As the venture capital landscape continues to navigate the impact of macroeconomic conditions, one segment has shown remarkable resilience: seed investing. The early stages of venture investing are often less sensitive to broader market fluctuations, and data suggests that this insulation is indeed holding up. However, a closer look at the Canadian market reveals a more nuanced picture, with some regions faring better than others.
Canada’s Thriving Seed Market
According to recent data from the Canadian Venture Capital and Private Equity Association (CVCA), Q2 2023 saw an impressive CAD$263 million invested in seed-stage companies across Canada. This represents not only a significant increase of 30% over Q1 but also the second-highest deal count on record, with a total of 104 seed deals concluded.
When compared to its North American counterpart, the United States, Canada’s seed investment volume is notable for its resilience. In contrast, U.S. seed funding declined by 35% from Q1 to Q2 this year, according to PitchBook data. While the Canadian market may be smaller in terms of overall size – with total U.S. seed volume in Q2 2023 reaching $3.9 billion – it’s clear that Canada is bucking the trend.
Why Canada’s Seed Market is Outpacing the U.S.
One possible explanation for this disparity lies in round sizes. As investment rounds have been trending downward, especially at later stages, seed investing has largely maintained its average deal size. According to Carta data, global seed deal sizes were up in Q2, a trend that PitchBook confirms is true of the U.S. However, Canada’s average seed deal size – CAD$2.52 million in Q2 – remains relatively stable compared to previous quarters.
The increased number of deals in Q2, from 78 in Q1 to 104, contributes significantly to Canada’s overall growth. This surge can be attributed, in part, to investors becoming increasingly cautious and seeking smaller check sizes as a way to maintain investment velocity without sacrificing LP returns.
A Tale of Two Markets: U.S. vs. Canada
The contrast between the two markets is striking. While Canada’s largest seed deal this year stands at $29 million (MeetAmi Innovations), the largest seed round in the U.S. was an eye-opening $450 million (Yuga Labs). Moreover, there were three other seed deals in the U.S. that exceeded $100 million.
Given these disparities, it’s reasonable to speculate on why Canada’s seed market is thriving while the United States’ is retracting. One key factor may be the relative size of seed rounds. In Canada, smaller checks are more common and seem less daunting to investors, making fundraising easier for startups.
Implications for Future Growth
The current state of the seed stage in both markets offers a glimpse into their respective ecosystems’ future health. Successful startups inevitably pass through this critical milestone, and if this trend continues, it may indicate that Canada’s market is better positioned for long-term success.
In contrast, the U.S. may need to reassess its approach to seed investing lest it face a condensed startup pipeline in the future. This consideration underscores the importance of understanding the nuances within each market and how they respond to changing economic conditions.
Conclusion
While the global venture capital landscape continues to navigate the challenges of macroeconomic conditions, Canada’s thriving seed market offers a beacon of resilience. By examining the factors driving this growth – smaller deal sizes, increased investor caution, and a more favorable market environment – we can gain insights into how regions and markets adapt to and respond to economic fluctuations.
As the venture capital ecosystem continues to evolve, it will be crucial to monitor these trends closely and understand their implications for future growth and innovation.
