Earlier this year, members of the CVCA were asked to provide their insights on the investment landscape for the next 12 months. The questionnaire covered various topics, such as investment prospects, market trends, and potential challenges faced by investors.
As we move further into 2023, venture capital and private equity investors are preparing themselves for a challenging year ahead, with most firms anticipating difficulties in several key areas that will require careful planning and execution to overcome.
58% of VC investors, 27% of PE investors, and 15% of other investors, such as Angel/Family Office and Fund of Funds, participated in the survey, of which, 29% of firms invest in pre-seed stage, 52% invest in seed stage, 63% invest in early stage, and 62% invest in later/growth stage.
According to the survey, attracting high-quality professionals for portfolio companies remains a persistent challenge that firms must address. In recent years, labour challenges have been at the forefront of business concerns, and layoffs across large tech companies have added to the ambiguity surrounding this issue. While there have been conflicting signals about the availability of skilled workers, it remains challenging to find such individuals. However, the recent layoffs in the tech industry present an opportunity for companies to act swiftly and recruit top talent that was previously out of reach. Smaller companies, especially, can benefit from this opportunity, as they often operate with limited resources and must be strategic in their recruitment efforts.
While the findings from this survey were obtained before the Silicon Valley Bank failure occurred, 46% of firms anticipated no change in new investment proposals over the next year, while 88% planned to invest in both existing and new portfolio companies. However, the availability of external debt/credit solutions for portfolio companies is expected to decline, potentially requiring investors to provide more capital.
While intervention by the U.S. government and regulators into SVB is expected to help alleviate immediate issues and prevent crisis, the longer-term impact is more difficult to forecast. Canada’s venture debt providers are well-capitalized and include large banks, crown corporations, and smaller lenders and all have been very active in assisting companies since SVB’s collapse. CVCA will be closely monitoring the US market for signs of a slowdown. Any decrease in U.S. venture capital dollars would have a strong ripple effect in Canada as U.S. investors invest heavily in Canadian startups, especially at the later stage.
In CVCA’s March 12 letter to the Canadian Deputy Prime Minister and Minister of Finance, Hon. Chrystia Freeland and the Minister of International Trade, Export Promotion, Small Business and Economic Development, Hon. Mary Ng, CVCA urged the government to provide support to mitigate the impacts of SVB’s collapse, specifically pushing for an acceleration of the flow of venture dollars in the Canadian market by modifying the threshold at which VCCI fund of funds managers can deploy dollars in Canadian venture funds.
CVCA has also asked the government to direct both crown corporations serving innovative companies, the BDC and EDC, to continue to deploy bridge financing which serves as a useful tool in turbulent times.
As for exit opportunities, the survey findings show that 58% of firms expect these opportunities to deteriorate over the next 12 months, and 79% of firms expect exit prices in the market to decrease over the next 12 months. Additionally, fundraising and the exit environment remain the biggest challenge for 60% of firms in the private capital business.
Despite the challenges, the average level of confidence investors have in the long-term growth prospect of Canadian private capital is 7.4 on a scale of 1 – 10. While the current market conditions present significant challenges, they also present opportunities for investors to capitalize on emerging trends and invest in undervalued companies. By focusing on sectors with increased demand, fostering strong relationships with portfolio companies, and capitalizing on Canada’s strengths as a leader in innovation and entrepreneurship, investors can navigate the current environment and position Canada for long-term success.
The long-term growth sentiment is echoed by Kim Furlong, CEO of CVCA, who offers insightful perspectives on the state of the market in her recent op-ed. Furlong’s article offers guidance on navigating the current economic landscape and maximizing opportunities, which can further bolster investor confidence in the Canadian private capital market.
As we approach Invest Canada ’23, these themes will be hot topics of discussion among industry professionals. Don’t miss out on the opportunity to network and learn from the best in the business. Get your tickets now and join us in Vancouver, May 30-June 1.
The full results of the survey:
Methodology
- 58% of VC investors
- 27% of PE investors
- 15% Other (i.e., Angel/Family Office, Fund of Funds)
Fund Stage Breakdown
- 29% of firms invest in pre-seed stage.
- 52% of firms invest in seed stage.
- 63% of firms invest in early stage.
- 62% of firms invest in later/growth stage.
Firm Challenges
- 75% of firms believe recruiting high-quality professionals is the most challenging for their portfolio company.
- 54% of firms believe securing financing/liquidity is the most challenging for their portfolio company.
- 52% of firms believe customer acquisition and retention is the most challenging for their portfolio company.
New Investment Opportunities
- 46% of firms expect the number of new investment proposals presented to them to stay the same over the next 12 months.
- 88% of firms expect to deploy capital into both existing portfolio companies and to make new investments.
PortCo Access to External Debt Solutions
- 40% of firms expect access to external debt/credit solutions of their portfolio companies to decrease over the next 12 months.
- 37% of firms expect access to external debt/credit solutions of their portfolio companies to stay the same over the next 12 months.
- 67% of firms expect it to be more difficult to find co-investors to syndicate over the next 12 months.
PortCo Valuation
- 42% of firms expect the valuation of portfolio companies to decrease over the next 12 months.
- 25% of firms expect the valuation of portfolio companies to stay the same over the next 12 months.
- 33% of firms expect the valuation of portfolio companies to increase over the next 12 months.
Exit Opportunities
- 58% of firms expect exit opportunities of their portfolio companies to deteriorate over the next 12 months.
- 33% of firms expect exit opportunities of your portfolio companies to stay the same over the next 12 months.
- 79% of firms expect exit prices in the market to decrease over the next 12 months.
Industry Challenges
- 60% of firms believe fundraising and the exit environment are the biggest challenge they see in the private capital business.
- 52% of firms believe market volatility is the biggest challenge they currently see in the private capital business.
- 23% of firms believe the biggest regulatory challenge faced by the Canadian private capital industry to be global market access/trade policy.
- 23% of firms believe the biggest regulatory challenge faced by the Canadian private capital industry to be lack of incentives/initiatives.
- 17% of firms believe the biggest regulatory challenge faced by the Canadian private capital industry to be financial policy.
Long-term growth prospect
On a scale of 1 – 10, the average level of confidence investors have in the long-term growth prospect of Canadian private capital is 7.4.
