PwC Canada and CB Insights have released their MoneyTree report on Canadian VC investment trends for 2018, showing a tech ecosystem demonstrating substantial growth year-over-year.

Canadian VC-backed companies raised a total of $4.6 billion CAD ($3.5 billion USD) across 471 deals in 2018, compared to $3.4 billion CAD (2.6 billion USD) across 361 deals in 2017*. Those numbers, a 35 percent and 30 percent increase year-over-year, respectively, make 2018 the largest year in terms of VC dollars and deals since CB Insights began collecting MoneyTree data in 2012.

2018 was the largest year in Canadian VC by dollars and deals since CB Insights began collecting MoneyTree data.

2018 was buttressed by a very strong Q4 2018, resulting in $1.3 billion CAD ($983 million USD) raised across 116 deals. According to PwC, this is the second largest quarter recorded by MoneyTree, topping Q3 2015, when $997 million USD was raised across 64 deals. Canada’s largest quarter? Q1 2018, where $1 billion USD was raised across 123 deals.

“We’re seeing a substantial lift in both categories, the number of deals being done and the quantum of dollars being invested into the sector,” Michael Dingle, National Technology Sector Leader for PwC Canada, told BetaKit. “That indicates we’ve got a full spectrum of activity from early-stage to the scaleups and beyond.”

The MoneyTree report noted several other signals of a healthy and growing tech ecosystem in 2018. Canadian investors participated in 67 percent of all VC deals in 2018, and the majority of seed and later-stage investments in Q4 2018. With the size of expansion-stage deals increasing by 26 percent year-over-year, Dingle was quick to note these factors as an indicator of scale in the sector and a shift in the narrative on Canadian venture capital.

“In the 2016 year-end report, we were starting to see less support from Canadian money in the later-stage deal activity,” he said. “We’re seeing the capacity now for Canadian money to write the larger size cheques, which addresses something that has been discussed a lot, that the Canadian entrepreneur needs to look elsewhere—south of the border perhaps—to find her late-stage funding. We’re starting to see the data tell us those days are behind us, or at least the tide has turned.”

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As well, corporate deal participation increased every quarter in 2018, topping out at 41 percent participation of all deals in Q4. Notably, of the 146 corporate investors that participated in deals in 2018, 63 (or 43 percent) were Canadian, a 10 percent increase over 2017.

“Corporate investors will likely participate in more deals this coming year as investors recognize the growing market opportunity within Canada,” said Anand Sanwal, co-founder and CEO of CB Insights.

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By sector, Canadian AI continued to drive energy and attention in the ecosystem. AI funding increased for the second consecutive year, with companies raising $548 million CAD ($418 million USD) in 2018, a 51 percent increase year-over-year. Annual deal count also rose for the fifth consecutive year, resulting in 43 Canadian AI investments.

“Between 2017 and 2018, we’ve seen a further evolution in the type of AI companies that are getting funded, from general AI to point solutions; a shift from horizontal, teams with general AI expertise, to verticalized, full-stack AI businesses delivering targeted solutions to industry,” said Shivalika Handa, Managing Director, Corporate Finance, at PwC Canada. “We expect capital to continue to flow in 2019 as AI becomes a new standard in technology.”

By city, Toronto continues to dominate the Canadian tech ecosystem, with $1.7 billion ($1.3 billion USD) raised across 160 deals, effectively matching the combined totals of the next two biggest markets, Vancouver and Montréal. Québec City and Calgary, following strong showings in Q2 2018, respectively rounded out the top five.

“Are we a drop in the bucket? We are, but a Canadian drop, and proud of it.”

Vancouver nearly doubled its deal total in 2018 with 101 VC-backed deals, but raising only $510 million CAD ($388 million USD) across them, which Dingle noted as an indication the market was skewing to smaller and earlier-stage deals comparative to the rest of Canada.

“Montréal is scaling, Vancouver is starting up,” he said.

While activity and signs of strong health are encouraging, comparing Canada to other global markets reveals limitations. The ecosystem’s deals and dollars are a drop in the bucket of the 5,936 deals and $102 billion USD invested across North America in 2018, and Dingle indicated that Canada was “not punching at our weight” pro rata other markets. Still, he remained optimistic.

“Are we a drop in the bucket? We are, but a Canadian drop, and proud of it,” he said.

“The question is, as the Canadian tech sector continues to lift, will our pace continue to hasten? When I look at 2018, I see the recipe we need. My hope is that we’re starting to see signs of catchup or surpassing paces of markets that are similar. Do we see that yet in the data? No. Is it important to the Canadian economy as a whole? It is.”

For Dingle, catching up to other ecosystems requires continued development of the macro levers that will accelerate scale, including government incentives and support for talent (both homegrown and immigrated).

“The pieces are in place, now it’s a question of tuning the machine.”

View and download the full report here.

BetaKit is a PwC MoneyTree Canada media partner.

*Disparities between 2017 VC deals and dollars as communicated in the initial report and the 2018 year-end MoneyTree report can be attributed to regular updates made over time by PwC and CB Insights to the self-reported data.