Réseau Capital analysis reveals that only a handful of managers can successfully attract private funding.
Québec’s venture capital ecosystem has made impressive strides over the past decade, yet it remains heavily reliant on public and para-public funding to sustain its momentum, according to a new report from Québec-based investment industry association Réseau Capital.
The report, which traces the evolution of Québec’s venture capital industry from 2013 to 2023, aims to assess the outcomes of Québec’s long-term strategy to develop a stronger private investment sector. The report also identified potential areas for strengthening the ecosystem by analyzing its evolution over the past two decades.
In the years leading up to 2022, private sources accounted for 60 percent of venture capital fundraising, which included a mix of local, national, and international sources. However, this figure dropped to 52 percent in the 2022 to 2023 period, a shift that the report attributes to the current funding downturn.
“The sharp drop in average fund size in 2022 and, even more so, in 2023 indicates that the industry is currently facing headwinds, particularly in terms of fundraising,” the report notes.
Public and quasi-public funding sources have played a crucial role in the province’s venture landscape, particularly in early-stage financing, where private investment has become more difficult to secure.
Québec is unique among other Canadian provinces because of the comparatively large presence of funds that are either funded with tax-payer dollars, or were established by Québec’s political parties.
Public entities such as the Business Development Bank of Canada, Investissement Québec, and workers’ funds like the Fonds de solidarité FTQ and Fondaction are some of the most active investors in the province, acting not only as limited partners (LPs) but also as direct investors in startups and later-stage ventures.
“While other Canadian VC ecosystems also rely on public contributions … the Québec ecosystem has a larger pool of public and para-public partners,” Olivier Quenneville, CEO of Réseau Capital told BetaKit. “As it is the case everywhere, one constraint of those investments are the local reinvestment clauses that might impede the attraction of other LPs.”
RELATED: GPs and LPs at Startupfest expect gradual recovery with 2024 on pace to be worst for Canadian VC in a decade
Some members of the Québec ecosystem have previously told BetaKit that the large presence of public and para-public investors has helped create a more resilient venture capital market in Québec compared to other provinces.
“The strong public and para-public presence in Québec funds was, and still is, an important contributor to the maturation of our industry,” Quenneville added. “Moreover, when fundraising is more challenging, having those LPs around is proving beneficial to counter some of this cyclical effect.”
One sector that has particularly benefited from this support is tech. The report notes that the tech sector (which it brands as information and communications technology) is the most advanced within Québec’s venture capital ecosystem, characterized by larger funds, experienced managers, and a more diversified and internationalized pool of capital.
According to data shared in the analysis, public or para-public funding experienced a sharp decline from around 80 to 90 percent from the period of 2004 to 2012 to approximately 30 to 40 percent by the 2016 to 2021 period, where it then stabilized. From 2022 to 2023 there was a slight uptick, with the share rising modestly to about 35 to 40 percent. The report noted that the relative share of public or para-public funding “has declined, but their contribution remains significant.”
Given the continued reliance on public and semi-public funding in Québec, the report said the sector overall remains “fragile,” given there are only a handful of established managers locally.
That fragility facing Québec’s venture capital industry is currently exacerbated by the sharp decline in average fund sizes in 2022 and 2023, as well as the fact that no later-stage funds were raised in 2023.
“These later-stage funds fill an important gap in the financing chain, which require greater capital and are often filled from funds outside of the province, most often from the United States,” the report said, noting that with the recent downturn, raising funds from private sources has grown increasingly difficult.
There are signs that 2024 will represent a turnaround for private venture funds in the province. This year, a few private venture capital and private equity firms in Québec have managed to close funds, including Inovia Capital, Mackinnon, Bennett & Company, Idealist Capital, and TandemLaunch.
Feature image courtesy Unsplash. Photo by Michael Beener.
