Deal Points Report: Venture Capital Financings - Corporate and Company Law

Introduction

Welcome to Osler, Hoskin & Harcourt LLP's inaugural annual comprehensive report on venture capital and growth equity financing transactions in the emerging and high growth companies ecosystem: the Deal Points Report: Venture Capital Financings.

The Deal Points Report synthesizes data from 332 venture capital and growth equity preferred share financings completed by Osler from 2019 to 2021, representing more than US$5.68 billion in total transaction value. It is important to note that these 332 financings represent, as a random sample, only a portion of Osler's significant overall financing deal volume which is a contributing factor in our ability to produce the Deal Points Report. During 2019 to 2021, Osler represented clients in the emerging and high growth companies space in 763 financing transactions with an aggregate deal value of approximately US$10.57 billion.

The Deal Points Report is unique within the market as it draws on both publicly available data, as well as Osler's confidential anonymized data sources, to deliver deeper access to comprehensive financing-related data. Osler has undertaken publishing the Deal Points Report as we believe this data should be available to all stakeholders within the emerging and high growth companies ecosystem. To accomplish this, the Deal Points Report includes, in addition to publicly available information, financing-related data extracted from non-public sources such as term sheets, subscription agreements, shareholders agreements and secondary sale transaction documents. And because all data presented in the Deal Points Report is from financings completed by Osler, its authors are able to interpret and contextualize raw data inputs, with the benefit of first-hand exposure to these financings, in a way that enhances the production of meaningful insights and reliable data.

The Deal Points Report also provides a unique opportunity to profile some of Osler's clients and tell their unique and inspiring stories. We are truly grateful for the support and trust of these clients, and all of Osler's clients. We are proud to be a part of their story, which in turn is part of a much bigger story – the growth and exceptional success of the emerging and high growth companies ecosystem across Canada, an ecosystem that continues to create jobs, innovation and economic growth across the country and attracts significant amounts of domestic and international investment.

Finally, there are many data points that we feel are relevant to the market and important to track, but which did not make it into this year's Deal Points Report. We will seek to refresh the content and data points that are tracked in future releases of the Deal Points Report. In the meantime, please do not hesitate to reach out to any of the lawyers in our Emerging and High Growth Companies Group in our offices across Canada to discuss the findings in this Deal Points Report. We also welcome requests to present additional data points that may be of interest in future versions of the Deal Points Report. To submit a request, please contact us at emergingcompanies@osler.com.

In addition to our Deal Points Report, we are also pleased to share the success stories of our clients who represent some of the most innovative companies in Canada. At Osler, we represent entrepreneurs and emerging and growth stage companies that cover a broad spectrum of knowledge-based industries, supporting them through the stages of their lifecycle and providing legal advice on a wide range of issues and requirements along the way. Read our emerging and high growth clients' success stories.

Highlights from the Deal Points Report

There was a marginal decline in series A financings which is consistent with findings from other Canadian reports, such as those prepared by the Canadian Venture Capital and Private Equity Association (CVCA) and CPE Analytics.
While 2020 saw a material increase in Series Seed and Series A financings and fewer Series B and later stage financings, the data for 2021 shows significant increases in Series B and other later stage financings, with only marginal declines in Series Seed and Series A financings.
Companies in the Information Technology industry (including artificial intelligence, blockchain, adtech, edtech and cybersecurity) made up over 39% of all companies raising a financing round covered by the Deal Points Report, with Consumer / Retail based companies having the second highest concentration of financings, representing 19% of the financings covered by the Deal Points Report.
Ontario and British Columbia have the highest concentration of companies raising a financing round – representing, respectively, 58.7% and 18.2% of all Canadian companies included in the Deal Points Report. This is consistent with the recent Year-End 2021 – Canadian VC & PE Market Overview released by the CVCA, which highlights a high concentration of investments in emerging and high growth companies located in Ontario and British Columbia.
Steady increase in the number of companies founded by women at the seed financing stage covered by the Deal Points Report from 13.5% in 2019 to 20.5% in 2021, and overall representation of women founded companies in approximately 15% of all financings covered by the Deal Points Report.
Pricing direction for financings – Up, Down and Flat rounds –generally aligned with U.S. reports, such as Fenwick's Silicon Valley Venture Capital Survey [PDF] and Wilson Sonsini's The Entrepreneurs Report [PDF]. In our Deal Points Report, 88.2% of financings covered were Up Rounds, with only a minority of transactions (7.2%) being Down Rounds.
Valuations for companies in the Information Technology industry (including artificial intelligence, blockchain, adtech, edtech and cybersecurity) represented significant valuation increases between financings of, on average, 235%.
The overall timing to close a financing, measured from the date a term sheet is executed until the initial closing date of the financing has steadily declined from 2019 to 2021, from 62 days to 52 days, likely due to the increasing trend towards "standardization" of financing transaction terms and intense investor competition in 2021, resulting in a desire to move as quickly as possible from term sheet execution to closing. At the same time, the average duration of exclusivity provisions in financings covered by the Deal Points Report ranged from 42 to 47 days, depending on the round of financing.
Where a financing had multiple closings, 69% of funds invested in the round were funded at the initial closings.
Over 95% of financings covered by the Deal Points Report used documentation based on the CVCA model financing agreements.
Secondary transactions were very common in post-Series Seed stage financings, with almost 50% of all Series B financings including a secondary component. Preferred Shares were the most common type of equity sold in secondary transactions (which includes instances in which common shares are exchanged for preferred shares, as discussed further below). At the same time, fewer secondary transactions involved an amalgamation structure in 2021, as compared to 2020 and 2019 (as discussed further below).
Financing terms between 2019 and 2021 are reflective of the continued move towards pari passu liquidation preferences, no participation rights, broad-based weighted average anti-dilution, no redemption rights and non-cumulative dividends as Canadian financing terms continue to align with U.S. financing terms on account of the high levels of U.S. investment in Canadian financings and companies and investors increasingly adopting these terms as part of a "best practices" approach to financings.
Data relating to preferred director, common director and independent director board representation shows a trend towards a greater proportion of preferred director representation in later stages of financings. In early stage companies, the data reflects a larger proportion of non-preferred directors in Series Seed and Series A financings, typically representing greater consolidation of founder and common shareholder control in these companies.

Methodology and background

Please note the following with respect to the methodology and background underpinning the Deal Points Report:

The Deal Points Report consists of a review of 332 preferred share financings, from Series Seed financings through to Series D financings and beyond completed by Osler between 2019 and 2021 – these preferred share financings include a small representation (approximately 8%) of transactions which involve a U.S. company in instances where a Canadian office of Osler was engaged in the transaction. Common share financing transactions and transactions resulting in the issuance of convertible securities (like SAFEs or convertible promissory notes) were excluded.
The total value of all initial investment across all financings reported on in the Deal Points Report was US$5.14 billion. The total value of initial investment, plus follow-on investment, across all financings reported on in the Deal Points Report was US$5.68 billion.
Of the financing transactions included in the Deal Points Report, Osler was company counsel in 71.9% of these financing transactions and investor counsel in 28.1% of these financings.
Of the financing transactions referred to above, Osler collected and anonymized data from both public and non-public financing documents, including term sheets, articles, subscription agreements, shareholders agreements and secondary sale transaction documents.
The Deal Points Report is broken out into four sections, with a view to coherently organizing the findings: General Overview, Valuation and Investment Intelligence, Financing Structure Intelligence and Financing Terms Intelligence.
The Deal Points Report does not attempt to filter out data which does not squarely fit within the construct of a "typical preferred share financing transaction." It is our belief that an unfiltered and unbiased perspective of deal terms and trends should be presented to the reader. In instances where we believe that one or more transactions significantly skew the data in the Deal Points Report, we have indicated as much for the reader's benefit.
All dollar amounts reported on in the Deal Points Report were converted into USD based on the applicable foreign exchange rate published by the Bank of Canada as of closing date of the applicable financing. To the extent that the closing date of a financing transaction occurred on a holiday, the applicable dollar amount reported on in the Deal Points Report was converted into USD based on the applicable foreign exchange rate published by the Bank of Canada on the next business day.

About Osler, Hoskin & Harcourt LLP's Emerging High Growth Companies Group Practice

The Emerging and High Growth Companies Group at Osler is composed of individuals who are passionate about entrepreneurship and fostering the growth of early and growth stage ventures. Ranked Band 1 in Chambers Canada and located in offices across the country, including Toronto, Vancouver, Montréal, Ottawa and Calgary, our team members are eager to share their experience and insight with emerging companies to help maximize their development and ensure long-term success.

We represent entrepreneurs and emerging and growth stage companies nationwide from a broad spectrum of knowledge-based industries, supporting them from incubation through their growth trajectory, as well as the venture capital funds, growth equity and private equity funds that finance them. We provide legal advice on the wide range of issues and legal requirements that emerging and high growth ventures face, from corporate and tax structuring and fundraising and shareholder agreements to intellectual property strategies and employment- and compensation-related matters – all of which require a deep understanding of the market and expert counsel.

Osler acts for more than 1,000 early, growth and late-stage ventures and venture investors across Canada, United States and around the world. In the last four years, we have acted on more than 810 angel, venture and private equity financings. In 2021, despite the effects of COVID-19 on the fundraising landscape, Osler advised on 272 deals with more than CAD$7.82 billion raised by emerging and high growth companies, many of which are showcased in the data forming the basis for this report.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.