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Executive Summaries Jan 22, 2019

How Did Venture Capital Fare in Quebec in 2018 and What Can We Expect to See Next?

The most crucial factor for entrepreneurs in the startup phase and as their business grows is undoubtedly the influx of capital. 

It’s not enough to have the best concept or a revolutionary product if there’s no money to develop it (the pre-seed phase), or to go on to the trial phase or into pilot production (the seed phase), and then produce it and bring it to market (the later development phase, Series A and subsequent financings).

Quebec prides itself on being a fertile ground for startups, but that’s not enough — it has to be able to supply entrepreneurs with the necessary tools, such as financing, so they can grow their business and become the next unicorn. One method of financing preferred by entrepreneurs is venture capital. In our two previous articles, we addressed pre-seed and seed funding and the Series A round of financing. We will now look at the status of venture capital in Quebec.

What is Venture Capital?

Let’s start off by defining venture capital. Venture capital is an equity or quasi-equity investment to finance a start-up with high growth potential. As its name indicates, the investment is risky for the party that is financing the company but, if that business is successful, can yield a high return on the investment.

In Quebec, based on data gathered by Réseau Capital as published in its report titled “Aperçu du marché québécois du capital de risque et du capital de développement/T3 2018,” the first three quarters of 2018 saw more than 125 venture capital deals, for a total investment in excess of $575M. However, these figures are down from 2017 when, for such comparative period and for an equivalent number of deals, a total of more than $1B was invested.

Who Benefited from the Money Invested in 2018?

When it comes to venture capital financing, Quebec compares favourably to the rest of Canada with the number of venture capital deals in Quebec representing 29% of the total number of deals in Canada, and 24% of the money invested. Once again, information technology companies garnered the biggest share of the investments—a total of over $350M (i.e., more than 60% of the total money invested).

Venture capital investment in early-stage companies represented only 6% of the total money invested, compared to 94% for companies at the startup and later stages of development (Series A and subsequent investments).

This indicates to us that early-stage companies are suffering from a lack of funding and, for the most part, do not have the capital they need to reach the startup phase and thus ensure their survival. Does this mean that early-stage companies will continue to be Quebec’s poor orphans in terms of venture capital in 2019? Here is what we expect.

Our Forecasts for 2019

Quebec is currently experiencing a startup boom. Numerous accelerators and incubators have been created in recent years and many initiatives have been set up to encourage entrepreneurship. As a result, many companies — many more than in the past — need early-stage venture capital. As we see it, venture capital market has adjusted to this situation and many funds have been created, or soon will be, to meet this growing demand.

Furthermore, many players have defined the market by financing these ventures through debt or quasi-equity, a formula that is working extremely well for the ventures in conjunction with injections of capital from other companies.

We are also seeing the creation of family offices, where wealthy investors surround themselves with skilled people and make regular investments in various companies, most notably providing seed funding. As well, our Quebec and Canadian companies are visible and attract more and more foreign investment, particularly from the U.S. These players are aggressive, and our investors need to make an effort to ensure the growth of our talented Quebec and Canadian businesses to keep them here, at home! BCF’s seasoned venture capital team is here to assist you each step of the way and guide you through the entire process.

 

To learn more about venture capital, sign up for our Strategic Forum on Corporate Financing, which will be held on Tuesday, February 19, 2019 in Montreal and Quebec City.