Clio boosted Canadian VC investment in Q3 2024, but early-stage funding reaches “worrisome” low

Despite an uptick in Canadian venture capital investment in Q3 2024, pre-seed and seed investments have sharply declined throughout the year, which the Canadian Venture Capital and Private Equity Association (CVCA) says could spell trouble for Canada’s early-stage pipeline.

According to a new CVCA report for Q3 2024, Canadian venture capital investment reached $2.65 billion (all figures in Canadian dollars) during the quarter. This marks a six percent increase quarter-over-quarter and a 51 percent increase year-over-year. 

Clio’s Series F round accounted for 47 percent of all dollars raised in Canada during Q3 2024.

Deal volume declined, however, with the CVCA tracking 130 deals during the quarter, down 17 percent compared to Q2 2024 and 14 percent compared to Q3 2023. As of the end of Q3, venture capital investment in Canada has reached $6.5 billion across 426 deals this year.

Investment in Q3 2024 received a major boost from a single funding round—the largest in Canadian tech history. Vancouver-based legaltech firm Clio’s $1.24-billion CAD Series F round, which was financed entirely by American investors, accounted for 47 percent of all dollars raised in Canada during Q3 2024, according to the report. 

Without Clio’s investment, Q3 2024’s total venture capital investment would drop to $1.4 billion CAD. Removing that funding from the tally, Q3 2024 investment would still surpass the same quarters in 2022 and 2023 in terms of dollars raised.

In its report, the CVCA characterized Q3 2024 as having “a mix of highs and lows” for Canadian venture capital. “While it’s exciting to see later-stage companies like Clio thrive, a decline in seed and pre-seed investments is worrisome,” CVCA CEO Kim Furlong wrote in a forward to the report.

CVCA links capital gains to early-stage slump

Early-stage investments, especially at the seed and pre-seed levels, have lagged all year, and Q3 was no exception. 

In Q3 2024, the CVCA tracked $19 million raised across 27 deals at the pre-seed stage and $104 million across 32 deals at the seed stage. The third quarter represents the lowest in 2024 for both early-stage funding and deal volume in what has already been a slow year for pre-seed and seed investments.

In the first nine months of 2024, pre-seed investments have dropped to $64 million across 77 deals, reaching only 40 percent of the $160 million raised in 2023. Similarly, seed investments have totalled $386 million over 141 deals, just 41 percent of the $952 million raised in all of 2023.

The CVCA said these declines in pre-seed and seed funding reflect a shift back to 2020 levels, continuing a trend seen throughout 2024. The report linked this downturn to recent changes to Canada’s capital gains tax. 

Earlier this year, the federal government increased the inclusion rate for individuals on annual capital gains exceeding $250,000 CAD, which many in the tech sector have argued will reduce the after-tax returns for investors and disincentivize investments in Canadian companies.

RELATED: Capital gains tax changes strike a nerve with Canadian tech ecosystem

“While the full impacts of recent capital gains reforms remain to be seen, these declines may indicate early signs of heightened investor caution, particularly as early funding rounds rely on participation from angel and high-net-worth individual investors—capital sources highly sensitive to tax increases,” the report stated.

It is worth noting that Furlong has been outspoken in her opposition to the tax changes this year. In an op-ed for the National Post in April, she called it the “single most damaging policy change for Canadian entrepreneurs.”

In comparison, funding for Series A and B rounds demonstrated resilience throughout the quarter, according to the report. Year-to-date, Canada recorded $2.5 billion invested across 134 deals across these stages, with an average deal size of $18.8 million CAD. This segment has contributed 39 percent of the total venture capital investment in Canada, closely mirroring 2023 levels.

However, the CVCA warned that if the current trend in pre-seed and seed funding continues, the Series A and B pipeline may face issues in the coming years.

“You can’t grow what you don’t seed, and we’re at risk of losing momentum in developing the next wave of high-growth startups,” Furlong wrote in the report.

A new low for late-stage funding

Later-stage venture capital investments in Canada continued to decline this year, with $1.3 billion invested across 36 deals year-to-date. Later-stage funding accounted for just 21 percent of total venture capital investment dollars in Canada by Q3 2024, a new record low.

The average deal size for later-stage funding also fell by 15 percent compared to the five-year average, reaching $37.1 million. However, the average disclosed deal size across all stages rose by 14 percent to $15 million in the first nine months of 2024.

Growth equity investments have risen in 2024, with $1.5 billion invested across only seven deals, marking the second-highest level on record for this category. This increase, however, was largely driven by Clio’s funding round.

Clio pushes BC ahead of Québec in investment

In the third quarter of 2024, Ontario, Québec, and British Columbia collectively represented 90 percent of the total venture investment in Canada and 75 percent of all deals. Ontario led in activity, accounting for 40 percent of all deals and 36 percent of the total invested amount, with three of the top ten largest deals contributing to a total of $1 billion CAD.

British Columbia had a strong third quarter following a slow start to 2024, driven largely by three major deals. By the end of Q3, BC had surpassed Québec in total investment dollars for the first time since 2021, reaching $2.1 billion across 64 deals year-to-date, with a substantial boost from Clio’s recent funding round. This positioned BC as responsible for 32 percent of Canada’s venture capital investment so far in 2024.

RELATED: “Intensely patriotic” Jack Newton shares practical approach to scaling Clio at BetaKit Town Hall: Vancouver

This year, Québec has seen $1.5 billion across 85 deals, representing 20 percent of Canada’s total deals. Comparing year-over-year figures, both Québec and BC have already exceeded their 2023 investment totals, while Ontario is on track to match 2023 in terms of dollars raised.

In Atlantic Canada, investment activity has held steady in the first nine months 2024. Newfoundland and Labrador led the region with $69 million raised across seven deals, followed by Nova Scotia with $59 million across 15 deals, and New Brunswick with $14 million from 12 deals. Alberta raised $478 million year-to-date through 61 deals.

Cleantech funding poised to top 2022 record

In the first nine months of 2024, the information and communication technology (ICT) sector led Canadian venture capital investments, securing approximately $3.8 billion across 201 deals. This increase was largely driven by four mega-deals totalling $2.2 billion.

Following ICT, the life sciences sector attracted $939 million across 98 deals during this same period. Although the number of life sciences deals was slightly lower than in previous years, total investment dollars remained steady due to a few large transactions.

Cleantech investment appears set to exceed the record levels from 2022, with $980 million raised year-to-date. The average deal size in cleantech also rose to $21.8 million, even as deal volume saw a slight decrease, with 45 deals so far in 2024.

RELATED: Despite strong 2022 for cleantech, EDC report finds Canada lags peers on R&D spending, funding, converting startups to scaleups

As of the end of the third quarter of 2024, exit activity reached $4.6 billion across 30 deals, though Q3 saw a slowdown. Mergers and acquisitions dominated, representing 90 percent of exits and contributing $4.3 billion in total value. The largest transaction remains AstraZeneca’s $3.3-billion acquisition of Fusion Pharmaceuticals, which was announced in the first quarter.

The CVCA has tracked zero venture capital-backed initial public offerings this year.

“This continued lack of liquidity is making capital harder to access,” Furlong noted in the report. “Without a more active exit market, the strain on seed and pre-seed funding could deepen, further impacting the flow of capital essential to nurturing Canada’s next generation of high-growth startups.”

Feature image courtesy Eric Ennis from Renovo Agency for BetaKit.