With only three deals closed, venture deal volume in the Waterloo Region reached a new three-year low in the third quarter of 2022, according to a new report from briefed.in.

In the third quarter of 2022, Waterloo Region tech companies raised a cumulative $111.7 million in venture funding. The region saw an 80 percent decline in venture funding from the second quarter of this year, but a 246 percent increase in funding from the third quarter of 2021, which at the time was a two-year low for the region.

However, Rob Darling, Waterloo-based founder of briefed.in, told BetaKit the year-over-year funding increase in Q3 2022 was due to one larger, later-stage deal and is not representative of the health of the ecosystem.

Even as investment dollars have ebbed and flowed, one trend has remained consistent in Waterloo Region: quarterly deal volume has been much lower than pre-pandemic levels.

The Waterloo Region has seen large swings in investment dollars each quarter over the last two years. Some of this can be partly attributed to local late-stage companies like ApplyBoard and Faire raising frequent nine-figure funding rounds, which beefed up the region’s total investment in certain quarters.

But even as investment dollars have ebbed and flowed in Waterloo Region over the last two years, one trend has remained consistent: quarterly deal volume has been much lower than pre-pandemic levels. In Q3 2022, this trend was particularly evident.

With only three deals tracked by briefed.in, the third quarter of 2022 was the lowest for deal volume on record in the Waterloo Region over at least the last three years (briefed.in began tracking regional investment in 2019).

While a concerning finding, there are several factors that likely contributed to the slowdown in local investment. For one, the third quarter can typically be slower for investment in many sectors and regions.

The third quarter of 2022 was the lowest for deal volume on record in the Waterloo Region over at least the last three years. (Image source: briefed.in)

Additionally, economic turbulence rattled tech companies across Canada in Q3 2022, with even the country’s largest tech ecosystems showing a clear knock-on effect on venture funding. Darling believes the current state of the economy and the confluence of recent global events have put Canadian investors in a far more cautious position than normal, which could also explain the slowdown in the Waterloo Region.

“While investors have more dry powder than ever before, they are deploying this to existing, less risky, portfolio companies to help them through these headwinds and are slowing down on deploying new, early-stage investments to wait and see what the economy does,” Darling added.

Though it has carved a big name for itself in the Canadian tech landscape, the Waterloo Region is also much smaller compared to ecosystems like Toronto; it can therefore be harder to gain reliable insights on investment from quarter to quarter. Still, according to briefed.in’s data, annual deal volume in the region has consistently fallen each year since 2019. So far in 2022, the region has seen 21 deals closed, which is less than half of the 57 deals tracked in 2019.

“Deal volume is something to watch, as lower pre-seed and seed volume could result in less later-stage deals in a few years,” said Jesse Rodgers, co-founder at Eigenspace and former CEO of Volta Labs.

So far in 2022, the Waterloo Region has seen 21 deals closed, which is less than half of the 57 deals tracked in 2019. (Image source: briefed.in)

Less than zero?

According to briefed.in, the three deals closed in the Waterloo Region during Q3 2022 included Avidbots’ $96.1 million Series C funding round, ProNavigator’s $10 million growth financing round, and Proto’s $5.6 million Series A funding round. briefed.in tracked no deals at the seed or pre-seed stages in the third quarter.

This is the first quarter since at least 2019 (when briefed.in began tracking Waterloo Region venture funding) with zero pre-seed or seed-stage deals in a quarter. This is also the second quarter in a row that Waterloo has not had any recorded any pre-seed deals.

Early-stage deals are typically more difficult to track compared to Series A and later-stage deals since smaller fundraises are often not publicly announced (briefed.in sources its data from online, public sources or from directly reported deals). Even so, the decline in early-stage deal volume is a trend in the Waterloo Region that spans more than two years.

“The current market headwinds have made the early stage funding gap in Waterloo even more evident,” Darling said.

This is the first quarter since at least 2019 with zero pre-seed or seed-stage deals in a quarter. (Image source: briefed.in)

To Rodgers, a healthy early-stage ecosystem would require pre-seed volume to be double or triple that of later-stage deals, a metric the Waterloo Region appears to be quite far from achieving. “I am watching to see if we have more than one pre-seed deal per quarter. That could have long-term consequences if [the result] doesn’t change,” he added.

The Waterloo Region is home to a number of incubators, accelerators, and other organizations that support early-stage founders. But as Rodgers has previously pointed out, many companies that get that early-stage support in Waterloo aren’t necessarily staying in the region. “I think young founders have been looking south of the border for opportunities in greater numbers than in the past,” Rodgers added.

The road ahead

As is the case for other ecosystems and the tech economy as a whole, the next few quarters are uncertain for the Waterloo Region. “Raising capital is always hard, even in good times,” Rodgers added. “I think more founders will have to re-evaluate the metrics they need to hit before they can raise capital as well as how much capital they actually need to get where they need to go.”

Even as dark clouds loom over the Canadian economy and venture funding landscape, Darling pointed to several silver linings in Waterloo Region’s tech sector. Over the summer, the Accelerator Centre launched AC:Studio, which is expected to provide 100 startups with up to $100,000 in seed funding until March 2025. Communitech also recently began hosting more founder events, including Techtoberfest this month, which is focused on connecting local startups with VCs.

Inovia Capital also recently announced plans to double down on the Waterloo Region, and recently hosted an event celebrating the opening of its office in the area. Darling noted that while will take some time to see the results of these initiatives, they are signs that the ecosystem is responding to the gap in early-stage funding.

The full briefed.in report on the Waterloo Region can be found here.

briefed.in is owned and operated by Communitech. BetaKit receives data from briefed.in as part of a media partnership with Communitech and retains full editorial control of all articles that reference the data produced by briefed.in/Communitech.

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