VCs are worried about money, too

Tech companies that want to catch an investor’s eye need to think less about flashy moonshots and more about old-fashioned returns on investment.

Driving the news: A survey by the Canadian Venture Capital and Private Equity Association (CVCA) found that 82% of Canadian venture capitalists think securing financing and liquidity will be their biggest concern in the year ahead, a worry shared by 57% of private equity investors.

• Interest rates taking longer than expected to fall are partially to blame, as higher borrowing costs make debt and riskier venture investments less attractive.

Why it matters: If the people who give out the money are worried about their own cash flow, that’s going to change what kind of tech companies get funded this year, and how much they get. CVCA found similar anxiety in last year’s survey, and VC deals ended up hitting a three-year low in 2023.

• Janet Bannister, managing partner at Staircase Ventures, tells Peak Tech that another trend she expects to continue is companies with a clear path to profitability being the ones getting funded.

Yes, but: The CVCA survey also found that 89% of VCs still plan to develop their portfolios with new investments and existing portfolios alike, with all private equity investors saying the same, as they deploy capital raised in previous years.

Zoom out: So, which companies will get that funding? Bannister expects a three-year surge in Canada’s early-stage companies to continue, especially in seed rounds. There are also signs of life for startups in certain sectors.

• AI is still booming, but investors are wary of companies that can’t deliver on overly ambitious ideas, or models that could be made obsolete by faster-moving rivals.
   
• Institutional investors are planning impact funds, spurred on by government support for climate tech. Canadian VC ArcTern raised US$335 million for its latest climate fund, double what it raised in 2020.

Big picture: Public companies are also feeling profit pressure. Lightspeed’s stock dropped this month when its (now former) CEO told investors it would be leaning more toward growth than profit. Despite beating earnings expectations, Shopify’s stock still slipped because its forecast included growing expenses that could impact profitability.