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| Hey Insiders, Today we are bringing you an extra analysis of the Canadian VC funding slump in Q1 2023 and Insight Partners' new $1.3B continuity fund. Scroll down for some quick hits, then let us know if you'd like to see more in future issues! Karan
p/karan-chafekar | |
| 1 | | Canadian VC funding continued to slide, with deal values dropping 54% QoQ to CA$1.17B ($870M) in Q1 2023, per Canadian Venture Capital Association (CVCA). 153 deals were closed in the recent quarter, down 11% QoQ. The dip suggests that VC funding is returning to pre-pandemic levels. CVCA's CEO Kim Furlong said that the numbers suggest a "return to normalcy," as investors adopted a cautious approach in response to current market conditions. 
All provinces in Canada witnessed a slump in VC funding. Startups in the province of Québec raked in the largest share of the financing at 32%, securing CA$373M ($277M) from 58 funding rounds. The province of Ontario came in at a close second with CA$324M ($240.5M). Alberta displaced British Columbia from the third spot raking in CA$198M ($147M). Alberta secured a spot in the top three thanks to Edmonton-based business management platform developer Jobber's CA$134M ($99.5M) Series D led by Version One Ventures and OMERS Ventures. Jobber's round was the largest Canadian VC funding round in the recent quarter. The other two large fundraisers include No Meat Factory's CA$56M ($41.5M) Series B round and NorthStar Earth & Space's CA$47M ($34.8M) Series C round. 
The funding pullback in the region impacted late- and growth-stage Canadian startups the most, with pre-seed, seed, and early-stage startups showing resilience to the slowdown. The resilience demonstrated by seed and early-stage startups was due to the rising investor interest in the Agtech sector. As a result, the largest deals across pre-seed, seed, and early stages all belonged to Agtech sector startups. Deal count in pre-seed startups remained comparable to Q1 2022 levels. Despite a drop in deal count for early-stage startups, deal values increased for the second consecutive quarter, with VCs investing CA$730M ($542M) across 50 deals. However, the honors for the largest share of VC deal counts belonged to seed stages startups which closed 60 deals in the quarter, representing 39% of all VC transactions. 87% of all transactions in Q1 2023 were into pre-seed to early-stage startups. Canadian startups opted for non-dilutive venture debt in Q1 2023 due to a lack of equity capital and uncertainties resulting from U.S. banking volatility. Startups availed CA$98M ($72M) worth of venture debt from 29 transactions in the first quarter of the year, up 10% YoY from Q1 2022. Venbridge, Espresso Capital, and CIBC Innovation Banking were the quarter's top three venture debt lenders. With a closed IPO window, the quarter recorded the fewest exits on record. No startup pursued an IPO listing in the quarter. In fact, no Canadian company has gone public since Q4 2021. The only exits were due to five M&A transactions worth CA$18M ($13.3M) that concluded in the starting three months of the year. |     | |
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| 2 | | Insight Partners missed its target for its continuity fund, suggesting that even some established venture capital firms are having trouble raising funds in the current environment. The firm was able to secure capital commitments worth $1.3B for the Continuation Fund II against an initial target of $2B. The fund intends to make follow-on investments into existing portfolio companies in the software sector that the firm's six other funds initially backed. From the second half of last year, the VC funding pullback had only impacted emerging fund managers trying to raise fresh funds. However, the news about Insight's new fund missing its target suggests that some established VCs are also facing difficulty in raising funds. The landscape for established VCs has changed drastically since 2022, when fund managers could raise record-setting capital from limited partners. By the end of 2022, U.S.-based VCs had $289B in dry powder available for deployment. Fund managers in the U.S. raised funds worth $170.8B in 2022 itself, eclipsing the previous record set in 2021 of $158.5B. The record-setting fundraising for VCs came against a backdrop of slowed deployment in startups as valuations of tech companies stumbled. 
The percentage of capital invested into $1B+ funds reduced in Q1 2023 compared to 2022. Only two funds larger than $1B closed in Q1 2023, the same as the preceding quarter. Data shows that LPs have reduced their capital commitments to large $1B+ funds. It is also likely that general partners that intended to raise large funds already did so last year and are not looking to raise additional capital now. Pitchbook estimates that the dry powder reserves will start declining in the coming quarters. However, firms that are looking to raise large funds will likely face strong headwinds. Tiger Global Management anticipated the VC retrenchment to affect its fundraising and lowered its target for the new fund from $8B to $5B. The firm had already lowered its target to $6B last October. Tiger — which marked down its portfolio by 33% in 2022 — roped in banks to liquidate its portfolio stakes in startups in the secondary market to balance the losses on its VC funds. Some VCs were reportedly liquidating their stakes at a 40% to 60% discount over the net asset value. After receiving pushback from LPs, Tiger also backtracked on its commitments to other VC funds. Investors were likely unwilling to commit to Insight Partners' new fund due to the drop in valuations of existing portfolio companies. Insight acknowledged that due to the new fund, the company would not need to sell its portfolio stakes prematurely in the secondary market at unfavorable prices, unlike peers. Additionally, new funds bring in additional income for fund managers through management fees, which will help sustain operations during the current economically volatile period. HarbourVest Partners and Lexington Partners led Insight Partners' new fundraising. At the end of last year, Insight Partners had over $75B worth of assets under management, with investments into 750 companies globally. | | | |
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 | Analyst | | Karan Chafekar is a Management Consultant, Business enthusiast, and Licensed Pilot. | | This newsletter was edited by Aaron Crutchfield | |
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