2016 shaping up to be conservative year for VC activity in Canada, and even globally
The first three months of 2016 was undoubtedly a hot quarter for venture capital activity in Canada – we saw a total of $838 million VC deals, with numbers nearly doubling VC activity in the same period of 2015.
We’re nearing the close of Q2 and we thought we’d reflect back on the VC activity we’ve seen over the last few months to get a sense of how the market might be shaping up for the latter half of 2016.
We sat down with Boris Wertz, Founding Partner at Version One Ventures to ask him some questions around what direction venture capital activity might be taking as we’re entering into the half-year mark for 2016.
Q: Early indicators and preliminary data on Q2 2016 activity suggests the rush of VC activity we saw in Q1 is unlikely to continue. Do you have any insight as to why VC has slowed down this quarter?
A: It has been the same story in the U.S. – the first quarter started off with a bang, but deal volume and capital deployment will end up being much lower in Q2. The numbers we’re seeing now in Canada are mirroring what’s been happening in the U.S. investment market. We’re seeing a slowdown in investment activity across the board.
Q: Why do you think Canada saw such a record-high boom of VC activity last quarter (Q1)
A: We need to be careful not to put too much emphasis on the Q1 numbers. There’s usually a 6+ week delay between when a company completes the raise, and when that round is actually announced. You may have had some December announcements defer until after the holidays. This means that some of the activity counted for Q1 2016 was actually done in Q4 2015, before everyone started talking about the slowdown in venture capital investing. It’s always tricky to extrapolate big trends from quarter-to-quarter data.
Q: What type of VC activity are you predicting for the remainder of 2016? Why?
A: I believe that the rest of 2016 is going to look more like Q2 than Q1. Investors are cautious. They’re taking a wait-and-see attitude – which means we shouldn’t expect a lot of activity over the next few months. In addition, investors are seeking out safer investments, less likely to make those big “swing for the fences” investments, and consolidating their focus on a smaller number of “safe” companies. We should still see some very large follow-on investments in big, trusted companies, as well as early-stage activity in proven business models/technologies. All in all, 2016 is shaping up to be a very conservative year.
Q: What types of VC investment trends have you been seeing in 2016 so far? What are they and why do you think investors are gravitating towards these particular sectors/investment types?
A: Machine learning (ML) and artificial intelligence (AI) are very promising areas for investors – there’s still a lot of untapped potential in this space. We have been hearing a lot about autonomous vehicles and drones in the media – these are very important applications, but AI has many other promising applications, too. For example, practically every single function in the enterprise can be reinvented by AI. And, drones and low-cost sensors are making data capture cheaper than ever – this means there’s a lot more data available to be analyzed and there’s a strong need to add the right data storage/analytics/search layer to help businesses make use of all this new data. We’re actively looking at these types of applications right now.
Q: What’s on the horizon for VC in Canada? What are you particularly excited about?
A: Canada is really well positioned to become a global leader in artificial intelligence and machine learning. Both the University of Toronto and McGill have been traditionally strong in machine learning, so these areas have already been attracting and developing top engineering talent. Last fall, the Creative Destruction Lab in Toronto created a separate program that focuses on machine learning and AI. Programs like this will help support promising early-stage ventures and create the type of ecosystem that founders need to build and scale a business.
Q: We’re seeing more deal volume and investment dollars in early-stage VC funding versus later-stage funding (virtually double the deal volume). Do you have any insight as to why investors are closing more early-stage deals versus later stage deals?
A: This is probably partly due to lumpy deal flow. That’s always a possibility when you’re talking about a few months. But, if I were to look for any trends from this data, I’d say there has been a lot of progress in the early-funding environment in Canada. Many new funds have emerged and these new funds are more likely to make early-stage deals.
*Boris Wertz is the founding partner of Version One Ventures, an early-stage venture firm based in Vancouver and Silicon Valley. Read Boris’ recent CVCA blog ‘The View from Here: Best Practices to thrive in Canada’s current & future VC environment’.