Why are Canadian investors not backing the country's innovators?

Foreign investors account for the overwhelming majority of venture capital supporting Canadian businesses

Why are Canadian investors not backing the country's innovators?
Steve Randall

Innovation has never been more important to Canada’s economic growth, as the world seeks solutions to increasingly-pressing issues.

Which raises the question, why do Canadian investors seem reluctant to help fund the country’s innovators?

A new analysis of venture capital (VC) disbursements shows that 72% of investments in Canadian firms in 2021 were from foreign investors with 56% coming from the US alone.

Total disbursements reached a record high of $13.6 billion with the US accounting for $7.6 billion, the CPE Analytics data reveals.

Canadian investors contributed just 28% of the total disbursements, down from a pandemic-induced record high of 48% and the previous worst in 2017 at 35%.

The biggest three investor types were US VCs ($3.5 billion), US hedge funds ($1.43 billion), and Canadian VCs ($1.2 billion).

A total 716 Canadian firms raised funds last year, with Ontario ($5.92 billion), BC ($3.93 billion), Quebec ($2.59 billion), and Alberta ($0.57 billion) seeing the bulk of the investments.

Disbursements were led by early-stage financings dominated both number of financing and disbursements, raising $6.91 billion from 379 financings. Seed/pre-seed financings secured $710 million, accounting for 23% of total number of financings, the highest level since 2017.

Canada’s VC funds raised $4.65 billion in 2021.

Over-reliance on US

Richard Rémillard, president of Rémillard Consulting Group, commented on the report, specifically the risk associated with such a large share of VC disbursements coming from south of the border.

“The dominance of venture capital investment volumes from the US is testament to the attractiveness of the Canadian innovation market but at the same time betrays an over-reliance on the US which could place Canada in a vulnerable position should American funds pull back and given the relatively small amounts of venture capital drawn from other international sources,” he said.  

CPE’s Canadian Venture Capital Report includes Equity and quasi-equity investments in companies directly but excludes mortgage funding and senior debt as part of an overall funding round and secondary transactions (investor/shareholder exit events) in which companies received no money.

Growth industries

Of the firms benefitting from investment in 2021, ICT and Biotech companies raised $8.73 billion and $1.98 billion respectively, together accounting for 79% of the total amount.

Cleantech and Financial companies were other $1 billion plus sectors, raising $1.01 billion and $1.38 billion respectively.

This is also a case of good news/bad news says Rémillard.

“The slightly over $1 billion deployed into cleantech - a considerable amount of capital but one that at a mere 7.4% of all venture capital investment in 2021 - is unlikely to materially assist Canada in meeting its ambitious earth and climate-friendly goals and commitments," he said.