement.

Industry groups such as CVCA, which represent some of the major private capital companies in Canada, have been working with government to strengthen the VC sector. BDC Capital, in its 2017 report of the VC landscape in Canada, said “an important metric for the health of the sector is the total amount of venture capital invested in the country.” The report noted that while VC investments were increasing up to 2016, as covered in the report, the average deal size has increased by only 16% since 2013, compared to 77% in the US and 123% in Great Britain.

PwC & CB Insights

The robust VC climate reported by CVCA is consistent with a report by PwC Canada and CB Insights. Their MoneyTree report noted that over US$1 billion was raised in 105 Canadian companies, up 52%, value-wise, and 30% deals-wise, from the previous quarter. It was the sixth year of quarterly highs.

Chris Dulny, national technology industry leader at PwC Canada, said in a statement that “2018 is off to a great start. Canada continues to be an innovative and attractive market when it comes to financing and it is set to continue.”

Like the CVCA data, the MoneyTree report notes that tech companies are the most attractive, particularly those working on artificial intelligence and digital health. Eight Canadian AI companies attracted US$83 million in quarterly investments, up by 88%. The report said most of the deals are seed and early stage companies – 122 and 81 deals, respectively, compared to only 50 for expansion-stage companies and 31 for later-stage companies.

Investments in digital health increased to $22 million for six deals, up from only one deal in Q1/17. The types of projects that received funding are split evenly between B2B and B2C all of which provide access to health information more efficiently.. Canadian Internet companies were the most attractive to investors, posting the largest increase at 155% to total $355 million for 41 deals. This represents a 52% increase in deals from Q4/17's 27 deals and a return to a historical range recorded in Q2/17 and Q3/17.

Similar to the CVCA report, Toronto, Vancouver and Montreal got the lion’s share of the VC investments. Ottawa and Waterloo rounded out the top five, with Waterloo deals low but funding up 68%.

The PwC-CB Insights report sees other bright spots throughout Canada, including the Prairies and the Atlantic. There were six deals valued at $7 million recorded for the quarter in Atlantic Canada and the same number of deals for $15 million in the Prairies.

“Continued strength in the Prairie and Atlantic provinces bodes well for distribution of the positive impacts of Canadian innovation,” said Joon Chan, assurance partner at PwC Canada.

Aside from ecobee and WealthSimple, the MoneyTree report also included other major deals, such as Montreal’s Enerkem ($224 million), Ancaster, ON’s The Green Organic Dutchman ($90 million), Montreal’s eStruxture Data Centers ($80 million) and Toronto’s Wattpad ($51 million).

Most active investors mentioned in the MoneyTree report include BDC, MaRS, iNovia Capital and Fonds de Solidarite FTQ.

PE

The CVCA report includes data on private equity investments, which were slower but totaled $6.5 billion in the quarter involving in 137 deals. About $5 billion alone went to the buyout of Husky Injection Molding Systems Ltd. Other than this, the other deals are relatively smaller, with no deals in the $500-million to $1-billion range and only four deals in the $100 million-to-$500 million range.

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