PRINT THIS PAGE Canadian venture investment grows during 2007's first quarter23/05/2007. Source: CVCA, Thomson Financial.
Venture capital investment across Canada in the first quarter of 2007 showed very strong growth on a year-over-year as well as a quarter-over quarter basis, totaling $598m, according to a quarterly statistical report released by the CVCA and Thomson Financial. This represents a 62% increase over the $370 million invested during Q1 2006, and is also 16% above the $517 million invested in the previous quarter (Q4 2006). Venture capital investment in Canadian companies from foreign (principally U.S.) VC funds reached an all-time record share of 51% of all invested capital, amounting to $304 million.
This represents an increase of 134% over the $130 million invested by foreign VCs during Q1 2006. U.S. venture investment into Canadian firms has been growing significantly during the past several quarters, rising from its historical average in the 25% range through 2005, to 32% during 2006, to now represent a majority of the invested capital.
“The real story this quarter is the increasing dominance of U.S. investors in the Canadian venture capital market,” said Rick Nathan, President of the CVCA and Managing Director of Kensington Capital Partners. “While we welcome foreign investment, it is absolutely vital that we also develop stronger Canadian based investors if we want to build strong Canadian companies.”
U.S. investors were particularly dominant in the larger transactions at the later stage of the technology growth cycle. A total of 7 large venture capital transactions, defined as investments in excess of $20 million, were completed during the quarter, with U.S. firms providing 82% of the capital committed to these deals. These large investments were the main driver of overall growth in the quarter – during the full year periods of 2006 and 2005, a total of only 16 and 12 venture capital investments in Canada exceeded this $20 million mark.
“A healthy venture capital market in Canada would see Canadian investors partnering with foreign capital at each stage. But the data clearly shows that the U.S. investors are dominating the later stage – when the most promising companies are on the home stretch to success – without meaningful Canadian participation. And the reason is very simple, the Canadian venture capital community just does not have the financial capacity take our best emerging companies all the way to the finish line,” added Mr. Nathan.
Regional Breakdown: Foreign Capital Flows into Ontario
The growth in venture capital investment during the quarter, including the dominance of U.S. investors, was strongest in Ontario, where $302 million was invested in 42 companies, with foreign investors taking a huge 64% share. Total investment in the Province was more than double the $149 million invested in Q1 2006, and represented just over 50% of all venture capital invested in Canada during the quarter.
Québec investment levels also increased, with 55 companies receiving $175 million, representing growth of 51% over the $116 million invested during Q1 2006. Activity in British Columbia declined from its relatively higher levels in recent periods, amounting to $62 million in 13 companies, down 22% from the $79 million recorded in Q1 2006.
North American Context
The CVCA has released data showing where the major Canadian markets rank in reported venture capital investment relative to activity in individual U.S. states. Ontario, Québec and British Columbia finished Q1 2007 in 6th, 10th and 21st place, respectively, with Ontario’s growth moving it up from a 9th place standing during the full year 2006.
The steady growth in the U.S. venture capital market continues, with total U.S. venture investment amounting to US$7.1 billion into 785 companies during the quarter. This represents an increase of 12% from the US$6.3 billion invested during the same period of 2006.
No Room for New Deals
The first quarter also saw a record level of follow-on investment in existing portfolio companies relative to first time venture investments in new emerging companies. Follow-on investment amounted to approximately 90% of all venture funding during the quarter, with only a small 10% share allocated to new emerging companies across the country. The total number of Canadian companies receiving venture capital funding continued the declining trend visible through the course of 2006. During the first quarter of 2007, a total of 125 companies received VC financing in Canada, a drop of 9% from the 137 companies funded in Q1 2006.
The continuing decline in the number of companies funded alongside the increasing amount of capital invested led to a substantial increase in the average amount invested per company. The average Canadian VC investment during Q1 2007 was $4.8 million, the highest quarterly average recorded in Canada since Q4 2000, and an increase of 14% over the $4.2 million average in 2006 ($3.0 million in 2005).
Venture funds in the U.S. market continue to invest substantially larger amounts than their Canadian counterparts in each of their portfolio companies with an average level of $10.6 million per company, or 2.2 times the Canadian average. This differential has been steadily narrowing in recent years after reaching a peak of 4.3 times in 2003, as investors in Canada work to place their portfolio companies on a more competitive footing and the impact of larger U.S. fund activity becomes more prevalent in the Canadian market.
VC Industry Fundraising
The shortage of capital for new investment by Canadian venture firms showed no sign of change during the quarter. Fund-raising by the Canadian VC industry remained flat, with a slight increase in the retail (LSVCC) sector offset by a slight decline among private independent funds. New funding raised by all venture capital funds amounted to $467 million in the first quarter of 2007, compared to $474 million raised in Q1 2006. LSVCC’s raised $396 million in Q1 2007 up 3% from the $386 million raised in Q1 2006. The new LSVCC capital was again concentrated in Québec, which raised 69% of the national total. Canadian private independent funds raised $71 million in new commitments in Q1 2007, compared to the $73 million raised in Q1 2006.
Investment by Sector
Activity in the Information Technology sectors continued to drive industry investment during Q1 2007, with $306 million placed into 56 companies representing 51% of all disbursements, an increase of 81% over the $169 million invested during Q1 2006. Within the IT sector, internet businesses held the strongest share with a total of $173 million (compared to $14 million in Q1 2006), followed by software with $56 million (compared to $50 million in Q1 2006), electronics and semiconductors at $43 million (compared to $38 million in Q1 2006) and communications and networking with $30 million (compared to $62 million in Q1 2006).
Biopharmaceutical and other life science investments increased in Q1 2007 with 25 companies receiving $206 million in new venture capital (up 44% from the $143 million in Q1 2006). Venture investment in environmental “clean” technologies also showed strong growth during the quarter, with $35 million invested in 9 companies, compared to $15 million invested in 7 transactions during Q1 2006.
Investment by Fund Type
Investment by retail venture capital funds (LSVCCs) also grew during the quarter, with $100 million invested, up 27% from the $79 million invested in Q1 2006. A total of 52% of this LSVCC capital was invested in Québec. Venture capital invested by Canadian private independent funds also grew during the quarter, with a total of $93 million invested, up 34% from the $69 million level recorded in Q1 2006.
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.
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