Globally, venture capital (VC) investment remained relatively strong in the first quarter, although the outlook has now dimmed considerably due to the effects of Covid-19, according to new a new report from KPMG LLP.
The firm reported that VC-backed companies raised US$61.0 billion in the first quarter from 4,260 deals.
Both deal volume and value were down only slightly from the fourth quarter of 2019, but the report suggested that this was primarily due to a strong pipeline of existing deals.
For Canada, VC investment didn’t hold up as well as it did in the rest of the world in the first quarter.
KPMG reported that venture investment in Canada dropped by 51% in Q1 to US$702 million, and that the number of deals that closed declined by 40%.
This drop came even as the quarter started well with the closing of Canada’s first private $1 billion VC fund.
“This fund highlights the strength of Canada’s VC market, despite the sharp decline in both total VC investment and the number of VC deals during the quarter,” the report said, noting that artificial intelligence “remained a strong focus for VC investors in Canada” in the first quarter.
In the short-term, the outlook for VC investment, both globally and in Canada, is weak.
“With the exception of strategic investments for example, to enhance digital connectivity and coworking, corporate VC investment will likely be minimal in the short-term as companies focus on ensuring the sustainability of their core business,” KPMG said.
In particular, KPMG noted that cross-border investment will likely be “very challenging…given travel and movement restrictions.”
Additionally, valuations are expected to fall in Q2 “as companies struggle to attract funding given the significant levels of uncertainty, specifically around the impact of the uncertainty on sales forecasts. There could also be an increase in distressed investments in some jurisdictions as companies begin to run out of cash,” the report noted.
However, it’s expected that deal activity will eventually recover.
“Canada continues to have a very strong economic base. We have an excellent banking system, a well-trained workforce, strong government supports, and a very strong innovation ecosystem. All of this should hopefully help us weather the current situation and lead to more positive results in the back half of the year,” said Sunil Mistry, partner with KPMG in Canada.
The report also noted that there is plenty of money on the sidelines.
“Globally, VC investors are sitting on a significant amount of dry powder,” KPMG said. “One Pitchbook estimate suggesting approximately US$189 billion.”
“A lot of money is waiting to be deployed and invested. When the uncertainty around Covid-19 begins to decrease, VC investors will be looking for ways to deploy these funds,” the report said.
When the market does come back, certain sectors are likely to benefit, including healthcare and biotech.
“Companies focused on productivity solutions, logistics and delivery, edtech, and online entertainment could also see some investment, along with cyber security and data protection companies given the significant increase in online services,” KPMG said.