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Funded deals, investment totals fall as VCs adjust to new normal: BDC

'We've entered into a more challenging time,' says BDC Capital exec
Research the Business Development Bank of Canada (BDC) released Wednesday concluded venture capital activity dropped in 2022 and is expected to remain slow as companies grapple with higher interest rates, a wave of tech layoffs and the fallout from the collapse of the Silicon Valley Bank. | Josh Laverty/E+/Getty Images

Canada's venture capitalists settled into a new normal marked by fewer and more cautious investments last year — and a new report suggests the pattern will continue.

Business Development Bank of Canada (BDC) said Wednesday that venture capital lending, which focuses on early stage companies with significant growth potential, dropped in 2022 and is expected to remain slow as companies grapple with higher interest rates, a wave of tech layoffs and the fallout from the collapse of the Silicon Valley Bank.

The research found the number of venture capital deals done in 2022 shrank by 12 per cent from the year before to 706, while the total amount invested declined 34 per cent to $10 billion. The average deal size pulled back 24 per cent to $14.2 million over the same period.

"We've entered into a more challenging time," said Jérôme Nycz, executive vice-president at BDC Capital.

"We've gone a long way in the last 10 years in creating a more mature, resilient, diversified and a bit more sophisticated VC class and now we're at risk of losing a lot of that momentum because of the economic environment."

He's noticed geopolitical uncertainty and the failure of the Silicon Valley Bank, which was used by a slew of tech startups, has investor confidence "notably shaken."

The new outlook has come after a bull market produced more than 100 Canadian unicorns — startups with $1-billion valuations — in the last 25 years.

However, companies big and small are now eschewing the "growth-at-all-cost" mentality they were once known for and instead focusing on cost reductions. 

Meta, the parent company of Facebook, Instagram and WhatsApp, even went so far as to name 2023 the "year of efficiency" when it embarked on a 10,000-person layoff earlier this year.

Canadian tech darling Shopify Inc. cut 20 per cent of its workforce in May, following a 2022 cut that saw 10 per cent of staff depart.

Google, Netflix, Oracle, Wealthsimple and Twitter have all made staffing reductions, too.

Nycz believes the pressure to be prudent with cash and efficient with operations will continue as management teams weigh the cost and benefit of growth against the need to preserve capital should the downturn become more severe.

Half of Canadian companies and up to 70 per cent of American businesses will need to raise capital over the next year, BDC anticipates.

Several companies across its portfolio have less than 12 months of runway.

Wrangling further investments will prove trickier than during the pandemic, when interest rates were low and investors were keen to put money behind ventures that were soaring amid remote work.

"People realize that we don't need money for the next six months," said Nycz. 

"They need money for the next 24 months or 36 months because people expect the market not to get back very rapidly."

Canadian VCs hold an estimated $13.2 billion in cash but BDC expects it to be handed out more slowly, leaving capital deployment figures below last year's.

Those that do offer money will seek lower valuations or more investor-friendly terms, BDC said.

This report by The Canadian Press was first published May 31, 2023.

Tara Deschamps, The Canadian Press