Canada’s venture capital scene is facing strong headwinds in 2024, with early numbers pointing to one of the most challenging funding environments since the pandemic boom. Last quarter’s investments totaled just $940 million across 114 deals – representing a 22% drop from the same period last year and continuing a troubling downward trajectory.
“We’re seeing a real flight to quality,” explains Janet Morrison, partner at Inovia Capital, one of Canada’s largest venture firms. “Investors are demanding more traction, better unit economics, and clearer paths to profitability before writing checks.”
This cautious approach comes after Canadian startups raised a record-shattering $13.6 billion in 2021, when zero-interest rates and pandemic-fueled digital transformation created a perfect storm for tech investment. Fast forward to today, and the landscape looks remarkably different.
The Bank of Canada’s high interest rates continue to reshape investor expectations around risk and return. When government bonds and GICs offer 4-5% returns with minimal risk, the hurdle for speculative tech investments grows significantly higher. Many institutional investors who flocked to venture capital during the zero-interest era have retreated to safer harbors.
Toronto’s tech ecosystem, which typically captures the lion’s share of Canadian venture dollars, saw funding decline by 31% compared to Q1 2023. Montreal fared slightly better with only a 17% drop, while Vancouver experienced the steepest decline at 43% year-over-year.
“It’s not just a Canadian phenomenon,” notes Alex Snyder, research director at Startupland. “We’re seeing similar patterns across North America, though Canada seems to be feeling the squeeze more acutely due to our smaller pool of growth-stage investors.”
The slowdown appears most pronounced in later-stage funding. Series C and beyond rounds have become increasingly rare, with just eight completed in Q1 compared to 22 during the same period in 2022. Many companies that raised at lofty valuations in 2021 are now facing the prospect of down rounds or difficult extension financing.
“We had term sheets at a $400 million valuation in 2021,” confided one Toronto fintech founder who requested anonymity. “Now we’re having conversations at less than half that figure, despite doubling our revenue. It’s a tough pill to swallow.”
The funding crunch has triggered a wave of layoffs and belt-tightening across Canada’s startup ecosystem. According to Layoffs.fyi data, Canadian tech companies have cut over 4,500 positions since January, with notable reductions at Shopify, Wealthsimple, and several prominent AI startups that once seemed immune to market pressures.
Early-stage investments are showing more resilience, particularly in artificial intelligence. Seed rounds for AI companies actually increased 12% year-over-year, according to the Canadian Venture Capital Association’s preliminary data. This bright spot reflects continued optimism around Canada’s AI research leadership, anchored by institutions like the Vector Institute in Toronto and Mila in Montreal.
“Capital is still abundant for truly innovative AI applications,” says Meena Khalili, who recently raised $3.2 million for her Toronto-based AI customer service startup. “But investors are much more technical in their due diligence. The days of raising millions on a vague AI pitch deck are over.”
The funding environment has also split along sector lines. Climate tech and healthcare startups have maintained relatively stable investment levels, while consumer-facing applications and enterprise software have seen the steepest declines. This sectoral divergence reflects both shifting priorities and practical considerations around capital efficiency.
“Healthcare and climate technologies often have longer development cycles and clearer regulatory pathways,” explains Thomas Brouwer, managing partner at MaRS IAF. “These companies typically burn cash more slowly than consumer startups trying to achieve rapid growth through expensive customer acquisition.”
The challenging market has also heightened regional disparities. While the Toronto-Waterloo corridor, Montreal, and Vancouver continue attracting investment, emerging tech hubs in Calgary, Edmonton, and Atlantic Canada have seen deal flow slow to a trickle.
“We’re concerned about losing momentum in regions that were just beginning to build critical mass,” says Caroline Pelletier of Startup Canada. “When funding concentrates exclusively in established tech centers, we miss opportunities to leverage diverse talent and regional advantages.”
Government support has become increasingly critical as private capital retreats. The federal Strategic Innovation Fund and various provincial programs have stepped up with bridge financing for promising companies caught in the funding gap. However, public dollars can’t fully replace the market validation that comes with private investment.
“Government support keeps the lights on, but doesn’t necessarily help companies become more capital efficient or find product-market fit,” cautions Morrison. “The best founders are using this period to refocus on sustainable business fundamentals rather than growth at all costs.”
For startups currently raising capital, the message from investors is clear: demonstrate efficient growth, extend runway, and focus on path to profitability. Gone are the days when burning cash to capture market share was rewarded with ever-larger funding rounds.
Despite the challenging climate, veteran investors see opportunity in the correction. “The companies that emerge from this period will be fundamentally stronger businesses,” notes Snyder. “We’re returning to first principles of company building – creating real value for customers and generating sustainable economics.”
With interest rates expected to begin moderating later this year, some analysts predict a gradual recovery in venture funding by 2025. Until then, Canada’s startup ecosystem faces a period of consolidation and recalibration after years of exuberant growth.
“Every technology cycle has these moments of reset,” concludes Khalili. “The entrepreneurs who adapt quickly to the new reality will not only survive but thrive when the market eventually turns.”
