The latest quarterly figures from the Canadian Venture Capital and Private Equity Association (CVCA) tracked almost $2.4 billion in VC investments into Canadian tech startups in Q2 2024.
This was a massive, 85 percent jump from the $1.3 billion secured across 128 deals in Q1, and shows a noteworthy Q2 rebound on both fronts, with 143 deals tracked over the previous quarter.
Year-over-year, however, the figures paint a different picture, as both funding totals and deal counts sank 14 percent and 16 percent, respectively, from Q2 2023.
Digging deeper into the Q2 figures, it becomes alarmingly clear that the resurgence in VC investment isn’t being shared across all stages of the startup lifecycle.
Pre-seed and seed funding investments dropped by 64 percent and 45 percent in Q2 2024 compared to the same period last year. These mirrored the funding trends tracked in 2020, before a surge of pandemic-era investments were made across the startup space that lifted the entire sector through 2021 and 2022.
Despite higher total funding figures for later-stage businesses in Q2, the total number of deals at the higher end of the VC investment spectrum across the first half of 2024 is tracking to be the lowest on record.
Zooming out, what does this all mean for innovative Canadian businesses?
While there’s hope that global market conditions around lending and interest rates will help turnaround the current downward investment trends, a lack of early-stage investment so far this year could be contributing to a contracting innovation pipeline across Canada.
Concerns around capital gains and interest rates puts tech investments in limbo
In response to the Q2 figures, CVCA CEO Kim Furlong framed the latest trends as “driven by investors doubling down on companies with proven track records and strong fundamentals.”
“The persistent decline in seed deals raises concerns about the long-term pipeline of investment-ready companies,” Furlong continued. “We will continue to monitor this trend closely as it could impact the sustained growth of the ecosystem.”
Furlong also joined the chorus of stakeholders within the tech and business community who protested the capital gains inclusion rate hikes that have alarmed business leaders across Canada. According to Furlong and other advocates, the new capital gains inclusion model “disadvantages” domestic business owners from receiving foreignVC investment that has been a key piece of the funding puzzle for Canadian founders for generations.
As a reminder, the Canadian capital gains inclusion rate effectively jumped from half to two thirds as part of the government’s Budget 2024.
The government did recently modify certain exemptions and incentives to satisfy the new capital gains rate’s biggest critics, including changes to the Canadian Entrepreneurs Incentive (CEI) that lowered the tax burden for founders upon exit.
However, even these latest amendments were viewed as “half-measures” by critics like the Canadian Council of Innovators (CCI) President Benjamin Bergen, who claimed in a statement that “misguided strategies will not drive the growth Canada needs.”
Tapping into non-dilutive funding, R&D as a source of growth
While private equity and VC funding may be harder to come by in the current market, there are still strategies and sources of capital that teams can use to ride out uncertainty and continue scaling their business.
Along with a wealth of government grants to launch research and development projects, for instance, the Canadian government’s banner Scientific Research & Experimental Development (SR&ED) tax credit can help teams recoup a significant share of their product development costs.
By getting back up to 60 cents on the dollar for eligible R&D investments like payroll and materials, teams can stretch their innovation runway further than ever. This helps teams develop more powerful, differentiated solutions to grow their market share, while uncovering white space and new opportunities to scale up.
Of course, a lot goes into compiling a maximized and defensible SR&ED claim that will pass muster with the CRA. That’s where Boast comes in.
With Boast, teams can rest assured that the claims our in-house experts compile with the help of our AI-driven platform will leave-no-stone-unturned in identifying SR&ED opportunities.
And with government budgets tighter than ever, the CRA is arguably taking a closer look at every claim and auditing with greater veracity than ever before. Lucky for Boast customers, we take on the complete audit defense for you, with an industry-leading recovery rate of over 90 percent.
To learn more about how Boast can help you stretch your investments further and help you scale in the current market, talk to an expert today.
Q2 2024 VC funding trends FAQ
- What are the latest trends in VC investments for Canadian tech startups? According to the CVCA, Q2 2024 saw $2.4 billion in VC investments, an 85% increase from Q1. However, year-over-year, both funding totals and deal counts decreased by 14% and 16% respectively compared to Q2 2023.
- How has early-stage funding been affected? Pre-seed and seed funding investments dropped significantly in Q2 2024, with 64% and 45% decreases respectively compared to the same period last year. This trend mirrors funding patterns seen in 2020, before the pandemic-era investment surge.
- What concerns have been raised about these investment trends? CVCA CEO Kim Furlong expressed concern about the persistent decline in seed deals, which could impact the long-term pipeline of investment-ready companies. There are also worries about the contracting innovation pipeline across Canada due to the lack of early-stage investment.
- How have recent policy changes affected the investment landscape? The capital gains inclusion rate hike announced in Budget 2024 has alarmed many business leaders. Critics argue that it disadvantages domestic business owners from receiving foreign VC investment. Recent modifications to the Canadian Entrepreneurs Incentive (CEI) were made to address these concerns, but some still view these as insufficient.
- What alternative funding strategies are available for Canadian startups? The blog post highlights non-dilutive funding options, particularly the Scientific Research & Experimental Development (SR&ED) tax credit. This program allows companies to recoup up to 60 cents on the dollar for eligible R&D investments, helping teams stretch their innovation runway further while developing more powerful, differentiated solutions.
