Quebec Seed-Stage Funding Plummets in 2024, Raising Concerns for Tech Sector

Montreal, Quebec – Quebec’s tech sector is facing potential challenges as seed-stage venture deals experienced a dramatic downturn in 2024. A recent report indicates a concerning drop of more than half in seed-stage deals year-over-year, with invested capital plummeting by two-thirds. This slowdown has sparked debate among experts regarding the long-term health and future prospects of the province’s startup ecosystem. The Réseau Capital report, utilizing data from the Canadian Venture Capital Association (CVCA), highlights a worrying trend that could impact the pipeline of high-growth startups.

The report, spearheaded by Réseau Capital, revealed that only 39 seed deals, totaling $112 million, were recorded in Quebec during 2024.This notable decrease mirrors a broader national trend, prompting concern from CVCA CEO kim Furlong, who stated it “presents concerns about the long-term pipeline of high-growth startups.” The implications of this funding drought are now being closely examined by industry stakeholders.

Diverging Opinions on the Impact

Despite the stark figures, opinions within Quebec’s venture capital community are divided on the severity and long-term consequences of this seed-stage slowdown. While some view it as a temporary setback, others fear it could signal deeper structural issues within the province’s funding landscape.

Olivier Quenneville, CEO of Réseau Capital, expressed his concern, stating, “Admittedly, the low number of seed-stage transactions is concerning. This could signal a weakening pipeline of companies that would or else progress to the early stage and beyond.” His statement underscores the potential for a ripple effect, impacting subsequent funding rounds and overall ecosystem growth.

david Dufresne,a Montreal-based VC who recently halted fundraising for his early-stage fund,CMD Capital,echoed these concerns. He described the numbers as “disappointing but not surprising” and indicative of an unhealthy ecosystem. Dufresne emphasized the critical role of early-stage funding, stating, “It’s a burden on future deal flow. If you don’t have a healthy number of pre-seed and seed rounds,it’s going to be hard to get a healthy number of later-stage rounds.”

Growth-Stage Investment and Capital Scarcity

Adding to the concerns, the Réseau Capital report highlighted the absence of growth-stage VC transactions in Quebec last year.The majority of later-stage investment in the fourth quarter was attributed to Blockstream’s $289 million convertible financing round, further emphasizing the concentration of capital in a limited number of deals.

Dufresne pointed to a dearth of capital available at the earliest stages as a critically important contributing factor.Réseau Capital has been tracking a weakening pre-seed and seed-stage surroundings for Quebec entrepreneurs sence the first quarter of 2023. Compounding the issue, the Quebec government quietly suspended an investment-matching program for startups raising thier initial rounds in November, a move that some entrepreneurs claim directly impacted their fundraising efforts.

The Need for Private Investment

Both Dufresne and Quenneville agree that the Quebec tech ecosystem requires more private capital, particularly at the seed stage.Historically, Quebec’s venture funding has heavily relied on public and quasi-public sources. The latest report reinforces this trend, identifying government-backed institutional funds as the most active investors.

Quenneville admitted that his initial “cautious optimism” at the beginning of the year has been tempered by the ongoing trade war between canada and the United States. “It is indeed still too early to draw conclusions, but the current uncertainty is never good for business,” he stated, highlighting the broader economic factors influencing investment decisions.

A Contrarian view: Temporary Dip or Systemic Issue?

While some view the funding decline as a crisis demanding immediate action, others believe it represents a temporary fluctuation that will self-correct.Hugues Lalancette, a partner at Inovia Capital, maintains that the “health of the ecosystem is strong.” He attributes the challenging year to a confluence of global and economic factors, including the aforementioned trade war.

lalancette acknowledged the scarcity of capital on the deployment side, attributing it to a slowdown in liquidity events such as exits and secondary issuances. However, he anticipates an increase in U.S. acquisitions of Canadian companies in the coming year, which would inject capital into the market, benefiting limited partners (LPs) and, subsequently, early-stage companies.

Inovia Capital, alongside Anges Québec, a network of angel investors, remained among the most active private investors in Quebec during 2024. Despite the overall decline in deals,Lalancette reported that Inovia has not experienced a slowdown in its venture funds. “What we’re seeing in our portfolio is actually reacceleration, especially at the venture stage, and more capital-efficient businesses, as entrepreneurs know that capital is not unlimited like it was in 2021,” he explained.

AI Adoption and Emerging Manager Challenges

Lalancette also highlighted the role of artificial intelligence (AI) integration in enabling Canadian startups to achieve more with less capital. Inovia’s recent state of software-as-a-service (SaaS) 2024 report ranks Quebec as the leading Canadian province for VC investments in AI, accounting for 24 percent of AI-related deals and 23 percent of AI companies with VC backing between 2019 and 2024.

though, the Inovia report also identified a critical challenge: dwindling funds for emerging managers. These managers, who tend to invest more at the pre-seed and seed stages, are struggling to secure funding from LPs. Fundraising for emerging managers plummeted from $1.2 billion across 28 funds in 2022 to a mere $172 million across eight funds in 2024, representing only seven percent of overall VC fundraising.

Dufresne’s firm, CMD Capital, recently ceased fundraising for its early-stage fund, citing a lack of appetite from institutional LPs to invest in first-time funds. This situation underscores the vulnerability of the early-stage ecosystem and the need for greater support.

“No one right now is taking duty for rebuilding the early-stage ecosystem.”

Dufresne concluded by emphasizing the urgent need for action: “No one right now is taking responsibility for rebuilding the early-stage ecosystem, in Québec specifically and in canada. I would love to see more people that have gained from this ecosystem take responsibility [for] building the next generation.”

Conclusion: A Critical Juncture for Quebec’s Tech Future

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quebec’s Tech Funding Freeze: Is This a temporary Blip or a Systemic Crisis?

Is Quebec’s vibrant tech scene facing a crippling blow, or is this downturn simply a temporary adjustment in the market? The recent plunge in seed-stage funding has sent shockwaves through the province, prompting crucial questions about the future of its innovative ecosystem.

Interview with Dr. Anya Sharma, Professor of Economics and Venture Capital at McGill University

Senior Editor (SE): Dr. Sharma, the recent report on the dramatic drop in seed-stage funding for Quebec startups has raised notable concerns. Can you elaborate on the key findings and their potential implications?

Dr. Sharma (DS): Absolutely. The report’s central finding highlights a significant decrease in seed-stage investments in Quebec’s tech sector. This translates too fewer startups securing essential early-stage capital, threatening the growth and scalability of promising ventures. This decrease, coupled with a scarcity of growth-stage funding, points to a potential bottleneck in the province’s innovation pipeline. The consequences could be far-reaching, impacting job creation, economic growth, and Quebec’s overall competitiveness in the global tech landscape. The reduced availability of capital at the earliest stages is especially worrisome, as it creates a “ripple effect” hindering the ability of startups to secure subsequent funding rounds.

SE: What are the root causes behind this funding downturn? Is it a unique challenge for Quebec, or are similar trends impacting other regions?

DS: Several factors contribute to this concerning trend. Firstly, global macroeconomic headwinds, including rising interest rates and inflation, have made investors more risk-averse, leading to a decline in overall venture capital activity worldwide. Secondly, a decrease in liquidity events, such as mergers and acquisitions or IPOs, reduces the returns available to Limited Partners (LPs), making them hesitant to invest further. third,a growing emphasis on capital efficiency has altered investor behavior; a startup’s ability to achieve ambitious goals with less capital is now a priority. This is compounded by the fact that Quebec’s venture capital ecosystem has historically relied heavily on public and quasi-public sources.

SE: The report mentions a divergence of opinion on the severity of this situation. Some view it as a temporary setback, while others fear deeper structural issues. What is your perspective?

DS: While the current situation is undoubtedly challenging, it’s crucial to differentiate between cyclical downturns and basic systemic issues. The current decrease in available capital could be partly explained by global economic factors and a shift in investor preferences. However, a persistent reliance on government-backed funds raises concerns about the long-term sustainability of Quebec’s entrepreneurial ecosystem. A healthy venture capital landscape needs a robust mix of public, quasi-public, and, most importantly, private investment. If this diversity isn’t nurtured, the sector remains vulnerable to external shocks.

SE: What specific steps can be taken to address this funding shortfall and bolster Quebec’s startup ecosystem?

DS: A multi-pronged approach is necessary.Frist, policies that encourage private investment in early-stage ventures should be developed and implemented. tax incentives,government-backed co-investment programs,and initiatives fostering angel investor networks can all play a vital role. Second, support for emerging venture capital managers is crucial.These managers often specialize in pre-seed and seed-stage investments and play a critical role in funding the earliest stages of a startup’s lifecycle. Providing seed funding and mentoring for emerging managers can strengthen the entire investment landscape. Third, fostering a more vibrant and diverse startup community through improved mentorship and networking opportunities is also essential.

SE: The report also highlights the critical role of Artificial Intelligence (AI) in shaping the future of Quebec’s tech industry. Can you comment on that?

DS: AI is undeniably transformative.Quebec has a strong foundation in AI research and growth, particularly in the field of Machine Learning. Leveraging this strength to attract private investment in AI startups is key. AI also offers startups the potential to be more capital-efficient, enabling them to achieve greater outcomes with less funding—a crucial factor in the current climate.

SE: What is your overall outlook for Quebec’s tech sector? What can we expect in the coming years?

DS: While the recent downturn is significant,it doesn’t necessarily signal a complete collapse. Quebec possesses many strengths, including its strong talent pool, robust research institutions, and supportive government programs. Ultimately, the long-term health of the ecosystem will depend on the government’s willingness to foster a diverse and dynamic funding structure, attract more private sector capital, and create an environment that encourages entrepreneurship and risk-taking. This requires a proactive strategy focused on sustainability and resilience.

SE: Thank you, Dr. Sharma, for your insightful analysis. Your perspective provides crucial guidance for navigating this critical juncture for quebec’s tech industry.

Call to Action: What are your thoughts on the future of Quebec’s tech sector? Share your opinions and predictions in the comments below or join the conversation on social media using #QuebecTechFunding.