Q3 2014

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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 2014.

VC activity overview

Investment and fundraising

Quarterly VC investment grows but fundraising drops

Canadian VC investment in Q3 2014 reached $745 million (Figure 1). It increased by 26 percent relative to VC investment in Q3 2013 and by close to 200 percent relative to VC investment in Q3 2012. Fundraising experienced a drop of 39 percent from $258 million in Q3 2013 to $158 million in Q3 2014 (Table 1).

Figure 1: VC Investment by quarter, 2012 to 2014

Figure 1: VC Investment by quarter, 2012 to 2014 (the long description is located below the image)
Source: Thomson Reuters Canada 2014.
Description of Figure 1
VC Investment by quarter, 2012 to 2014
Quarter 2012 2013 2014
($ millions)
Q1 269 367 385
Q2 487 455 508
Q3 373 581 745
Q4 376 542
Total 1,505 1,945 1,638
Table 1: VC investment and fundraising, Q3 2013 and Q3 2014
Q3 2013 Q3 2014 Percent Change
($ millions)
Source: Thomson Reuters Canada 2014.
Investment 581 734 26
Fundraising 258 158 −39

Deal size

Large deals rise in Q3 2014

In Q3 2014, the average deal size reached $6.92 million, compared to the $4.67 million deal size of Q3 2013. This is due to a combination of a drop in the number of deals by 16 percent, from 124 in Q3 2013 to 104 in Q3 2014 and an increase in the total amount of VC investment in Q3 2014 compared to Q3 2013. Deals under $1 million dropped from 70 in Q3 2013 to 45 in Q3 2014, a 35 percent drop (Figure 2). In contrast, deals over $5 million increased from 22 in Q3 2013 to 33 in Q3 2014, a 50 percent increase.

Figure 2: Distribution of VC investment by deal size, Q3 2013 and Q3 2014

Figure 2: Distribution of VC investment by deal size, Q3 2013 and Q3 2014 (the long description is located below the image)
Source: Thomson Reuters Canada 2014.
Description of Figure 2
Distribution of VC investment by deal size, Q3 2013 and Q3 2014
Deal size Q3 2013 Q3 2014
(# of deals)
Under $1M 70 45
$1M to $4.9M 32 26
$5M and over 22 33

Stage of development

Investment in later stage companies increases during the quarter

There was $515 million invested in later stage companies in Q3 2014, an exceptional 169 percent increase over the $191 million invested in later stage companies in Q3 2013 (Figure 3). This increase was attributed to a small number of large deals in later stage companies, such as Desire2Learn Inc., Lightspeed POS Inc., Monteris Medical Holdings Inc., and D-Wave Systems Inc. Investment in expansion stage companies dropped from $274 million in Q3 2013 to $80 million in Q3 2014, a 70 percent drop. Investments in seed and early stage companies increased from $116 million in Q3 2013 to $140 million in Q3 2014, a 20 percent increase.

Figure 3: VC investment by stage of development, Q3 2013 and Q3 2014

Figure 3: VC investment by stage of development, Q3 2013 and Q3 2014 (the long description is located below the image)
Note * of Figure 3: In addition to later stage deals, this category includes public market and acquisitions financing.
Source: Thomson Reuters Canada 2014.
Description of Figure 3
VC investment by stage of development, Q3 2013 and Q3 2014
Stage of development Q3 2013 Q3 2014
($ millions)
Seed and early stage 116 140
Expansion 274 80
Later stage Note * referrer of Figure 3 191 515

New versus follow-on investments

New investments drops during the quarter

The number of companies that received venture capital for the first time dropped to its lowest level in four quarters. There were only 18 of these companies during Q3 2014, compared to 45 in Q2 2014 and 60 in Q3 2013. The number of companies that received follow-on investment increased to 84, compared to 64 in Q3 2013 (Table 2).

Table 2: Number of companies that received new versus follow-on investments, Q3 2013 to Q3 2014
Total Investment Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014
Source: Thomson Reuters Canada 2014.
New Seed and early stage 42 33 26 27 15
Expansion 7 6 9 7 1
Later stage 11 18 11 11 2
All 60 57 46 45 18
Follow-on Seed and early stage 18 20 19 30 21
Expansion 17 15 15 19 22
Later stage 29 36 45 40 41
All 64 71 79 89 84
Total 124 128 125 134 102

Type of investor

Private Independent Funds account for close to 45 percent of Q3 2014 VC investment

Private Independent Funds invested $329 million in Q3 2014, an increase of 10 percent compared to the $298 million of Q3 2013. This category represents 45 percent of VC investment in Q3 2014 (Figure 4).

Figure 4: Distribution of VC investment by type of investor, Q3 2013 and Q3 2014

Figure 4: Distribution of VC investment by type of investor, Q3 2013 and Q3 2014 (the long description is located below the image)
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
Distribution of VC investment by type of investor, Q3 2013 and Q3 2014
Type of investor Q3 2013 Q3 2014
($ millions)
Private Independent Funds 296 329
Labour-sponsored venture capital corporation/Retail Funds 18 30
Institutional/Corporate Note * referrer of Figure 4 54 81
Government 40 50
Other 27 44
Undisclosed 141 201

Source of funds

Domestic investors experiences faster growth

In terms of source of funds, Q3 2014 witnessed an increase in VC investment from all locations. Canadian VC funds increased their investment activity to $365 million in Q3 2014, compared to $259 million in Q3 2013, a 40 percent increase. VC investment from the United States increased by 9 percent, from $245 million in Q3 2013 to $269 million in Q3 2014. Finally, VC investment from undisclosed countries increased by 22 percent, from $67 million in Q3 2013 to $82 million in Q3 2014 (Figure 5).

Figure 5: Distribution of VC investment by fund location, Q3 2013 and Q3 2014

Figure 5: Distribution of VC investment by fund location, Q3 2013 and Q3 2014 (the long description is located below the image)
Source: Thomson Reuters Canada 2014.
Description of Figure 5
Distribution of VC investment by fund location, Q3 2013 and Q3 2014
Fund location Q3 2013 Q3 2014
($ millions)
Canada 259 365
United States 245 269
Other countries 7 18
Undisclosed 67 82

Regional distribution

VC investment grew significantly in Ontario and Quebec

VC investment in Ontario grew by close to 100 percent from $119 million in Q3 2013 to $236 million in Q3 2014. Quebec also experienced significant growth in VC investment, though in smaller percentage than Ontario, from $146 million in Q3 2013 to $235 million in Q3 2014, a 60 percent increase. British Columbia experienced a significant drop in VC investment from $218 million in Q3 2013 to $145 million in Q3 2014, a 33 percent drop (Figure 6). VC investment also dropped in Alberta from $88 million in Q3 2013 to $69 million in Q3 2014, a 21 percent drop.

Figure 6: Regional distribution of VC investment in Canada, Q3 2013 and Q3 2014

Figure 6: Regional distribution of VC investment in Canada, Q3 2013 and Q3 2014 (the long description is located below the image)
Source: Thomson Reuters Canada 2014.
Description of Figure 6
Regional distribution of VC investment in Canada, Q3 2013 and Q3 2014
Province Q3 2013 Q3 2014
($ millions)
British Columbia 218 145
Alberta 88 69
Saskatchewan 0 11
Manitoba 0 31
Ontario 119 236
Quebec 146 235
New Brunswick 3 1
Nova Scotia 2 5
Prince Edward Island 0 0
Newfoundland and Labrador 0 0
Territories 0 0

Despite the growth of VC investment in Ontario, the number of deals dropped from 46 in Q3 2013 to 24 in Q3 2014, a 48 percent drop. The growth in investment in Ontario is explained by some large deals. Quebec experienced a 33 percent increase in VC deals, from 33 in Q3 2013 to 44 in Q3 2014. The number of deals dropped in Alberta by 36 percent, from 14 in Q3 2013 to 9 in Q3 2014, while it remained stable in British Columbia during Q3 2014 at 17, compared to 16 in Q3 2013, despite the drop in VC investment the province experienced during Q3 2014 (Table 3).

Table 3: Number of companies receiving VC by province, Q3 2013 and Q3 2014
Province Q3 2013 Q3 2014 Percent Change
Source: Thomson Reuters Canada 2014.
British Columbia 16 17 6
Alberta 14 9 −36
Saskatchewan 2 2 0
Manitoba 0 1 n/a
Ontario 46 24 −48
Quebec 33 44 33
New Brunswick 7 3 −57
Nova Scotia 3 1 −67
Prince Edward Island 0 0 n/a
Newfoundland and Labrador 1 1 0
Territories 0 0 n/a

Sector distribution

Information Technologies sector attracts the bulk of VC investment

The Information Technologies sector attracted the bulk of VC investment in Canada in Q3 2014, with $512 million, up 36 percent from the $375 million in Q3 2013. The Life Sciences sector attracted $97 million in Q3 2014, more than double the amount in Q3 2013. In contrast, Traditional Industry sector experienced a 27 percent drop from $150 million in Q3 2013 to $109 million in Q3 2014 (Figure 7).

Figure 7: VC investment by industry sector, Q3 2013 and Q3 2014

Figure 7: VC investment by industry sector, Q3 2013 and Q3 2014 (the long description is located below the image)
Note * referrer of Figure 7: 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.
Note ** of Figure 7: Traditional refers to companies that are not included in the other sectors.
Source: Thomson Reuters Canada 2014.
Description of Figure 7
VC investment by industry sector, Q3 2013 and Q3 2014
Industry sector Q3 2013 Q3 2014
($ millions)
Information Technologies 375 512
Life Sciences 44 97
Clean Technology Note * referrer of Figure 7 12 17
Traditional Note ** referrer of Figure 7 150 109

Government activities

Business Development Bank of Canada activities

During Q3 2014, the Business Development Bank of Canada (BDC) made VC commitments totalling $26.7 million into 22 companies (Table 4). These financings were leveraged by an additional $110.4 million from co-investors for total investments of $137.1 million.

Table 4: VC activities of the Business Development Bank of Canada, Q3 2014
BDC Co-investors Total Number of deals
($ millions)
Source: Business Development Bank of Canada 2014.
Seed/start-up 8.1 22.5 30.6 12
Development 12.9 50.9 63.8 7
Later stage 5.7 37.0 42.7 3
Total 26.7 110.4 137.1 22

Additionally, the BDC invested a total of $10 million into private independent funds. Funds were matched by co-investors for a total of $45 million.

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.

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Aussi offert en français sous le titre Le Moniteur du capital de risque — Troisième trimestre de 2014.

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