Back in the heady dot-com days, venture capital was the Holy Grail for emerging companies. Those heady days aren’t here again, but there remains plenty of cause for optimism among entrepreneurs discouraged by the dwindling venture-capital supply.
The Canadian Venture Capital Association’s annual report of vencap activity shows that VCs invested $1.5 billion in Canadian firms in 2003, a 41% decrease from the $2.5 billion invested the year before. At the same time, the number of investments dropped from 681 to 616. Do the math, and the amount invested per company plummeted, from $3.7 million in 2002 to $2.4 million last year.
“People were being pretty careful last year,” explains Robin Louis, president of the CVCA. Louis cites fewer attractive investment opportunities as one reason for the decline. He also explains that foreign venture-capital investment, which contributed about 40% of the total in previous years, dropped by half. VCs also shied away from big deals: year over year, the combined value of the ten largest investments fell by more than 50%, to $210 million.
However, Louis believes VCs will spend more in 2004. Recent interest in initial public offerings by technology companies could convince investors to loosen their purse strings. There’s even better news for the leaders of seed and early-stage companies, if the following trend continues: last year, emerging firms attracted 51% of all disbursements, up from 44% in 2002. (Another 45% of spending went to expansion-ready enterprises.) Finally, at year’s end VCs were sitting on $6.2 billion in uncommitted capital. That’s down from $8.3 billion at the close of 2002, but enough to boost thousands of companies.
What can entrepreneurs do to get their share? Louis says it’s back to basics. Specifically, entrepreneurs should have a well thought-out idea, customer validation of their product and an established revenue stream before beating the vencap path. He also advises targeting a market that’s big enough to accommodate exponential growth.
And, as always, management quality is critical. “This has always been a business that’s about people,” says Louis. “The more credibility that your team has, the more experience, the more commitment, the more you get people’s attention.”