Canadian AI Startups Fundraising: A Standout Performance

The Surge in AI Startup Funding

A period of significant growth is currently being experienced by startups focused on developing or integrating AI functionality. The Exchange previously analyzed the increasing flow of venture capital into AI startups, highlighting record-breaking investment levels in Q4 2020.

This trend continued with successive record quarters throughout 2021, demonstrating sustained investor enthusiasm.

Understanding the Investment Landscape

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Considering the generally robust state of the venture capital market, these figures weren't entirely unexpected. However, the level of activity within the Canadian AI startup ecosystem proved particularly noteworthy this year.

This shouldn't have been a surprise, according to Matt Cohen, managing partner at Ripple Ventures, who explained to The Exchange that “AI-enabled startups are demonstrably outpacing other Canadian startup sectors in terms of investment growth.”

Exploring the Canadian AI Story

We acknowledge a lag in our previous coverage. However, we are now focusing on the burgeoning Canadian AI startup narrative. Key questions driving our investigation include: What factors are contributing to the rapid increase in funding for Canadian startups?

Which specific areas within the AI technology stack are attracting investment? What is the influence of government funding on overall investment figures? And finally, what role do Canadian universities play in advancing artificial intelligence research and development?

To gain insights, we analyzed data from CB Insights and incorporated perspectives from Ripple’s Cohen, Ali Zahid (Ramen Ventures), Shawn Chance (OMERS), Bruno Morency (Techstars Montréal AI), and Louis Fischer (CB Insights intelligence analyst).

Our analysis will begin with a review of the data, followed by a discussion of the underlying drivers behind these increasing investment numbers.

Canadian AI Investment: A Surge in Funding

Examining yearly trends reveals a significant pattern. Investment in Canadian AI startups reached unprecedented levels in 2019. However, a subsequent decline was observed in 2020, with total funding amounting to $488 million.

The year 2021 demonstrates a strong recovery for Canadian AI startups, with approximately $1.5 billion secured through the third quarter.

Quarterly Performance and Growth

While the growth isn't perfectly consistent, the overall trend is positive. Canada witnessed $895 million in funding across 21 deals during Q2 2021. This was followed by $446 million in Q3, distributed across 24 deals.

Considering that the Q3 2021 funding total nearly matches the entire year of 2020, a cautiously optimistic outlook is warranted.

AI's Share of Venture Capital

The increasing proportion of Canadian venture capital directed towards AI is noteworthy. In 2021, AI companies have secured 16% of all known venture capital funds.

This represents a substantial increase from 2016, when AI companies accounted for only 2% of the total venture capital volume.

Beyond Mega-Rounds

The growth isn't solely driven by large investment rounds. Smaller funding rounds are also contributing to the overall increase.

The third quarter saw only two mega-rounds – deals exceeding $100 million – compared to four in the second quarter.

However, data from CB Insights indicates that the median round size for Canadian AI startups reached $3 million in 2021, matching a previous high set in 2018.

Rising Deal Sizes and Notable Investments

This indicates both increased total funding and larger individual investments. In 2020, the median deal size was $2 million, representing a one-third decrease.

QScale, a Canadian company, secured a $24 million seed round in Q3, marking the third-largest seed funding event globally during that period.

Deep Genomics led Canadian AI funding in Q3 2021, raising $180 million in a Series C round.

What's Fueling the Growth?

The combination of increased funding and rising deal sizes prompts the question: what factors are driving this growth within Canada’s AI sector?

Exploring the Foundations of Canada's AI Growth

An examination of the factors driving advancements in AI within Canada, focusing on chip development, public funding, and academic institutions, is essential to understanding its current position.

Government Policies and Investment Trends

A global surge in investment within AI companies is currently underway, as Fischer observed. However, Canada possesses a distinct advantage within a specific segment of the AI market. He believes that “Canada’s strength lies in its burgeoning AI chip sector.”

This observation wasn’t universally shared, yet Fischer presented supporting data: “In 2021,” he stated, “three of the nation’s six largest funding rounds were secured by AI chip developers – Tenstorrent, Untether AI, and Xanadu.” Consequently, “30% of Canada’s total AI investment was directed towards AI chip companies, in contrast to a global average of 10%.”

Fischer anticipates this trend will continue, citing the ongoing global chip shortage and Canada’s advantageous tariff regulations on manufacturing components. This positions the country to potentially become a prominent hub for AI chip development.

These favorable tariff laws exemplify the positive influence of Canadian public policies on its technology sector, according to multiple sources. Canadian AI startups are benefiting from the widespread increase in private funding, while public funds are also playing a crucial role, they indicated.

“Generally, capital – both public and private – is readily accessible, making startup launches easier than ever before,” Zahid explained.

This public funding takes various forms. Beyond grants and research tax incentives, “public entities are significant limited partners in the majority of seed and Series A venture capital funds in Canada,” Morency highlighted. The Venture Capital Action Plan (VCAP), initiated in 2013 with a CA$390 million commitment, is a prime example. Furthermore, Canada’s federal structure ensures funding flows from both national and provincial institutions, alongside contributions from pension funds.

Supporting Artificial Intelligence Initiatives

The aforementioned points pertain to startups generally, but often benefit AI specifically, which is also the focus of dedicated programs. Public funding supports research institutions like Toronto’s Vector Institute for Artificial Intelligence, as mentioned by Chance, Cohen, and Zahid.

This support extends beyond Toronto. Morency described Montreal’s Scale AI Supercluster as “a collaboration of private companies, research centers, academic institutions, and promising startups dedicated to advancing AI in Canada,” representing “a successful joint investment by the Canadian and Québec governments.”

“Public funding is a substantial and vital contributor to the growth of AI in Canada,” Morency asserted. He posited that “a key motivation is to provide opportunities for skilled individuals to remain and thrive within the country.”

Indeed, Canada is attracting and cultivating a significant pool of AI talent. “Toronto, in particular, boasts an exceptionally rich talent pool in this field,” Cohen noted. However, other Canadian cities also offer substantial expertise.

“The leadership of professors like Doina Precup and Joëlle Pineau at McGill University, and Yoshua Bengio at Université de Montréal, has fostered a critical mass of globally recognized AI talent in Montréal. Similar concentrations exist in Toronto and Edmonton, thanks to Geoffrey Hinton and Rich Sutton at the University of Toronto and University of Alberta, respectively,” Morency stated, with Chance also acknowledging the University of Waterloo and McGill for their “strong academic reputations.”

A Positive Reinforcement Cycle

The concentration of talent has created “a degree of positive feedback,” Zahid explained, “attracting top researchers to these labs due to their groundbreaking research publications.” This also enhances the appeal of the entrepreneurial ecosystem. Morency informed TechCrunch that “the majority of applications originate from startups based outside Canada, with European companies prominently represented among alumni.”

Notably, several initiatives are bridging the gap between research and commercialization. “Organizations such as CDL, DMZ, MaRS, and the Vector Institute are instrumental in fostering many emerging AI startups,” Chance said. “Collectively, they form the foundation for a new generation of AI ventures.”

Further initiatives aim to “connect academia with corporate labs and encourage SMEs to embrace risk by adopting products from AI startups,” as Morency described, presenting a favorable view of Canada’s technological landscape.

“This combination of talent, academic and corporate research leadership, and early-stage venture capital creates a conducive environment for entrepreneurs to build and scale AI companies,” Morency emphasized. However, the types of companies being developed are diverse. Investors differed from Fischer’s focus on chips, emphasizing the broad application of AI across numerous industries driven by increasing automation demands.

Chance of OMERS was particularly emphatic. “AI is impacting nearly every sector,” he stated. “Similar to ‘cloud,’ I believe AI is becoming a fundamental technical skill, rather than a standalone feature.” The focus is shifting from isolated AI solutions to applied AI integrated into a wide range of industries. “Startups participating in our program since 2018 utilize AI in diverse fields such as agriculture, law, healthcare, pharmaceuticals, clean energy, fashion, and diversity initiatives,” Morency shared regarding Techstars Montréal AI’s program.

Increased Capital Inflows and Rising Startup Valuations

A significant influx of both private and public capital is currently contributing to elevated startup valuations, a generally positive development for company founders.

While raising capital at an excessively high valuation can present challenges related to future growth expectations, increased valuations typically result in reduced founder dilution, which is a favorable outcome.

This correlation between increased capital availability and higher startup prices is not merely an observation; it's a demonstrable trend. Zahid explicitly linked the “exploding” valuations seen in the startup ecosystem to the unprecedented levels of public and private funding accessible to each startup.

However, Zahid also noted that the growth in potential “terminal values” justifies these higher valuations, and further fuels additional capital investment into the startup landscape.

Future Outlook for Startup Funding

Looking ahead, the expectation is for a continuation of current trends across numerous startup sectors and geographic hubs: an increase in the number of funding rounds, the total amount of capital deployed, and the average valuation of those rounds.

Although some factor will inevitably slow the pace of growth within the current startup cycle, the market has not yet reached that point.

Consequently, AI startups, particularly those based in Canada, are poised to continue benefiting from this favorable investment climate.

Key takeaways include:

• Higher valuations generally benefit founders by minimizing dilution.
• Increased capital availability is directly correlated with rising startup prices.
• Growth in terminal values supports higher valuations and attracts further investment.
• The current trend of increased funding is expected to continue in the near term.

The momentum remains strong, and the conditions are ripe for continued expansion within the AI startup sector.