2023 Deal Points Report: Venture Capital Financings – Corporate and Company Law

Table of contents

Introduction

Welcome to Osler, Hoskin & Harcourt LLP’s third annual
comprehensive report on venture capital and growth equity financing
transactions in Canada’s emerging and high growth companies
ecosystem.

The state of Canadian venture capital and growth equity
financing in 2023 can be best described by two words —
resilience and renewal. In 2023, the Canadian economy settled into
the reality of higher, sticky interest rates as the Bank of Canada
continued to battle inflation, with the result being a continued
reduction of business and consumer activity amidst the high cost of
borrowing and looming fears of a recession in 2024. These economic
trends also affected the venture capital and growth equity
financing space across Canada, creating downward pressure on
overall financing activity in 2023, with a return to pre-pandemic
levels of investment and an uptick in more investor-friendly terms,
particularly for those companies raising capital in the context of
a down round.

However, there is still good reason for optimism in the Canadian
venture capital and growth equity financing space. We see signs of
great resilience as new, transformative technologies in cleantech
and artificial intelligence emerge and create investment
opportunities in Canada for Canadian and non-Canadian investors
alike. At the same time, provinces like Ontario, British Columbia
and Québec continue to serve as engines of venture capital
and growth equity financing activity in Canada, while provinces in
the Prairies and Atlantic Canada continue to make the case that
they, too, are critical destinations for venture and growth equity
investment in Canada. We also see clear signs of renewal as
early-stage financings dominated deal flow in 2023, signaling
investor confidence in the future of Canada’s emerging and high
growth companies ecosystem as these investors made new long-term
bets on promising companies — all despite the economic
challenges that marked 2023.

About the 2023 Deal Points Report

This year’s release of the Deal Points Report: Venture
Capital Financings synthesizes data from 486 venture capital
and growth equity preferred share financings completed by Osler
from 2020 to 2023, representing more than US$7.7 billion in total
transaction value. It is important to note that these 486
financings represent, as a random sample, only a portion of
Osler’s significant overall financing deal volume; from 2020 to
2023, Osler represented clients in the emerging and high growth
companies space in 1,106 financing transactions, including
preferred share equity financings and the issuance of convertible
securities (such as Simple Agreements for Future Equity (SAFEs) and
convertible promissory notes), with an aggregate deal value of
approximately US$14.16 billion. This significant level of
transaction volume, combined with Osler’s position as the
preeminent Canadian legal advisor to clients in the emerging and
high growth companies space, are key factors in our unique ability
to produce a publication like the Deal Points Report. In
the LSEG (formerly Refinitiv’s) Global Private Equity Legal
Review: Full Year 2023, for example, Osler was ranked eighth
globally amongst legal advisors to venture-backed companies based
on number of rounds and tenth globally amongst legal advisors to
venture-backed companies based on round value. Our firm was the
highest ranking Canadian legal advisor included in the global top
ten for these rankings. In addition, Osler is the only Canadian
firm to rank as “Band 1” for Startup & Emerging
Companies in the 2024 Chambers Canada rankings.

The Deal Points Report is unique within the Canadian
market as it does not rely solely on publicly available information
or third-party submitted data. Instead, it draws on Osler’s
confidential anonymized data sources, with a focus on providing
readers with deeper access to comprehensive financing-related
information that goes beyond what can be gathered from publicly
available data sources. Osler has undertaken publishing the
Deal Points Report as we believe information from
non-public sources — including comprehensive
financing-related data extracted from term sheets, share purchase
agreements, shareholders agreements and secondary sale transaction
documents — should be available to all stakeholders within
the emerging and high growth companies ecosystem. And because all
data presented in the Deal Points Report is from
financings completed by Osler across the country, the authors are
able to interpret and contextualize raw data inputs with the
benefit of first-hand exposure to these financings, thereby
enhancing the production of meaningful insights and reliable
conclusions.

The Deal Points Report also provides the opportunity to
profile some of Osler’s clients and to share their unique and
inspiring stories, including how these clients were able to succeed
in raising a financing round and continue to thrive despite
2023’s challenging market conditions. We are truly grateful for
the support and trust of these clients, and all of the firm’s
clients. At Osler, we are fortunate to represent entrepreneurs and
emerging and growth stage companies that cover a broad spectrum of
knowledge-based industries, supporting them through the phases of
their lifecycle and providing legal advice on a wide range of
issues and requirements along the way (read our emerging and high growth clients’
success stories.) We are proud to play a role in each of these
journeys, which in turn are parts of a much bigger story: the
growth and exceptional success of a resilient emerging and high
growth companies ecosystem across Canada, an ecosystem that
continues to create jobs, promote innovation and foster economic
growth across the country while attracting significant amounts of
domestic and international investment.

Finally, there are many data points that we feel are relevant to
the market and important to track, but that did not make it into
this year’s publication. We will continue to refresh the
content and data points in future releases of the Deal Points
Report. In the meantime, please do not hesitate to reach out
to any of the lawyers in our Emerging and High Growth Companies Group in
our offices across Canada to discuss the findings in this
year’s publication. We also welcome requests to present
additional data points that may be of interest in future versions
of the Deal Points Report. To submit a request, please
contact us at emergingcompanies@osler.com.

Get key insight and analysis of the Deal Points
Report

Discover more about this report as members of Osler’s
Emerging and High Growth Companies Group discuss the findings in a
webinar.

Register for the webinar

Osler’s emerging and high growth clients share their success
stories

For more than a decade, Osler has served as counsel to some of
Canada’s most innovative startup founders and growth-stage
investors.

Read these success stories

Highlights from the Deal Points Report

• The number of down rounds in 2023 was 2.25 times the average of
  the previous three years (2020–2022) covered by the Deal
  Points Report. Additionally, in 2023, 16% of all financing
  rounds, where a company was raising a subsequent round of
  financing, qualified as down rounds — compared to only 7% of
  such financing rounds in 2022. Notwithstanding the increased
  incidence of Canadian down rounds in 2023, the Canadian average was
  still below the U.S. average reported by Carta, where more than 19% of U.S. funding
  rounds in 2023 were down rounds. We believe this data confirms the
  expectations that we set out in prior releases of the Deal
  Points Report: companies that raised at significant valuations
  during the pandemic have exhausted their cash runways and bridge
  financing strategies (which were designed to defer setting new
  valuations in 2022) were forced to go back to the market in 2023,
  where valuations were markedly lower than they were during the
  pandemic.




• Of those companies that completed a down round during the
  four-year period covered by the Deal Points Report, the
  highest incidence of down rounds occurred in later stage financings
  (i.e., Series C, Series D and beyond). This aligns with our
  expectations: companies completing later stage financings are more
  susceptible to market pressures that affect their financial and
  customer metrics, which in turn influences investor demand and
  valuations. This data is also consistent with U.S. deal studies in
  2023, including Fenwick’s Silicon Valley Venture Capital Survey —
  Third Quarter 2023 [PDF], Wilson Sonsini’s The Entrepreneurs Report Private Company
  Financing Trends [PDF] and CooleyGo’s Interactive
  Data for 2023, which showed that U.S. emerging companies
  experienced a sharp increase in the number of down rounds, with Carta calling 2023 the “year of the down
  round”.




• The highest concentration of financings in Canada occurred at
  the early stages (i.e. Series Seed and Series A; representing 78%
  of all 2023 financings rounds), which is consistent with findings
  from other Canadian reports, such as those prepared by the Canadian
  Venture Capital and Private Equity Association (CVCA), including
  the Canadian
  Venture Capital Market Overview — 2023 and U.S. reports,
  including those from CBInsights.




• 50% of financings covered in the Deal Points Report in
  2023 saw the conversion of convertible instruments on closing: the
  highest incidence of the conversion of convertible instruments was
  at the Series Seed and Series A stages. Similarly, between 2022 and
  2023, there was an approximate 1.73 times increase in the
  percentage of Series A financings whose closings included the
  conversion of convertible instruments. This pattern is reflective
  of emerging companies’ strategies during 2022–2023 to
  raise bridge rounds in an effort to extend their cash runway, and
  avoid potentially lower valuations in 2023. As a result, many of
  these bridge rounds are now converting, as these same companies
  start returning to the market to raise priced rounds.




• Companies in the information technology industry (including
  artificial intelligence — which accounted for nearly 50% of
  all investments in these companies — blockchain, adtech,
  edtech and cybersecurity) make up over 30% of all companies raising
  a financing round covered by the Deal Points Report in
  2023, with health/life sciences-focused companies having the second
  highest concentration of financings, representing over 19.8% of the
  financings covered. Notably, investments in cleantech-focused
  companies nearly doubled from 2022 to 2023 and we expect to see
  this trend continue. One particular figure is worth noting:
  artificial intelligence companies (included in the information
  technology industry figures above), represented 15% of the
  financings for 2023).




• In 2023, Ontario and British Columbia had the highest
  concentration of companies raising a financing round that were
  included in the Deal Points Report — representing
  48.1% and 16.5% respectively, of all Canadian companies
  included.




• The percentage of companies covered in the Deal Points
  Report that were founded by women fell from 16.4% in 2022 to
  14.7% in 2023. Similar to 2022, our data from 2023 shows that
  Series Seed, Series A and Series B financings contained the largest
  concentration of companies founded by women. However, and as
  supported by the Pitchbook Venture Monitor, investment in
  women-founded companies in 2023 most notably declined at the Series
  Seed financing stage. We intend to monitor this data point and
  remain committed to supporting women in the emerging and high
  growth companies ecosystem as they continue to build incredible
  companies at all stages of growth.




• Over 97% of financings in 2023 covered by the Deal Points
  Report used documentation generally based on the CVCA model
  financing agreements, demonstrating that financings based on forms
  consistent with the CVCA model financing agreements continue to be
  market standard in Canada.




• While our data did reveal an uptick in investor-friendly terms
  between 2022 and 2023, most notably in terms of a greater incidence
  of senior ranking preferred shares, cumulative dividends and
  participation rights, our data also shows that there continues to
  be an overall adherence to historical norms for key financing
  terms, including pari passu 1x liquidation preferences, no
  participation rights, broad-based weighted average anti-dilution,
  no redemption rights and non-cumulative dividends.




• For 38% of financings covered by the Deal Points
  Report in 2023, proceeds were invested over more than one
  closing, up from 22% in 2022, as companies often took longer to
  establish their investor syndicates, and investors required
  additional time to obtain internal approvals amidst challenging
  market conditions. Notwithstanding this trend, the number of days
  to get from an executed term sheet to a first closing decreased
  across all categories of financing rounds (as compared the average
  closing times during 2020 through 2022). This is consistent with
  the above, as companies were more willing to allow for multiple
  closings, enabling them to close more quickly with initial
  investors.




• Data relating to preferred director, common director and
  independent director board representation shows a trend towards a
  greater proportion of preferred director representation in later
  stages of financings (with preferred directors representing 45% and
  56% of the total composition of the board for Series C and Series D
  companies, on average, for 2023). The data reflects a larger
  proportion of non-preferred directors in Series Seed and Series A
  financings, typically representing greater consolidation of founder
  and common shareholder control in these companies.

Resilience and renewal characterize the emerging and high
growth companies ecosystem in 2023

Michael Grantmyre, partner in Osler’s Emerging and High
Growth Companies Group, outlines the key findings and trends from
theDeal Points Report.

Watch the video

Methodology and background

• The Deal Points Report consists of a review of 486
  preferred share financings, from Series Seed financings through to
  Series D financings and beyond, completed by Osler between 2020 and
  2023. These preferred share financings include a small
  representation (approximately 9.5%) of financings involving a U.S.
  company where one of the firm’s Canadian offices was engaged in
  the matter. Common share financings and financings resulting in the
  issuance of convertible securities, such as Simple Agreements for
  Future Equity (SAFEs) or convertible promissory notes, were
  excluded.




• The total value of all initial investment across all of the
  financings covered by the Deal Points Report was US$7.1
  billion. The total value of initial investment, plus follow-on
  investment, across all these financings was US$7.7 billion.




• Osler was company counsel in approximately 73.3% of the
  financing transactions included in the Deal Points Report
  and investor counsel in approximately 26.7% of these
  financings.




• Osler collected and anonymized data from both public (where
  documents such as company articles are publicly filed) and
  non-public financing documents related to these transactions,
  including term sheets, articles, share purchase agreements,
  shareholders agreements and secondary sale transaction
  documents.




• Financings covered in the Deal Points Report span a
  four-year period.




• The Deal Points Report is divided into four sections:
  General overview, Valuation and investment intelligence, Financing
  structure intelligence and Financing terms intelligence.




• All dollar amounts for financing transactions that were not
  originally denominated in USD were converted into USD based on the
  applicable foreign exchange rate published by the Bank of Canada on
  the closing date for the applicable financing. To the extent that
  the closing date of such a financing transaction occurred on a
  holiday, the applicable dollar amount was converted into USD based
  on the applicable foreign exchange rate published by the Bank of
  Canada on the next business day.

About Osler’s Emerging High Growth Companies Group

The Emerging and High Growth Companies Group at
Osler is composed of individuals who are passionate about
entrepreneurship and fostering the development of early and growth
stage ventures. Osler is the only Canadian law firm ranked Band 1
in Chambers Canada, and our team members in our Toronto,
Vancouver, Montréal, Ottawa and Calgary offices, are eager
to share their experience and insight with emerging companies to
help maximize their development and ensure long-term success.

We represent entrepreneurs and emerging and growth stage
companies nationwide from a broad spectrum of knowledge-based
industries, supporting them from incubation through their growth
trajectory, as well as the venture capital funds, growth equity
funds and private equity funds that finance them. We provide legal
advice on the wide range of issues and legal requirements that
emerging and high growth ventures face, from corporate and tax
structuring, to fundraising and shareholder agreements, to
intellectual property strategies and employment and
compensation-related matters — all of which require a deep
understanding of the market and expert counsel.

Osler acts for more than 2,000 early, growth and late-stage
ventures and venture investors across Canada, in the United States
and around the world. In 2023, despite the effects of market
changes and pressures, Osler advised on 269 venture financing
transactions, including preferred share financings, convertible
note financings and SAFE financings, with more than US$2.19 billion
raised by emerging and high growth companies, many of which are
showcased in the data forming the basis for this Deal Points
Report.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.