Investment in Canadian fintech companies dropped three-fold in the first half of 2023 as valuations continued to slide to levels not seen since the beginning of the COVID-19 pandemic, driven primarily by macroeconomic concerns, according to a report released Thursday by KPMG in Canada.
In the first six months of 2023, investment (including venture capital, private equity and merger and acquisition activity) totaled US$353.7 million across 57 deals. That’s down from the US$1.09 billion invested across 87 deals in the second half of 2022, and US$834.1 million invested across 109 deals in the first half of 2022, according to data compiled by PitchBook for KPMG in Canada.
The first half of 2023 was one of the weakest for valuations since the first half of 2020, when the COVID-19 pandemic rattled global markets and the economy, said the report.
“Investors are still quite concerned about the state of the global economy, with fears of a recession, elevated inflation and interest rates continuing to put a significant strain on valuations, and that’s causing them to pause and reflect on their current investments and strategies. Geopolitical concerns and the failure of several banks in recent months are also playing into investors’ decisions. On the latter, the fact that that some loan portfolios and investment teams have been acquired by financial institutions recently illustrates that there are still opportunities in fintech,” said Geoff Rush, partner and national industry leader for financial services at KPMG in Canada.
In the first quarter, investment in Canadian fintech totaled US$297.3 million across 30 deals, but it fell more than five-fold to US$56.5 million across 27 deals in the second quarter. In fact, Q2 was one of the weakest quarters for Canadian fintech valuations since the third quarter of 2016, said the report.
“While investment will continue to be weak in the second half, we will likely see pockets of activity in areas like blockchain, artificial intelligence and machine learning. There are a lot of financial services companies that rely significantly on technology and are looking to adopt more emerging technologies such as generative AI, so that should bode well for the fintech space in the near to long-term,” said Rush.
The report said venture capital (VC) firms invested US$260.1 million into Canadian fintechs the first six months of 2023 (across 47 deals), down nearly four-fold from the last six months of 2022, when US$989 million was invested (across 65 deals), and the first half of 2022 when US$805.7 million was invested (across 95 deals). In the first quarter of 2023, VC firms invested US$203.7 million into 25 deals, falling to US$56.5 million over 22 deals in the second quarter.
The majority of deals were early-stage and seed-round investments, followed by late-stage funding rounds. There were no initial public offerings in the first half, continuing the drought from last year, said KPMG.
“Right now could be good timing to launch a fintech startup as investors would be coming into the early financing rounds. At reasonable valuations, many investors have time to see their investment through, so it’s a good opportunity for new fintechs to emerge,” said Georges Pigeon, a partner in KPMG in Canada’s deal advisory practice.
“Fintechs that have been able to hold off from raising cash might find a better funding environment towards the end of the year as investors’ fears of a recession abate as they anticipate the eventual plateauing of interest rate increases. We could see some stability coming back to financing markets by the end of 2023 or early 2024. Unfortunately, that timing may mean some more mature fintechs that have yet to achieve sustained positive cash flows may be facing very difficult choices by then, such as selling at down-valuation or simply shuttering.”
Mario Toneguzzi is Managing Editor of Canada’s Podcast. He has more than 40 years of experience as a daily newspaper writer, columnist, and editor. He was named in 2021 as one of the Top 10 Business Journalists in the World by PR News – the only Canadian to make the list)
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