Small Business

Venture capitalists ready to invest in 2006

Written by Jim McElgunn

It’s never easy for an entrepreneur to secure backing from a venture capitalist, but things are looking up. VC funds now have more cash to invest after raising nearly one third more capital in 2005 than the year before.

A new survey of Canadian VC funds reveals they raised $2.21 billion in new capital last year. The report, from Canada’s Venture Capital & Private Equity Association and its research partner, Thomson Macdonald, shows this was 32% higher than the $1.67 billion raised in 2004. That marked the first time since 2002 the total has topped $2 billion.

Despite the increase in funds raised, VC disbursements (the total amount invested) were virtually flat in 2005: $1.83 billion, versus $1.84 billion in 2004. It’s normal to see a lag between higher fundraising and subsequent growth in investments, because VCs undertake a long review before they green-light a deal, says CVCA president Rick Nathan. Barring unforeseen developments, he says, last year’s big jump in fundraising should lead to a significant increase in disbursements in 2006.

“The level of market activity is becoming reasonable,” says Nathan, managing director of Goodmans Venture Group, a Toronto-based law firm and business consultancy. “There’s a good flow of deals and activity, though it could always be better. If you have a good company and want it funded, you can do that.”

Quebec is Canada’s vencap hot spot, with a 39% share of investments in 2005. That almost equaled Ontario’s 41% share, even though the latter has far more people (12.6 million versus 7.6 million). The 41-39 Ontario-Quebec split compares with 45-35 in 2004.

The study didn’t analyze why investment is far greater per capita in Quebec. But Nathan said the province’s incentive programs seem to be working. As well, local institutional investors, such as large pension funds, have encouraged the VC funds they invest in to open offices in Montreal, leading to more deals there. In contrast, the Ontario government shocked the industry in September by announcing a phase-out of its 15% tax credit for labour-sponsored investment funds.

The report offered one dramatic sign that this is already having an impact. Normally, there’s a big spike in the final quarter of each year in VC investing by retail funds (those that raise money from the public) as deals are completed using money raised during the previous RRSP season. In 2004, Q4 accounted for fully 46% of total investments by retail funds in Ontario. Yet this seasonal spike, previously as reliable as clockwork, vanished in 2005, when Q4 accounted for just 27% of the year’s total. In dollar terms, retail funds in Ontario invested just $41 million in Q4 of 2005, a huge drop from $104 million in the same quarter of 2004.

Other highlights of the study:

  • The first-ever figures for VC investment by North American jurisdiction showed Canadian provinces lagging well behind many U.S. states. Ontario’s $751 million placed it seventh among states and provinces, while Quebec’s $710 million placed it ninth. Canadian-dollar data showed these provinces are only around the same level as Washington ($886 million) and Colorado ($744 million), but dwarfed by California ($12.4 billion), Massachusetts ($2.8 billion), Texas ($1.3 billion) and New York ($1.3 billion). B.C.’s $226 million ranked it 20th.
  • Canadian VCs continue to spread their money among more but smaller deals than their U.S. counterparts. Average deal size here was $2.9 million, versus $10.5 million in the U.S.
  • Information technology still rules. It accounted for 51% of disbursements, virtually unchanged from 52% in 2004. Life sciences attracted 24% of all VC dollars, versus 25% the year before.
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