PRINT THIS PAGE Canadian venture capital investment falls in Q3 200607/03/2007. Source: Canada’s Venture Capital and Private Equity Association (CVCA), Thomson Financial .
Venture capital investment in emerging Canadian technology companies continued to decline in Q3 2006 to $331m, a drop of 32 per cent from the $489m invested in Q2 2006, according to Canada’s Venture Capital and Private Equity Association and their research partner Thomson Financial. Year to date, venture capital investment in Canada totaled $1.19 billion, a decline of 8% from the $1.3 billion invested during the first nine months of 2005. In spite of this overall declining trend, quarterly investment activity did represent 13% more capital deployed in the most recent quarter than during a low water mark of $292 million invested during Q3 2005.
"The continued drift downward in Canadian venture capital investment reflects a slower pace of activity in all of our major market sectors and regions," observed Rick Nathan, CVCA President and Managing Director of Kensington Capital Partners. "On the positive side, Canadian venture firms are becoming more focused, concentrating more attention and scarce capital on fewer investments, in order to provide their more promising companies with a better chance to succeed. This strategic shift is also evident in the increasing attention paid to follow on investment – deploying fresh capital into companies already in their portfolios – and a resulting more cautious approach to investing in new companies."
Venture Firms Tighten their Investment Focus
Continuing a trend of recent quarters, venture capital firms are focusing their investments more tightly, deploying somewhat larger amounts in fewer companies. A total of 122 Canadian companies received venture capital investment in Q3 2006, a drop of 27% from the 168 companies funded in Q3 2005 (when 13% less capital was invested).
Investment patterns through 2006 continue to show a move away from new companies, as more than 85% of all capital deployed in Q3 2006 went to follow on investment in existing portfolios, and two thirds of all investment was classified as later stage.
While the average size of Canadian venture investments is growing, it remains far below comparable levels in the United States venture market. During the first nine months of 2006, the average Canadian venture financing amounted to $3.8 million ($2.7 million during Q3), an increase of 31% over the average of $2.9 million during the same 2005 period.
By comparison, the average venture investment in the U.S. market amounted to $9.6 million, or more than 2.5 times the Canadian figure. This ratio has been narrowing through the past several quarters, from its historical level of 3 to 4 times, suggesting that Canadian investors are attempting to put their portfolio companies in a more competitive financing position relative to their peer companies in the U.S.
Regional Breakdown
Within the Canadian market, Ontario led other provinces with total reported investment of $153 million in 39 companies, representing a decline of 26% from the $208 million invested during the prior quarter, and a 46% share of all Canadian activity. Investment levels in Quebec dropped to $105 million in Q3 2006 in 52 companies, down 22% from the $135 million invested in the prior quarter, representing 32% of all Canadian venture investment during the quarter. Activity in British Columbia was also down from the prior quarter, as investors deployed $46 million in 11 companies, a drop of 64% from the $128 million reported in Q2 2006.
North American Context
A total of US$6.2 billion was invested in the U.S. venture capital market during Q3 2006, representing approximately 20 times the amount invested in Canadian firms. Year to date, U.S. venture capital investment amounted to $19.1 billion, an increase of 13% from the level of $17.0 billion in the first three quarters of 2005, and in contrast to the 8% drop experienced in the Canadian market.
The CVCA has also released data showing where the major Canadian markets rank in reported venture capital investment relative to activity in individual U.S. states. All of the main Canadian markets continue to slide in these rankings, as Ontario finished Q3 2006 in 11th spot, Quebec in 17th place, and British Columbia in 23rd position. In addition to the major venture and financial markets of California, Massachusetts, New York, New Jersey and Texas, quarterly venture capital investment in Ontario finished behind the U.S. mid-market States of Colorado, Pennsylvania, Virginia, Washington and Arizona.
Increasing Reliance on Foreign Capital
The importance of U.S. based venture capital firms (and other foreign investors) to the Canadian market continues to grow, as the available capital from Canadian based venture funds has become more scarce. Non-Canadian investors accounted for $90 million invested during Q3 2006, up 67% from the $54 million invested during the same period last year.
Year to date, non-Canadian investors represent more than 33% of all venture capital activity in the Canadian market, a clear increase from their traditional level of approximately 25% reported from 2001 through 2005.
Venture Fundraising Remains Soft
New capital commitments to Canadian venture capital firms amounted to $388 million in Q3 2006, for a total of $1.3 billion in new capital year to date. This represents a decline of 15% from the $1.5 billion committed during the same period last year. Of the total new commitments, retail funds such as Labour Sponsored Venture Capital Companies, accounted for 58% of the total, with the overwhelming majority of these funds being raised in Quebec. Outside of the Quebec retail market, total new venture capital fundraising in Canada through the first three quarters of 2006 amounted to $663 million, compared to $836 million during the same period of 2005.
Sector Breakdown
Information technology led all other sectors with 59% of all disbursements in Q3 2006, amounting to $195 million invested in 59 companies. This was down 22% from the prior quarter when $251 million was invested (and up 37% from the $142 million invested in Q3 2005).
Software investment led the IT sub-sectors with $68 million in Q3 2006, followed by Communications and Networking at $47 million and Internet based investments of $33 million during the quarter.
Investment in life sciences totaled $61 million in 24 companies during Q3 2006, a decrease of 59% from the prior quarter and an increase of 17% from the $52 million invested in the sector during Q3 2005.
The CVCA - Canada’s Venture Capital & Private Equity Association, was founded in 1974 and is the association that represents Canada’s venture capital and private equity industry. Its over 1100 members are firms and organizations which manage the majority of Canada’s pools of capital designated to be committed to venture capital and private equity investments.
Thomson Financial is a US$1.9 billion provider of information and technology solutions to the worldwide financial community. Through the widest range of products and services in the industry, Thomson Financial helps clients in more than 70 countries make better decisions, be more productive and achieve superior results.
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