Canada venture capital investment subdued in third quarter

Activity in Canada's venture capital market continued at the slower pace in quarter three 2008 that has been apparent since the first half of the year, according to a report by Canada's Venture Capital & Private Equity Association and research partner Thomson Reuters.

Nationally, a total of CAD372m was invested between July and September, lagging by 26 per cent the CAD501m invested at the same time in 2007.

The number of Canadian-based firms securing venture capital was also reduced on a year-over-year basis.

The number of companies financed totaled 123 during the third quarter, or 12 per cent fewer than the 140 companies financed one year ago.

Year-to-date numbers confirm the extent of the market downturn currently taking place in Canada.

As at 30 September just over CAD1bn has been deployed to 296 companies, which is 33 per cent below the CAD1.5bn that went to 336 companies during the same nine-month period in 2007.

However, venture capital activity in quarter three 2008 actually improved on results recorded in the year's two prior quarters.

Disbursement streams were up 22 per cent from the CAD304m invested in the second quarter of 2008, and up six per cent from the CAD352m invested in the first quarter.

The data also show that venture capital-backed companies are receiving smaller cash infusions.

The average amount invested per firm was CAD3.5m in the first nine months of 2008 compared with an average of CAD4.6m the year before.

Consequently, firms in Canada are now obtaining less than 40 per cent of the venture capital amounts going to firms in the US, which averaged CAD9m per firm in 2008.

Gregory Smith, president of the CVCA and president of Macquarie Capital Funds Canada (photo), says: 'These investment numbers, which ultimately reflect the availability of capital in the venture capital industry, are worrisome in that they further confirm Canada's ongoing weakness in driving innovation. The CVCA has developed a four-point commercialization support program to help address these venture capital industry trends and to increase the availability of venture capital for high-growth small businesses.'

The association has called for the government of Canada to establish a fund of funds structure make improvements to the SR&ED tax credit program, improve the incentives for corporations to invest in venture capital funds and actively promote investment in Canadian venture capital funds as part of the offset agreements that are negotiated with major government contractors.