The earliest stages of venture investing are the most insulated from macroeconomic conditions. When the public market dislocation started causing a broad venture funding pullback, it appeared seed investing would be safe for a while. Data indicates that that is bearing out as expected. But checking in halfway through the year, some markets are faring better than others.
Canada, for one, is having a great year. The second quarter saw the most capital invested into Canadian seed-stage companies yet. New data from the Canadian Venture Capital and Private Equity Association found that CAD$263 million (USD$202 million) was invested in Q2 through 104 seed deals, the second highest deal count on record.
Canada’s seed investment volume increased by 30% in Q2 over Q1 and was up 8% over its second-best quarter on record, Q2 2021, when CAD$243 million was invested. Meanwhile, U.S. seed funding declined 35% from Q1 to Q2 of this year, according to data from PitchBook.
Yes, the Canadian market is not very big; for comparison, total U.S. seed volume in Q2 2022 was $3.9 billion. But Canada’s seed market is heading up and to the right, which is not something that can be said about the U.S.
It’s fun to speculate on why Canada’s seed market is growing while the United States’ is retracting.
One reason could be due to round size. As round sizes are dropping, especially at the later stages, seed is largely an outlier. Alex Wilhelm wrote earlier this week that global seed deal sizes were up in the second quarter, according to data from Carta. PitchBook data confirmed that’s true of the U.S., but that isn’t the case in Canada.
Last quarter, the average seed deal size in Canada was CAD$2.52 million, down just a tick from CAD$2.58 million in the first quarter. While seed deal sizes have overall been trending up in that market for the past few years, it has not been a straight shot up and to the right. Q2 saw just the fourth highest average Canadian seed deal size in the past few years.
While the average deal size dipped in the second quarter, the number of deals shot up from 78 in Q1 to 104 in Q2, explaining the overall strength in Canada’s seed market.
And as some investors get increasingly conservative this year, it’s likely an easier fundraising sell when smaller check sizes are involved.
So it makes sense that there is a larger pullback in seed investment volume in the U.S. over Canada because some of the seed rounds in the U.S. are almost laughably large.
The largest seed deal in Canada so far this year, according to Crunchbase, is $29 million (MeetAmi Innovations). The largest in the U.S. was $450 million (Yuga Labs), with three other seed deals also landing in megadeal territory, or worth $100 million or more.
If an investor is looking for a way to continue investing in this downturn while appeasing their LP base, leading a round like Yuga Labs’ $450 million seed round from March will most likely be off the table for a while. This is a non-factor for Canadian seed-stage startups.
The state of a market’s seed stage can be a great indicator of the future health of the ecosystem because all successful startups passed through that milestone. If that continues to be a good marker, the U.S. may need to rethink its approach to seed investing unless it wants to head for a condensed startup pipeline in the future. Canada, meanwhile, is setting its market up for success.