INTRODUCTION

Welcome to Osler, Hoskin & Harcourt LLP's second annual comprehensive report on venture capital and growth equity financing transactions in the emerging and high growth companies ecosystem.

In 2022, headlines and market sentiment painted a tumultuous picture of the technology and venture markets amidst the backdrop of rising interest rates, leading to increases in the cost of capital, shrinking consumer spending and reduced business investment growth. Notwithstanding this, in 2022, Osler represented clients in the emerging and high-growth companies space in 301 preferred share equity financing transactions with an aggregate deal value of approximately US$4.01 billion, representing impressive signs of growth, renewal and resilience in the ecosystem. At the same time, Osler continued to expand the national footprint for its Emerging and High Growth Companies Group, including in the province of Québec and the Prairie provinces of Canada. Many others shared our optimism about the performance and potential of the ecosystem in 2022, including the Canadian Venture Capital and Private Equity Association (CVCA), which noted that "[i]n 2022, the Canadian venture capital market saw the second-highest record in both deal count and deal value, despite market uncertainties" and pointed to the renewal in the ecosystem, evidenced by the sustained activity of venture investors and the number of early-stage financings that occurred during the course of 2022.

With the backdrop and context noted above, the Deal Points Report: Venture Capital Financings synthesizes data from 353 venture capital and growth equity preferred share financings completed by Osler from 2020 to 2022, representing more than US$6.13 billion in total transaction value. It is important to note that these 353 financings represent, as a random sample, only a portion of Osler's significant overall financing deal volume; during 2020 to 2022, Osler represented clients in the emerging and high growth companies space in 837 preferred share equity financing transactions with an aggregate deal value of approximately US$11.98 billion. Over the same period, Osler also acted on hundreds of financing transactions involving the issuance of convertible securities (such as Simple Agreements for Future Equity (SAFEs) or convertible promissory notes) which transactions were not included in our Deal Points Report. This significant level of transaction volume, combined with Osler's position as the preeminent Canadian legal advisor to clients in the emerging and high growth companies space, are key factors in our unique ability to produce a report like the Deal Points Report. In the Refinitiv's Global Private Equity Legal Review; Full Year 2022, for example, Osler was ranked seventh globally amongst legal advisors to venture backed companies based on number of rounds and tenth globally amongst legal advisors to venture backed companies based on round value, and was the highest ranking Canadian legal advisor included in the global top ten for these rankings.

The Deal Points Report is unique within the Canadian market as it does not rely only on publicly available information or third party submitted data, but draws on Osler's confidential anonymized data sources, with a focus on delivering its readers deeper access to comprehensive financing-related information that goes beyond information that can be gathered solely from publicly available data sources. 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 comprehensive 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 across the country, 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 conclusions.

The Deal Points Report also provides the opportunity to profile some of Osler's clients and to share their unique and inspiring stories, including how these clients, in the midst of challenging market conditions, were able to succeed in raising a financing round and continue to thrive. We are truly grateful for the support and trust of these clients, and all of Osler's clients. At Osler, we are fortunate to represent entrepreneurs and emerging and growth stage companies that cover a broad spectrum of knowledge-based industries, supporting them through the phases 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.) We are proud to be a part of their journey, which in turn is part of a much bigger story - the growth and exceptional success of a resilient 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. Importantly, one of the focuses for this year's Deal Points Report is understanding the implications of overall changes in financial markets for the emerging and high growth companies ecosystem itself. We are excited to explore the data relating to this with readers of this year's Deal Points Report.

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 publication. We will continue to refresh the content and data points that are tracked in future releases of the Deal Points Report.

Highlights from the Deal Points Report

  • Notwithstanding market uncertainties in 2022, the number of down rounds were below the three-year average (2020 - 2022) covered by the Deal Points Report. In 2022, 7% of all financing rounds qualified as down rounds while less than 2% of all rounds qualified as flat rounds. While this result is surprising in light of the macroeconomic pressures on technology and venture markets, we believe that the reliance on bridge financing strategies by companies in 2022, discussed further below, directly correlates to the lack of down round financings that we observed in 2022.
  • There was a pronounced increase in the use of convertible instruments in financings in 2022, particularly where companies sought to extend their cash runway, while continuing to grow in order to obtain a more desirable valuation at a subsequent equity financing. In fact, our data shows that there were 30% more bridge financing rounds completed in 2022, as compared to 2021.
  • Of those companies that completed a down round during the three-year period covered by the Deal Points Report, the highest incidence of down rounds occurred in later stage financings (i.e., Series C, Series D and beyond). This aligns with our expectations: companies completing later stage financings are more susceptible to market pressures that affect their financial and customer metrics, which in turn influences investor demand and valuations. This data is also consistent with U.S. deal studies in 2022, including Fenwick's Silicon Valley Venture Capital Survey - Fourth Quarter 2022 and Wilson Sonsini's The Entrepreneurs Report Private Company Financing Trends which showed that U.S. emerging companies experienced a sharp increase in the number of down rounds for later stage financings (Series D and beyond).
  • Data from 2020 through 2022 reflects the continued standardization of key financing terms, being pari passu 1x liquidation preferences, no participation rights, broad-based weighted average anti-dilution, no redemption rights and non-cumulative dividends. This continued alignment of Canadian financing terms with U.S. financing terms can be attributed to 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. In 2022, despite changing market conditions, the aforementioned financing terms continued to reflect standard market practice, without any material shift or trend towards more 'investor friendly' terms.
  • The highest concentration of financings in Canada occurred at the early stages (i.e. Series Seed and Series A), which is consistent with findings from other Canadian reports, such as those prepared by the CVCA, including the Canadian Venture Capital Market Overview - 2022 Year in Review.
  • Companies in the information technology industry (including artificial intelligence, blockchain, adtech, edtech and cybersecurity) made up over 40% 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.
  • Over the three-year period covered by the Deal Points Report, the largest increase in the number of financings by industry was in fintech (5.89% increase) and information technology (4.65% increase).
  • Ontario and British Columbia have the highest concentration of companies raising a financing round that were included in the Deal Points Report - representing, respectively, 56% and 19% of all Canadian companies included. High levels of venture activity in Ontario and British Columbia during 2022 in particular are also reflected in the recent Canadian Venture Capital Market Overview - 2022 Year in Review released by the CVCA. Additionally, the CVCA reported that Québec-based companies received 25% of all venture capital proceeds invested in Canada in 2022. Given this exciting growth, and as a result of the recent high-profile additions to Osler's Montréal-based Emerging and High Growth Companies practice, we expect to see additional increases in Québec-based financings in the 2023 data for the next release of the Deal Points Report.
  • There was a steady increase in the number of companies founded by women - from 13.3% in 2020 to 16.4% in 2022. Overall representation of women-founded companies stood at approximately 15% of all financings covered by the Deal Points Report. Additionally, there was a higher concentration of women-founded companies raising Series A (19%) and Series B (21%) financing rounds in 2022, a significant increase from 2021 where only 10% of women-founded companies raised a Series A round and 11% raised a Series B round.
  • The total investment amount in U.S. dollars (including for any initial closing and follow-on investment for that same transaction) broken down by series, for financings completed in 2021 and 2022, shows a material decrease in the aggregate investment amount invested in companies at all stages of financing, but particularly in companies raising later stage financings. These results are generally in-line with the Canadian Venture Capital Market Overview - 2022 Year in Review released by the CVCA.
  • The overall timing to close a financing, measured from the date a term sheet is executed until the initial closing date of the financing, increased at all stages of financings in 2022 amidst heightened uncertainty in the market.
  • Where a financing had multiple closings in 2022, 31.1% of the funds invested in the round were funded after the initial closing, up from 25.5% in 2021, as companies often took longer to establish their investor syndicates, and investors required additional time to obtain internal approvals to make investments amidst changing market conditions.
  • Over 95% of financings covered by the Deal Points Report used documentation generally based on the CVCA model financing agreements.
  • 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. 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

  • The Deal Points Report consists of a review of 353 preferred share financings, from Series Seed financings through to Series D financings and beyond, completed by Osler between 2020 and 2022. 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 (such as Simple Agreements for Future Equity (SAFEs) or convertible promissory notes) were excluded.
  • The total value of all initial investment across all of these financings was US$5.7 billion. The total value of initial investment, plus follow-on investment, across all these financings was US$6.13 billion.
  • Osler was company counsel in approximately two-thirds of the financing transactions included in the Deal Points Report and investor counsel in approximately one-third of these financings.
  • Osler collected and anonymized data from both public (where documents such as company articles are publicly filed) and non-public financing documents related to these transactions, including term sheets, articles, subscription agreements, shareholders agreements and secondary sale transaction documents.
  • As noted above, financings covered in the Deal Points Report span a three year period. Rather than focusing on only one year (i.e. 2022), we believe that including historical data provides the reader with long term directional insight into the developments in venture financing trends. Additionally, we believe that covering data from a three year period yields a broader data set, that in turn yields more accurate and informative insights for the reader. As such, while 2021 and 2020 data covered in the Deal Points Report was present in the last iteration of the report, we believe that this two year historical data serves a critical role in the context of this report.
  • The Deal Points Report is divided 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." We believe that an unfiltered and unbiased perspective of deal terms and trends should be presented to the reader. In instances where one or more transactions significantly skew the data in the Deal Points Report, we have indicated as much for the reader's benefit.
  • It is widely understood that financial markets and many industries, including in the emerging and high growth companies space, were in a state of change in 2022, particularly relative to their performance during 2021. Despite this, we observed that many financing terms, which were viewed as typical in 2020 and 2021, continued to be typical in 2022. We believe that this outcome is the result of two factors. First, many companies that might have faced the prospect of completing a down round with less friendly terms may have deferred completing an equity financing altogether, or alternatively, decided to raise a bridge round (or round extension) on the same terms and valuation as the prior round or issue convertible instruments (such as SAFEs or convertible notes) to avoid potentially punitive valuations or financing terms. Second, companies that were able to command strong valuations, relative to their prior valuation, and favourable financing terms in the context of equity financings, moved forward with those transactions, despite overarching market changes in 2022. We believe that it is important to draw the reader's attention to the foregoing to provide context for many of the charts that follow. We will be interested to see whether the 2023 data for the next version of the Deal Points Report shows any changes to the use of typical financing terms as some companies may be forced to raise equity rounds of financing, regardless of the terms that are offered by investors.
  • Given macro shifts in the market between 2021 and 2022, we believe that it is critical, in certain instances, to further break down data for the reader between 2021 and 2022. Accordingly, certain data in this year's Deal Points Report now includes additional charts comparing our 2021 data to our 2022 data.
  • This year's release of the Deal Points Report includes new charts, displaying data points on terms and trends that were not covered in last year's version. The addition of these new charts is consistent with our ongoing commitment to ensure that the Deal Points Report continues to evolve and expand in ways that are meaningful and valuable to the reader.
  • All dollar amounts reported on in the Deal Points Report for financing transactions that were not actually denominated in USD 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 such a financing transaction occurred on a holiday, the applicable dollar amount was converted into USD based on the applicable foreign exchange rate published by the Bank of Canada on the next business day.

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