Venture capitalists in Canada expect their industry to contract further while those in emerging markets, including China, India and Brazil, expect to see theirs expand over the next five years, according to a survey by Deloitte, Canada’s Venture Capital & Private Equity Association and several other industry associations.
According to the survey results, two thirds (66 per cent) of Canadian survey respondents expect the number of venture firms to decrease between now and 2015, while a great majority of venture capitalists in China, India and Brazil anticipate adding more venture firms in their country during the same time frame.
Venture capitalists in the US and the European continent also expect an industry tightening in their respective countries, but the Canadian industry is much more vulnerable to such a trend given its much smaller size.
The outlook for the dollar amount of venture capital available for investment in the next five years followed similar trends, with half of Canadian respondents seeing a decline or no change. In fact, 11 per cent of respondents predict a decline of more than 30 per cent, the second worst outlook of any country surveyed. Comparatively, respondents in Brazil, China and India see healthy increases.
The institutional source of funds is also expected to be weak by Canadian VCs: only 25 per cent of Canadian respondents believe limited partners are likely to invest in the country’s venture capital funds in the next five years, compared to 92 per cent for Brazil, 91 per cent for China and 76 per cent for India.
The 2010 Global Venture Capital survey, which measured the opinions of more than 500 venture capitalists worldwide, also examined the factors contributing to each country’s outlook and identified sectors of future growth.
As opposed to past years, and following recent Deloitte-led changes to Section 116, Canadian respondents did not say that tax policy or regulations were creating an unfavourable climate for venture capital. Only 28 per cent cited tax rules as a major barrier. And they are positive on government support of R&D, with 67 per cent naming it as a favourable factor, second only to Israel.
Despite those advantages, when asked about the dangers of a lack of an established VC industry, Canadian VCs were by far the most critical in the world, with 61 per cent suggesting the lack of critical mass is creating a poor climate for investment and innovation. In contrast, VCs in other developed nations saw this as a non-factor, with only seven per cent on average mentioning it.
"Clearly, Canadian venture capital firms are up against serious competition from emerging markets, as are their counterparts in the US and Europe. But with the small size of the Canadian industry, the impact of this decline is even more devastating for Canada," says John Ruffolo, national leader, technology, media and telecommunications industry group, Deloitte.
Despite numerous challenges, survey respondents across the globe show interest in new investment opportunities on the horizon. In looking ahead, respondents singled out clean technologies, healthcare services and new media/social networking as areas of great interest over the next five years.
"With characteristic optimism, venture capitalists are already looking ahead to new growth industries and opportunities. In order for Canada to participate fully in this new economy, we need to have a larger and better-financed VC community to help incubate and grow these industries of Canada’s future," says Ruffolo.
