Canada has healthy VC environment but could be better

Venture capital funding is healthy in Canada, although it could use a dose of vitamin "cash." This was the overall consensus among a group of investors Tech Media Reports spoke with on the heels of the Canadian Innovation Exchange's (CIX) pitch fest in Toronto two weeks ago. VC investments in Canadian companies decreased from $504 million in Q4 2006 to $500 million in Q4 2007, according to recent figures from Thompson Financial. The size of average investments grew from $3 million per company to $3.9 million and that means fewer Canadian firms are getting VC cash infusions. This trend doesn't appear to be deterring venture capitalists as they remain bullish. "I think the VC market is robust and will continue to be so for many years to come," says Joe Catalfamo, managing director, Summerhill Venture Partners. "There's a lot of innovation coming along and a lot of sectors poised for growth." This message is consistent with the results from Thompson Financial in its report on the state of Canada's VC industry in 2007. The report notes that certain markets and geographic regions are, however, benefiting more than others. VC investments topped $2 billion in 2007. Ontario drew $937 million, helping it climb to 6th, from 10th place in North American VC disbursements. Quebec climbed from 11th to 10th with $648 million. Even with a downward trend in venture financing new firms are emerging to provide much needed funding. Bernie Li, a principal with iNovia Capital in Montreal, points to his company as well as others such as Brightspark and JL Albright, which recently started operations in Montreal, Proquest in New Jersey and Garage Canada. "In different provinces there's a different set of dynamics and different set of players, but I think overall the sector is looking good," he says. Cities such as Ottawa, are enjoying a particularly balmy investment climate. In the first quarter of 2008, the Ottawa Centre for Research and Innovation reports area businesses attracted $42.8 million in investments, up from a 10-year low of $8 million in Q4 2006. Increased foreign investment may have contributed to these gains; Thompson reports an increase of more than $300 million in foreign dollars between 2006 and 2007. Andreas Stavropoulos, managing director, Draper Fisher Jurvetson, highlighted the importance of attracting funds beyond one's borders in a presentation at the CIX conference. "Venture and private equity in general has globalized. It's not will globalize, it has globalized. Globalization is very important," he said. "We were the largest investors in Skype. Skype was a company that was born in Europe in a couple different places ... but the idea was one that had global implications and changed the world in its own small way. These kinds of ideas can happen anywhere." British Columbia, which dropped from 18th to 19th place in Thompson's report, is hoping to bolster investments and interest in its industries with increased government support. Last month the provincial government announced a $90 million venture capital fund to boost investment in the clean technology, information technology, new media and life sciences sectors; sectors that are already top-of-mind for would-be investors. In our conversations with VCs, clean technology was a recurring theme in terms of upcoming trends. Clean technology attracted over $80 million in investments during Q4 2007, versus $10 million during the same period last year. For the full year, clean technology attracted approximately $160 million, according to Thompson. With VC money decreasing slight, it's no surprise there are winners and losers, and while green companies took in more green, IT operations lost ground. Investment in IT companies was down nearly $50 million in the final quarter of 2007 compared to the same period in 2006. "I've been in the industry for while and I've seen some better times," says Skypoint Capital's Larry Perron. "We're seeing much smaller play as a result of the lack of capital that's available. It's heavily geared towards software, because that requires far less capital." In addition to green being a winner, companies that address bandwidth and networking needs are also gaining attention. According to Perron, broadband wireless technologies such as WiMAX and wireless traffic backhaul are two key areas to watch. "What we have to do is find companies that are trying to address small niches in there, because capital requirements are just not available in Canada to try and address the bigger picture," Perron says of WiMAX. "The bandwidth requirements for backhauling a lot of the web traffic on wireless networks remain insufficient and there may be some need to optimize that capability." AT&T and Verizon have spent over $70 million over the past two years to expand capacity and fortify their networks with optical technology. According to estimates by the Internet Innovation Alliance, by 2010 the average household will be using 1.1 Terabytes of bandwidth a month. The proliferation of online videos, and its emergence in the mobile space, is contributing to this bandwidth crunch. "Mobile videos and videos in general are strong areas of interest. You increase capacity, enable people, and they'll use it. Everybody's got a cell phone and a laptop, the faster the networks are, the more they're going to want to do things," Summerhill's Catalfamo says. "Companies that can address these needs will be sought after." "A lot of the infrastructure for delivering mobile content is still very nascent," he adds. "Mobile data is going to be a major area for growth and it's going to touch on a lot of things." Li from iNovia agrees, pointing to Streametrics Corp., a Montreal start-up that measures online video traffic and was chosen as one of Canada's top 20 most innovative companies by the CIX. "Just as an overriding trend, I think there's a lot of traffic that's evolving from being text based into video. One of the challenges for the web is getting accurate measurements on viewers. Someone that has a solution that might be innovative in that area and that becomes a standard measurement tool, could have a good chance of success." But to be successful, start-ups have to get off the ground. "The market has a noticeable absence of early-stage investors," Perron says. "Investors in our funds are redirecting their allocation into different asset classes. It's becoming a little more challenging to generate investments in earlier stages." In Ottawa, for example, none of the $42,8 million generated in VC funds went to new start-ups. Robert Koturbash of Maple Leaf Angels is optimistic. "To their credit, the venture firms are working very closely with us to make sure that the early stage companies that we provide financing for have a good chance of receiving further financing," he says. "I certainly think that if you have a strong management team and a good idea, you'll be able to find funding in Canada."

Canada has healthy VC environment but could be better

News | 05/12/2008 1:14 pm EDT

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