Q3 2013

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This publication by the Small Business Branch provides current information about the venture capital industry in Canada. The series will track trends in investment activity, report on topical research and look at key technology clusters where investment is taking place.


Introduction

This issue covers venture capital (VC) investment and fundraising activity in Canada during the third quarter of 2013.Footnote 1 It also describes recent government activity in the VC market.

VC activity overview

Investment and fundraising

Strong overall performance for Canadian VC in Q3 2013

Investment activity in Canada's VC market rose sharply in both deals and dollars in the third quarter of 2013 (Table 1 and Figure 1). Disbursements by VC funds totalled $570 million between July and September, up 56 percent from the $366 million invested at the same time in 2012. Also in Q3 2013, the number of VC deals involving Canadian companies totalled 123, up 40 percent year over year. It should however be noted that Canadian VC activity during the quarter was heavily influenced by several major transactions including the US$165 million financing for Vancouver-based HootSuite, the largest VC deal ever for the Canadian market.

Table 1: VC investment and fundraising, Q3 2012 and Q3 2013
Q3 2012 Q3 2013 Percent Change
($ millions)
Source: Thomson Reuters Canada 2013 and 2014.
Investment 366 570 56
Fundraising 42 258 514

Figure 1: VC Investment by quarter, 2011 to 2013

Figure 1: VC Investment by quarter, 2011 to 2013
Source: Thomson Reuters Canada 2014.
Description of Figure 1
Figure 1: VC Investment by quarter, 2011 to 2013
Quarter 2011 2012 2013
($ millions)
Q1 361 246 369
Q2 365 487 486
Q3 407 366 570
Q4 400 390
Total 1,533 1,489 1,425

In contrast with the first half of 2013, Canadian VC fundraising activity saw improvement during Q3 2013 with $258 million in new capital committed to funds over the quarter. The value of new capital raised in Q3 2013 was much greater than the $42 million committed to funds at the same time in 2012. This growth was a consequence of several major VC fundraising events described in the fundraising section below.

Deal size

Significant increase in deal sizes

Total deals completed during Q3 2013 rose in all ranges as 35 more deals were completed than over the same period the previous year (Figure 2). The increase in deals was most prevalent in the under $1 million dollar range, but was noted across all ranges. The average deal size was $4.6 million, higher than the $4.1 million per deal tracked in Q3 2012. As noted earlier, the principal source of higher average deal sizes over the quarter stemmed from several major deals, including the US$165 million Series B financing for Vancouver-based HootSuite.

Figure 2: Distribution of VC investment by deal size, Q3 2012 and Q3 2013

Figure 2: Distribution of VC investment by deal size, Q3 2012 and Q3 2013
Source: Thomson Reuters Canada 2014.
Description of Figure 2
Figure 2: Distribution of VC investment by deal size, Q3 2012 and Q3 2013
Deal size Q3 2012 Q3 2013
(# of deals)
Under $1M 49 70
$1M to 4.9 25 34
$5M and over 14 19

Stage of development

Growth in investment heavily concentrated in firms at other early stages of development

The value of investments at all stages of development increased during Q3 2013 compared to Q3 2012. This growth in investment was most pronounced in firms at "other early stages" of development, which attracted $274 million this quarter as compared to $85 million over the same period during the previous year (Figure 3). Investors placed $106 million in seed and start-up companies over the quarter, a slight increase over the $102 million attracted over the same period in 2012. Later stage companies raised $190 million in Q3 2013, just slightly more than the $180 million raised in Q3 2012.

Figure 3: VC investment by stage of development, Q3 2012 and Q3 2013

Figure 3: VC investment by stage of development, Q3 2012 and Q3 2013
Source: Thomson Reuters Canada 2014.
Description of Figure 3
Figure 3: VC investment by stage of development, Q3 2012 and Q3 2013
Stage of development Q3 2012 Q3 2013
($ millions)
Seed/start-up 102 106
Other early stages 85 274
Later stage 180 190

New versus follow-on investments

Total number of deals split evenly among new and follow-on

Of the 123 deals completed during the quarter, 61 were first time investments while another 62 were follow-on investments (Table 2). The value of new deals was $189 million, $13 million less than the $202 million placed into new deals over the same period in 2012.

Table 2: Number of companies that received new versus follow-on investment, Q3 2012 to Q3 2013
Total Investment Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013
Source: Thomson Reuters Canada 2014.
New Seed/ start-up 22 38 21 33 42
Other early stages 4 11 13 3 7
Later stage 8 7 9 15 12
All 34 56 43 51 61
Follow-on Seed/ start-up 8 12 9 18 17
Other early stages 25 30 23 19 17
Later stage 21 24 30 24 28
All 54 66 62 61 62
Total 88 122 105 112 123

Type of investor

Increase in investments from private independent funds

Investment activity over the quarter was led by private independent funds, which cumulatively put $296 million to work in Canadian companies (Figure 4). Investments by Labour Sponsored Venture Capital Corporations (LSVCC) reached a single-quarter low during Q3 2013 with only $18 million invested into companies.

Figure 4: Distribution of VC investment by type of investor, Q3 2012 and Q3 2013

Figure 4: Distribution of VC investment by type of investor, Q3 2012 and Q3 2013
Note * of Figure 4: Institutional/Corporate refers to direct investments by banks, financial institutions, endowments, foundations, pension funds and corporate venture funds.
Source: Thomson Reuters Canada 2014.
Description of Figure 4
Figure 4: Distribution of VC investment by type of investor, Q3 2012 and Q3 2013
Type of investor Q3 2012 Q3 2013
($ millions)
Other 100 170
Government 10 37
Institutional/Corporate Note * referrer of Figure 4 70 48
LSVCC/Retail 22 18
Private Independent Funds 164 296

American and other foreign VC funds were active in the Canadian market between July and September, bringing in $245 million to deals, up 131 percent from the $106 million they contributed at the same time last year. A further $252 million was placed by Canadian funds and $72 million in VC was invested by funds from locations that Thomson Reuters could not disclose.

Fundraising

Increase in fundraising during the quarter

In contrast with the first half of 2013, Canadian VC fundraising activity increased during the third quarter with VC funds raising $258 million (Table 1). The value of new capital raised in Q3 was much greater than the $42 million committed to funds in Q3 2012.

This growth was a consequence of several major VC fundraising eventsFootnote 2 in the third quarter, including the $120 million final close of the fourth partnership of EnerTech Capital and the allocation within the Business Development Bank of Canada (BDC) of $135 million to its Healthcare Fund. As well, the BDC and the Fonds de solidarité FTQ announced a $30 million investment in the U.S.-based Sanderling Ventures fund, which will establish a facility in Montréal.

The other positive development in the quarter was the announcement by the federal government of the Venture Capital Action Plan's intent to make a total of $50 million in commitments to CTI Life Sciences Fund II, Lumira Capital II, Real Ventures Fund III and Summerhill Ventures II.

Regional distribution

British Columbia experiences a very strong quarter

British Columbia experienced a record level of investment during the quarter due mainly to the $165 million placement into HootSuite. Similarly, Alberta experienced a very strong quarter, attracting $85 million in Q3 2013, due in part to a $42-million investment in the agricultural-technology company Sulvaris. Quebec also saw a year-over-year increase in investments levels over the quarter as Quebec-based firms attracted $135 million in Q3 2013 as compared to $102 million over the same period the previous year (Figure 5 and Table 3).

Figure 5: Regional distribution of VC investment in Canada, Q3 2012 and Q3 2013

Figure 5: Regional distribution of VC investment in Canada, Q3 2012 and Q3 2013
Source: Thomson Reuters Canada 2014.
Description of Figure 5
Figure 5: Regional distribution of VC investment in Canada, Q3 2012 and Q3 2013
Province Q3 2012 Q3 2013
($ millions)
British Columbia 45 222
Alberta 16 85
Saskatchewan 9 0
Manitoba 0 0
Ontario 190 122
Quebec 102 135
New Brunswick 3 3
Nova Scotia 1 2
Prince Edward Island 0 0
Newfoundland and Labrador 0 0
Territories 0 0
Table 3: Number of companies receiving VC by province, Q3 2012 and Q3 2013
Province Q3 2012 Q3 2013 Percent Change
Source: Thomson Reuters Canada 2014.
British Columbia 14 17 21
Alberta 8 15 88
Saskatchewan 4 3 −25
Manitoba 0 0 n/a
Ontario 32 46 44
Quebec 27 31 15
New Brunswick 2 7 250
Nova Scotia 2 3 50
Prince Edward Island 0 0 n/a
Newfoundland & Labrador 0 1 n/a
Territories 0 0 n/a

In contrast, Ontario experienced a very weak quarter over Q3 2013. Only 20 percent of total Canadian VC activity over the quarter took place in Ontario as $122 million was placed into 46 companies. About half of all Canadian VC dollars were placed into Ontario companies over the same period the previous year.

Sector distribution

Increase in investment IT and traditional sectors driven by a few large deals

During Q3 2013, the information technology sector attracted the large majority of VC investment in Canada, $361 million, a major part of which was the HootSuite deal (Figure 6). This represents a 48 percent increase in the IT sector year-over-year. Investment in life sciences companies totalled $40 million during Q3 2013, down 56 percent from the same period in 2012. Companies in traditional sectors raised a total of $156 million in VC during the quarter, including the investment in Sulvaris noted previously.

Figure 6: VC investment by industry sector, Q3 2012 and Q3 2013

Figure 6: VC investment by industry sector, Q3 2012 and Q3 2013
Note * of Figure 6: Clean Technology refers to companies that are developing clean technologies and that are not already included in the industry sectors of Life Sciences or Information Technologies.
Source: Thomson Reuters Canada 2014.
Description of Figure 6
Figure 6: VC investment by industry sector, Q3 2012 and Q3 2013
Industry sector Q3 2012 Q3 2013
($ millions)
Life Sciences 91 40
Information Technologies 243 361
Clean Technology Note * referrer of Figure 6 6 12
Other Technologies 26 156

Government activities

Business Development Bank of Canada activities

During Q3 2013, the BDC authorized VC investments totalling $15.3 million into 22 companies (Table 4). These financings were leveraged to a total of $46.3 million including contributions by co-investors.Footnote 3

Table 4: VC activities of the Business Development Bank of Canada, Q3 2013
BDC Co-investors Total Number of deals
($ millions)
Source: Business Development Bank of Canada 2014.
Seed/start-up 5.6 7.9 14.3 14
Development 4.9 5.7 9.5 3
Later stage 1.8 0.8 2.8 2
Other 3.0 9.0 12.0 1
Total 15.3 31.0 46.3 22

Notes

This publication is part of a series prepared by the Small Business Branch. The branch analyses the financial marketplace and how trends in this market impact small businesses' access to financing.

To be added to the distribution list of online release of the Small Business Branch publications, please subscribe at the Subscribe to publications page.

For questions related to its content, please email: SBB-DGPE.

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