Report also shows increase in number of woman-founded companies participating in financing rounds
Prevailing economic challenges did not significantly stifle venture capital financings among Canadian startups, according to a new report from Osler Hoskin & Harcourt’s emerging and high-growth companies group.
Over the last three years, with rising interest rates making capital more expensive, sagging consumer spending, the invasion of Ukraine, and declining investment in business growth, Michael Grantmyre says he was surprised at the number of “down rounds” the report found. A “down round” is when a company’s valuation ahead of a venture capital financing round is lower than the valuation that followed the last round.
“We saw much fewer down rounds than we expected to see… we saw valuation still hold the line,” says Grantmyre, a partner in Osler’s emerging and high-growth companies group.
In 2022, the down-round total was lower than the three-year average covered in the report. Seven percent of all financing rounds qualified as down rounds, and another two percent were flat rounds – where the pre-financing valuation equals the previous closing valuation. The report notes that this mirrors the US market, where comparable reports from US law firms found five-to-ten percent of all financings qualified as down rounds.
There are nuances to these numbers, however, says Grantmyre. In 2022, companies that anticipated a down round may have put off the financing or extended their previous round on the same terms and valuation. They may also have issued convertible instruments to evade a weak valuation and unfriendly terms. The report states there was a “pronounced increase” in convertible instrument use, and in 2022, there were 30 percent more bridge financing rounds – smaller funding rounds in between larger rounds – than in 2021.
The report also found that, among the companies that completed a down round in the last three years, most occurred in later-stage financings when companies are “more susceptible to market pressures that affect their financial and customer metrics, which in turn influences investor demand and valuations.” But the financings were most highly concentrated in the earlier rounds, such as seed and series A.
The Deal Points Report: Venture Capital Financings is Osler’s second comprehensive tally on venture capital and growth equity financing transactions among emerging and high-growth companies. The report drew on data from 353 venture capital financings from 2020 to 2022, representing more than US$6 billion in deal value. Osler notes this is a “random sample” of the firm’s overall financing deal volume during that time, which amounted to 837 transactions worth around US$11.98 billion in the emerging and high-growth companies space.
The report relied on publicly available information, “third-party submitted data,” and “confidential anonymized data sources” derived from transactions in which Osler was involved.
The report also showed women have made slight gains as leaders in the Canadian startup space. The number of female-founded companies grew from 13.3 to 16.4 percent between 2020 and 2022. Overall, 15 percent of the financings covered in the report involved a company founded by a woman.
The number of female-founded companies participating in series A and series B financing rounds roughly doubled between 2021 and 2022, going from 10 and 11 percent to 19 and 21 percent, respectively.
Of the financings included in the report, 40 percent were in information technology, 19 percent in consumer/retail, 15 percent in fintech, 14 percent in health/life sciences, and four percent were in cleantech.
