KPMG data shows steep drop in Canadian fintech funding in H1 2023
Macroeconomic concerns have led investments in Canadian fintechs to drop three-fold to early 2020 levels in H1 2023, according to data from KPMG in Canada.
Canadian fintech investment drops in H1 2023
The first half of the year saw investments, including venture capital, private equity and mergers and acquisitions, total $353.7 million across 57 deals, down from $1.09 billion across 87 deals in H2 2022.
H1 2022 also saw higher figures in comparison, with $834.1 million being invested across 109 deals, according to data compiled by PitchBook for KPMG in Canada.
“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,” says Geoff Rush, partner and national industry leader for financial services at KPMG in Canada.
Rush adds that “geopolitical concerns and the failure of several banks in recent months are also playing into investors’ decisions” and expects the downward trend to continue for the remainder of the year.
In particular, venture capital funding in H1 2023 was down nearly four-fold compared to H2 2022. VC firms pumped $260.1 million in Canadian fintechs across 47 deals in the first six months of this year, a steep drop from the $989 million that was invested across 65 deals in the second half of 2022.
Majority of the deals were seed rounds and early-stage investments, with no initial public offerings (IPOs) seen in H1 2023.
For companies looking to fundraise, Georges Pigeon, a partner in KPMG in Canada’s deal advisory practice, anticipates the possibility of flat or reduced valuations, with companies having a better shot at raising funds towards the end of the year, as recession fears “abate” and the “eventual plateauing” of interest rate rises.
“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.”
Some bright spots
However, looking at the brighter side, Pigeon suggests that the current activity in seed and early-stage investments reflect investors’ interest in funding young start-ups.
“Right now could be good timing to launch a fintech start-up as investors would be coming into the early financing rounds,” Pigeon says. “At reasonable valuations, many investors have time to see their investment through, so it’s a good opportunity for new fintechs to emerge”.
And while KPMG expects investment activity to remain on the lower side throughout the year, Rush expects “pockets of activity” in areas such as blockchain, artificial intelligence (AI) 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,” he adds.
