Venture capital investments in Canadian technology companies dropped off in the third quarter as venture firms grew more cautious, committing larger amounts to fewer, more established companies.
According to a report by Canada's Venture Capital & Private Equity Association and research partner Thomson Financial, investment fell 32 per cent to $331-million from $489-million in the second quarter of this year. It was, however, 13 per cent higher than the $292-million invested in the third quarter of 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,” said Rick Nathan, the president of CVCA.
Mr. Nathan said that Canadian venture firms are focusing their attention and scare capital more tightly on fewer investments, assigning smaller amounts of money to fewer companies.
”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,” he said.
The report showed that 122 Canadian companies got money from venture capital firms in the third quarter, a 27 per cent drop from the third quarter of last year. More than 85 per cent of all the capital built on investment in existing portfolios, and two thirds of all investment was classified as ”later stage.”
The average size of Canadian venture investment rose, but remains below comparable levels in the much-larger United States venture market.
Since the start of the year, the average Canadian venture financing reached $3.8-million, a rise of 31 per cent over the average of $2.9 million during the same 2005 period. However, the average venture investment in the U.S. market during that time frame was $9.6-million.
In the third quarter alone, a total of $6.2-billion (U.S.) was invested in the U.S. venture capital market, roughly 20 times the amount invested in Canadian firms.
The report noted that the ratio has narrowed in the last few quarters, which suggests Canadian investors are trying to put their portfolio companies in a more competitive financing position relative to their peers in the U.S.
Investors who were not Canadian investors accounted for $90-million (Canadian) invested in the third quarter, up 67 per cent from a year ago. In the first nine months of 2006, non-Canadian investors have made up more than 33 per cent of all venture capital activity in the Canadian market, compared with a traditional level of around 25 per cent.
”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,” the report said.
On a year-to-date basis, venture capital investment in Canada fell 8 per cent to $1.19-billion from the first nine months of 2005. In the U.S., investment rose 13 per cent to $19.1-billion during that same time period.
On a regional basis, Ontario accounted for 46 per cent of all reported Canadian investment in the third quarter. The province's tally was $153-million in 39 companies, a 26 per cent drop from the second quarter.
Information technology received the lion's share of Canadian venture capital money, with 59 per cent of all investing - around $195-million - going to that sector.
© The Globe and Mail
