After a slip in 2022, venture activity faces tougher future

Venture investment pulled back in 2022 but still managed to generate the second-highest total on record, according to a new report from KPMG.

Amid the chilling effect of tougher economic and market conditions, more than US$10 billion was invested in Canada’s venture capital market in 2022, the firm said. That was down from a record high of US$13 billion in 2021.

The volume of deals also dropped from 1,361 in 2021 to 1,080 last year, it noted.

“Despite difficult market conditions last year, venture capital activity in Canada remained robust, with interest widespread in innovative, high-growth-potential firms,” said KPMG’s Sunil Mistry, partner, enterprise and technology, media and telecommunications, in a release.

Indeed, the total value of deal activity in 2022 ranked second only to 2021’s record levels.

However, the bulk of the deal activity came in the first quarter last year, before the market turmoil arose.

After a huge first quarter ($4.6 billion), deal activity plunged in the second quarter to $2.2 billion and fell further in the third quarter to $1.6 billion, before ticking up in the fourth quarter to $1.9 billion.

KPMG also reported that corporate VC-backed funding was down 15% year over year to US$5 billion in 230 deals, from US$5.9 billion in 2021.

And it said that VC exit activity also “remained robust” in 2022, with 104 exit transactions, valued at approximately US$8 billion.

Looking ahead, however, the report indicated that a tougher climate for venture activity is expected this year.

“A potential recession and bearish market have venture capitalists raising the bar on their due diligence and laser-focused on their return on investment,” said Mistry.

“Last year’s rout in the public markets and rising interest rates has led to uncertainty over the valuations of privately held assets and their price on the secondary market,” he added. “With ‘caution ahead’ the watchwords, we expect to see a bit of a reset in the market making it unlikely that we’ll see deals close as quickly as they did over the past couple of years.”

Notwithstanding the expected slowdown in VC activity, KPMG said that investor interest remains strong in certain sectors, including fintech, biotech, cleantech, cybersecurity and artificial intelligence.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.