How entrepreneurs and start-ups can capitalize on the shifting VC market

Venture capital (VC) may be shifting gears, but Canadian entrepreneurs who focus on building their business and strengthening their networks now will be better positioned to capitalize on a changing market.

In brief:

Canadian entrepreneurs and start-ups can take advantage of
favourable venture capital markets by: 

1. Being more liquid and freeing up your working capital.
2. Assess whether it’s the right time to make a drastic move within the business be it hiring, moving, or refinancing.
   
3. Think about how you can elevate your business with outside of the box talent.
   
4. Hone in on your internal processes and ensure you are running a lean and efficient business.

How is VC changing in Canada today?

Although venture capital investment financings have dipped since 2021, Canadian firms have still been able to raise capital in the first half of 2022. Toronto, Montréal, Vancouver and Calgary generated the lion’s share of VC activity, as the IT, biotech, financial services and cleantech sectors continued to garner the most attention. By the numbers, for the first half of 2022, Canada had 299 financings and $4.72b in disbursements1.

Even so, challenges are emerging. Investors from the US and abroad fuel a large portion of the VC activity that takes place in Canada. In 2021, record amounts of funding were provided by US and Canadian investors. That said, as economic conditions changed, venture capital disbursements dipped 67% from $3.547b in Q1 2022 to 1.168b in Q22 . As a more cautious investment environment is emerging, this could make it much harder for Canadian entrepreneurs to garner a significant share of the smaller — and more selective — VC funding coming from US and foreign investors.

What do these VC shifts mean for entrepreneurs here?

Taken together, this puts Canadian companies in an interesting spot. Valuations are under renewed scrutiny, as investors seek to understand the real value of a business beyond its long-term potential. Layer in shifting macroeconomic headwinds across everything from interest rates and inflation to geopolitics, and it could be a while before Canada once again sees energetic VC interest from US and other foreign investors.

Still, this is not the time for entrepreneurs to sit on the sidelines or lick their wounds. Today’s uncertainty provides a perfect opportunity for entrepreneurs to build their business, extend their networks and do everything possible to reinforce profitability. Focusing on these areas now can put businesses in a strong position to review strategic options as the market evolves in the quarters ahead.

How can entrepreneurs make the most of this in-between VC stage?

Keeping these four core principles in mind can empower entrepreneurs to transform the waiting game into a powerfully productive period that positions them to emerge ahead of the pack:

1. Look for ways to free up working capital to extend the runway of liquid funds. Fundraising will not be easy in the months ahead. Reinforce liquidity now to empower the business’s progress, no matter what the short-term VC outlook.
   
   
2. Scrutinize any major investments, building, hiring or expansion plans. Without a clear and obvious high return on investment, these actions may not be worth the risk. Now is the time to focus on serving customers in core markets and adding value — the kind that translates into VC interest down the road.
   
   
3. Consider adding strategic talent. Conversely, this is a good time to hire strategically and build out the talent base. As overextended companies trim headcounts, entrepreneurs may want to look for opportunities to recruit high-impact or specialized talent as the job market loses some of its tightness.
   
   
4. Challenge efficiency and performance. If you’re not getting any traction with investors, now’s the time to refocus on customers and execution. Stay lean. Be profitable. Conserve cash. Operate well. Achieving good results in tough times impresses investors.