2021 has been a phenomenal year for Canadian venture capital with $11.8 Billion invested into a whopping 568 deals. Toronto itself received a record amount of funding year-to-date with $4.9B invested across 154 deals. 2021 has been the strongest year on record for VC with some of the biggest deals in Q3 including investments into Clearco for $270M, Deep Genomics for $225M, and 1Password for $127M. Whilst later stage investments accounted for 40% of all dollars invested, early stage was close behind with 32% and growth stage with 24%.
The pandemic has continued to impact the venture capital ecosystem and 2021 has seen some interesting shifts in the ways funds operate and the way companies approach valuations and fundraising. We’ve seen industries both emerge and disrupt, as well as falter and dissipate. We’ve also watched the VC ecosystem adapt to the rise in aggressive and swift deal making by some major global funds such as Tiger Capital, SoftBank Group, and Sequoia Capital.
With the year coming to a close, here’s a roundup of some of the trends we’ve been excited about and look forward to watching in 2022.
Fintech: Disintermediation & Millennials
There’s no doubt that fintech enablers and infrastructure platforms have dominated the field in 2021. Fintech APIs (including our portfolio company Pngme) are ushering in a new era where any organization can readily enable and integrate financial products and services. This is a concept known as embedded finance where all companies can theoretically be fintech companies. According to A16z’s Alex Rampell, “Embedded finance lets any company easily offer financial services in an integrative way, not saying, “here’s a loan” and it goes to a third party website. The loan is actually captive within the product. We’ve seen financial service companies do this first. Square has a low margin credit card processing business. That gives them captive rights to that entire merchant base to do what’s called merchant cash advance business (MCA business).”
We’re also seeing the emergence of digital only banks, and open banking platforms that come at a time when more than 5 billion people across the globe have cell phones and 80% have internet access through their smartphones. Just like Amazon democratized and commoditized retail, the process will happen to banks too. According to A16z, every consumer will access their savings, loans, and investments via a mobile app. Consumer fintech banks are poised to offer just this and we have seen the growth in this vertical too.
Millennials in particular are disrupting the personal finance space. According to CBInsights, one fourth of millennials now have their primary checking accounts in digital-only banks, according to a 2021 study by Cornerstone Advisors. In addition, 77% say they are likely to move their bank account to a digital-only bank, according to Galileo Financial Technologies. This openness to banking alternatives presents opportunities for fintech startups looking to innovate in financial services from the outside. Millennials are more likely to switch banks, prefer not talking to bank employees, don’t like paying annual fees, and have started investing via robo advisors. All of which have contributed to the ever-changing fintech landscape we’ve watched in 2021.
Fintech has evolved drastically pre and post pandemic. Brick and mortar banks are seeing a decline as more and more consumers prefer managing their finances online. It seems banks and fintechs will continue to target and serve different consumer demographics and as this competition builds, it will be interesting to see whether the outcome ultimately serves the end consumer or not.
Notable players: Chime, Railz, Yotta , Greenlight, Plaid, Marqeta
NFTs/DAOs/Crypto & The Blockchain: Growing infrastructure and Web 3.0
You’ve probably heard a lot of noise around these terms this year, and rightly so. Web 1.0 (from around 1999 to 2004) was all about basic websites that allowed us to consume content and information. Web 2.0 was ushered in on the waves of innovation in mobile, cloud, and social platforms. We moved from digesting content to creating our own content. It also exposed the immense power large tech platforms had accumulated over the years as it pertained to user data, privacy, surveillance, censorship, and control.
We are now at the forefront of the Web 3.0 innovation which at its core, might act as the perfect reset. It allows us to prioritize, question, and solve some of the most important concerns that came out of Web 2.0. According to A16z, Web 3.0 should be open, participatory, and well-governed, distributed and resilient, sustainable, accountable, efficient, secure, and designed to help individuals and communities, not middlemen.
Web 3.0 includes themes within blockchain and crypto, digital assets, DeFi (decentralized finance), NFTs, and DAOs.
Global blockchain funding reached $15B in the first 9 months of 2021, and NFT funding skyrocketed to over $2B in 2021 so far, with a growth rate of 6,523% over 2020’s 12- month total. More than 90% of NFT deals this year have been early-stage. Decentralized finance startups saw 191 equity deals in the first 9 months of 2021, up 57% from the 2020 total. Canada invested $0.5B in 8 blockchain deals in Q3’21. Amongst the top ten equity deals are Canadian, Dapper Labs and Blockstream.
Despite still being in its early days, Web 3.0 has already seen some interesting infrastructure developments across the banking, consumer lending, cloud, and content/entertainment verticals. Our portfolio company Horizon Blockchain Games is building a New Dimension where Internet economies are fun, accessible, and for the benefit of all participants.
Notable players: Helium, Rally, Maple, Dime,
Health-Tech: Telemedicine, Biotech R&D, and Innovations in Women + needs
Digital health funding has continued to soar quarter by quarter since the pandemic hit in 2020. Venture backed health-tech companies raised a whopping $14.7B in the first half of 2021 alone. Speaking to Rock Health, Michael Pimental, Partner and Co-Founder of CVS Health Ventures notes that, “We’re seeing an increase in round sizes, new investors, and the pace at which funding is happening in digital health. There’s an acceleration of exits, as well as the emergence of combined companies that can address health care more broadly. It is exciting to see how quickly everything is happening this year.” Some key players in our portfolio include: Poppy, Epistemic AI, and BenchSci.
Since the start of the pandemic, more and more consumers are accessing telemedicine services and virtual care platforms. The market is becoming increasingly commoditized where telehealth is becoming more of a plug-and-play model where companies can offer layers of capabilities on top of pre-existing infrastructures. This has shifted what strategy looks like in the ecosystem where winning requires market share rather than platform differentiation. According to Rock Health, “Beyond the traditional video visit, telemedicine is now embedded in many solutions as a tool to connect patients and providers. Few (if any) emerging startups today would call themselves “telemedicine companies.” Instead, telemedicine is one tool within a comprehensive offering and experience.” They give the example of Noom, Ro, and LetsGetChecked, a weight loss, digital pharmacy, and at-home lab test company respectively. Here, some modality of telemedicine is combined with other tools to engage consumers and drive outcomes.
There has been a lot of growth in the clinical trial, therapeutic, and clinical intelligence space as well. As of mid-September 2021, total venture capital investment in Canadian life sciences companies had already surpassed 2020 full-year investment by almost 50 percent, reaching C$1.658B in the aggregate in 75 companies. So far in 2021, nearly 60% of venture capital investment in Canada in life science companies has gone toward drug discovery, diagnostic equipment, and biotech companies, according to Tory’s Quarterly Report.
Finally, 2021 has seen a surgency in startups that cater towards underserved patients, in particular, femtech and the women + segment which describes the full spectrum of health needs related to cisgender, transgender, or nonbinary individuals. According to a report by Rock Health, US digital health startups serving women+ raised $1.3B through August 31, 2021, nearly doubling all of 2020’s $774M funding across a similar number of deals. Women+ funding accounts for 7% of this year’s US digital health funding through August 2021.
We have seen a tremendous number of opportunities in the following sectors: pregnancy and parental support, fertility support, reproductive and sexual health, and perimenopausal and menopausal care.
We anticipate seeing continued M&A activity within the space and believe that a B2C2B business model will be far more popular than the traditional payer-first model.
Notable Players: Hyivy, Evvy, Koble Care , Jack Health, AbCellera
Deep Tech Commercialization: The Next Frontier
We have seen opportunities mature in areas such as quantum, semiconductor tech, robotics, and space tech in particular when it comes to the deep tech ecosystem. Two of our portfolio companies that are doing really well in this space include Zinite and Stratum AI. The pandemic, along with increased global competition has made this an interesting vertical for several VCs. According to Crunchbase, investment in quantum computing already has hit record levels this year as it seems poised to go above $1 billion in venture funding. So far in 2021, more than $728 million has been invested in the sector. $8 billion has been invested in robotics across 319 deals in 2021.
There is also an increasing demand for new chips and better chip architectures. Deloitte insights recently published a report predicting that VC firms globally will invest more than US$6 billion in semiconductor companies in 2022. The report maintains that in the first half of 2021 alone, VCs from both inside and outside China invested US$3.85 billion in Chinese chip companies, equal to or larger than the amount of global investment in the entire industry in 19 of the last 20 years.
Space tech is also an interesting opportunity. According to data by CBInsights, nearly $5.2 billion in venture funding has gone into space tech funding already this year . Despite SpaceX’s $850M round, the trends in the industry go beyond funding rockets to developing space infrastructure that supports the pre-exiting ecosystem on our home turf.
Although deep tech commercialization is still in its early days and comes with longer R&D cycles as well as increased risk in some cases, we are watching the space very carefully.
Notable Players: Kepler, Zinite, Phase Four, MDA