As venture capital markets continued to ebb and flow, early-stage startups were exploring non-dilutive funding opportunities in record numbers during the first half of 2023.
According to the H1 2023 VC & PE Canadian Market Overview from the CVCA, there were 126 non-dilutive funding deals closed during the first half of the year, with 99 taking place in Q2 alone. That sets both a half-year and quarterly record for non-dilutive funding activity, which has been a boon for growth stage companies that have lagged in raising venture capital compared to early-stage/seed startups and more mature business.
“This is likely due to a number of factors, including rising interest rates and changing market dynamics, which have made it more difficult for companies to secure traditional equity financing,” David Kornacki, director of data and product at CVCA, told Betakit.
As a result, more firms than ever before are turning to the Scientific Research and Experimental Development (SR&ED) tax credit and venture debt as a means to secure their runway and fund innovation.
That said, many businesses are continuing to be cautious given the rocky market conditions, with the average non-dilutive deal value declining year-over-year. During H1 2023, there was actually a 70 percent drop in total non-dilutive dollars invested, with $195 million being distributed across all deals.
This reflects many businesses simply seeking smaller non-dilutive funding infusions, despite many viewing this avenue as a preferable alternative to equity funding in the current market. In this case, it’s simply a matter of founders showing caution in their capital strategy, and likely “staying tuned” as markets shift heading into H2 2023.
Cleantech and ICT remain VC darlings
While more companies than ever are seeking out non-dilutive funding, venture capital activity is still rampant in specific sectors of the Canadian tech ecosystem.
During Q2 2023, the CVCA reported more than $2.8 billion in VC investments across 1700 deals, marking the second-largest Q2 since the CVCA started tracking activity. This is not just a 45 percent increase year-over-year, but a 140 percent jump since just the last quarter in terms of total dollars invested.
This is the opposite of how things have panned out in the United States over the past year, as VC activity stateside dipped last quarter to its lowest levels since Q2 2020.
Looking at specific sectors, the Information and Communications Technology (ICT) sector attracted $1.8billion across 84 deals, making it the strongest sector for VC investment during H1. Cleantech also saw a 116 percent jump in venture capital investments from Q1 to Q2 2023, as climate issues have taken center stage across Canada and globally as forest fires and extreme weather events have proliferated over the past year.
“This quarter’s performance demonstrates that Canadian entrepreneurs are building solid companies,” said Kim Furlong, Chief Executive Officer, CVCA, in the report. ?“The increasing investment in the early stages underscores the commitment to building a strong pipeline of deals and serves as a testament to Canada’s vibrant culture of innovation. Despite economic challenges and uncertainties, the performance demonstrates that Canadian investors are looking ahead and staying the course, which is encouraging.”
Tapping into SR&ED and extending your runway
While venture capital remains tight, and market conditions continue to be in flux heading into fall, businesses are wise to explore as many non-dilutive funding opportunities as they can to extend their runway without handing over equity.
At Boast AI, we partner with thousands of startups—from seed to growth and beyond—across North America to not only tap into programs like SR&ED, but optimize their R&D operations from the ground up.
By integrating with the project tracking and financial systems your team already uses to manage their workflows today, Boast AI can actively track for SR&ED-worthy activities throughout the year to ensure you always have an accurate picture of how much money you’ll get back from the CRA.
With Quickfund from Boast AI, teams can even leverage their SR&ED funds early, tapping into non-dilutive funding quarterly or throughout the year to infuse their operations without handing over equity.
Talk to an expert from Boast AI today to learn more about how we combine cutting edge technology with years of expertise—and a founder’s POV—to optimize your R&D and fund your innovation.