Increasing startup failures, a divided venture capital market, the rise of artificial intelligence and the shaky future of federal funding apparatus Sustainable Development Technology Canada are among the stories we will follow closely in 2024.

For the second year in a row, the outlook for Atlantic Canadian innovators remains challenging thanks to broader economic forces. Just as founders are beginning to report a slight easing of their staffing woes, for example, a potentially disruptive new influence on the labour market has emerged in the form of artificial intelligence.

Here’s a look at the questions we expect to answer in 2024:

Will startup failures continue to rise?
We identified at least a record 117 startup failures in 2023, as macroeconomic conditions saw the demise of more companies than even the early days of the pandemic, when we lost 102.

The Bank of Canada is holding interest rates at their highest levels since 2001, and tightening capital markets and tough conditions across sectors are taking their toll on young companies. By comparison, we recorded just 63 failures in 2022, when the COVID-19 recovery was still ongoing.

The startups that ceased operations this year included major players, like drug discovery specialist IMV and video game technology-maker Swarmio, both of which were publicly traded. Nearly half of the failures, though, were less than two years old. Those startups will not have been zombies — stagnant enterprises that have stalled in their growth — but rather new businesses that never fully found their feet.

The high number of closures is likely tied in part to intermediate-stage companies that weren’t growing fast enough to attract fresh investment or non-dilutive financing. No doubt many founders found more attractive opportunities working for someone else, given the demand for talent, rather than struggling on with their startups. 

But there may also be cause to anticipate the spate of startup failures continuing into 2024. Final numbers for venture capital investment in Atlantic Canada for the fourth quarter of last year are not yet available from the Canadian Venture Capital and Private Equity Association, but preliminary calculations by Entrevestor peg VC raises for the period at somewhere north of $47 million, compared to $117 million in the third quarter.

Compounding the apparent decline in the availability of equity funding is a growing divide in the capital markets between established businesses with traction and young startups still looking to prove themselves to investors. Despite total VC fundraising in 2023 surpassing 2022 by at least $7.6 million, more than half of total funding went to just four companies that together raised $138.7 million. And of that half, the majority went to a single business: Dartmouth cleantech star CarbonCure, when it raised US$80 million, or about C$105.7 million, setting a new record for Nova Scotia.

While those figures are a boon to Atlantic Canada’s more mature startups, they suggest that investors are wary of backing earlier-stage, less proven companies. Founders that have spoken with Entrevestor in recent months have frequently reported difficulty raising capital, and if funding availability for smaller deals continues to be a challenge in the ecosystem, more businesses could ultimately find themselves without the runway needed to keep operating.

How will the innovation economy capitalize on AI?
News of how startups are using artificial intelligence to modernize industries as diverse as mining and medical record-keeping became a common theme in our reporting last year, and we expect that momentum to continue.

In fact, the second largest capital raise of 2023 was by St. John’s-based Spellbook, the maker of artificial intelligence-enabled contract-drafting software, which in May raised a US$10.9 million or C$14.8 million seed round. And the fourth largest was a US$8 million or C$10.7 million Series A deal from aquaculture AI-maker ReelData.

Not only are more and more startups making artificial intelligence a core part of their product offerings, but early signs suggest many could soon be deploying AI internally for applications like programming. Diffblue, which emerged from Oxford University, has built a code automation tool used by global businesses like Amazon Web Services and J.P. Morgan., and California’s Factory is preparing to launch a similar system.

Such products are still far from perfect, but several Atlantic Canadian founders have quietly speculated to Entrevestor about using automation tools to alleviate staffing pressure. That could, in turn, reduce their overhead and help mitigate some of the effects of the difficult VC market, since programmers on the East Coast typically command salaries in the high five figures or low six figures.

The rise of AI also intersects with one of the trends we listed this time last year as a focus for our 2023 reporting: medical technology. That year, we noted that many of the most promising startups in our database were medtech businesses. That remains true, but equally notable is the extent to which many of those same companies are leveraging artificial intelligence in their product offerings.

Less than a month after our article highlighting medtech as an area to watch, Halifax’s NovaResp raised a $2 million funding round to further development of its AI system for making continuous positive airway pressure, or CPAP, machines more effective at managing sleep apnea. And in February, St. John’s-based SiftMed raised $2.7 million as it entered commercialization of its AI system for cleaning up disorganized medical records.

Even Halifax’s Begin.AI, which uses the technology to tailor video games to individual users and last January raised US$1 million, has potential applications in physical medicine and rehabilitation. The field is increasingly using virtual reality games as a tool for patient engagement, founder Rima Al Shikh said at a Springboard Atlantic event last month.

In 2024, we’ll be watching to see which other fields capitalize on artificial intelligence the way medtech has, as well as whether AI continues to dominate the funding landscape.

How will upheaval at SDTC affect non-dilutive funding on the East Coast?
Sustainable Development Technology Canada, the federal funding agency that in October paused new funding announcements due to conflict of interest allegations, was originally slated to resume operations around now. But last month, the future of Innovation, Science and Economic Development Canada’s division for funding private sector research and development became less certain.

When the federal government originally froze SDTC in October, Minister of Innovation, Science and Industry Francois-Philippe Champagne said if the agency implemented a set of auditor’s recommendations, he would let operations resume in the new year. But on Dec. 1, he walked that plan back in favour of waiting on the results from a second investigation, this one focused on allegations of workplace misconduct.

The initial impact of the SDTC freeze on Atlantic Canadian startups was limited because the region is underrepresented in the agency’s funding announcements. Over its 22-year history, SDTC has distributed about $1.13 billion to some 638 private sector research and development projects, but just $40 million, or about 3.5 percent, has gone to East Coast businesses, with 45 projects.

Of the agency’s currently active commitments, though, $18.9 million is slated to flow to Atlantic Canada — enough to dramatically shift the fortunes of the companies receiving it, particularly since the funding often comes during the crucial early days of a startup’s commercialization efforts.

Startups in the region that have previously received backing from SDTC include rising stars like Halifax-based Milk Moovement and Zen Electric. Milk Moovement in 2020 received $100,000 towards a $300,000 research and development project, before going on to raise US$20 million in 2022. And Zen Electric earlier this year finished a $207,500 project, of which SDTC paid for $100,000, around the same time the company said it was preparing for mass production.

Dartmouth-based Meta Materials received $5.95 million, up from a planned SDTC contribution of $5.4 million towards a renewable energy-related project.

If the steps taken to mitigate conflict of interest concerns at SDTC involve changes in how funding decisions are made or who makes those decisions, it could create new opportunities for East Coast startups to pursue research funding. If operations stay paused for too long, though, innovators could begin to feel the sting of opportunity lost.