Canadian tech companies are catching up to their American cousins in terms of venture capital funding, according to a study released earlier this week.

The study, released jointly by The Canadian Venture Capital Association (CVCA) and Macdonald & Associates Ltd., suggests more American VC investors are injecting money into the Canadian economy. U.S. investors spent $705 million in the first half of 2001, versus $486 million during the same period last year, an increase of 45 per cent. VC spending in Canada in the second quarter of 2001 has increased marginally overall, while disbursements south of the border have been halved compared to Q2 in 2000.

The U.S. experienced a larger economic upswing than Canada during the boom years of the late 1990s, but is now in a deeper rut as a result, said CVCA president John Eckert. “I think they’re looking to Canada because Canada has outstanding technology,” he said. “It’s still relatively attractive from a valuation standpoint. I think they see it as a more maturing market, one that has not moved as far and as quickly as some of the hot sectors in the U.S.”

High-tech is far and away the biggest sector for capital investment, according to the report, with more than 90 per cent of the total. Ontario makes up almost half of VC investment and the Ottawa Valley in particular has been a flashpoint of activity in 2001, accounting for 26 per cent of the national total. Telecommunications, semiconductors and software continue to be the biggest areas of investment, added Eckert.

But it’s not time to break out the champagne and toast a high-tech recovery just yet. The results of the study are indicative of survival rather than prosperity. “It’s not uncommon to hear of a company raising capital and virtually the same day doing some layoffs. I think what that’s all about is making sure they have enough capital to get through this,” said Mary Macdonald, president of Toronto-based Macdonald & Associates.

Funding is up, but the number of companies actually funded has shrunk, according to the study. There are fewer VC deals available to new start-ups and more of the capital is being dispersed to companies going through their second or third round of funding.

In fact, a June study from PricewaterhouseCoopers (PwC) states that the number of high-tech IPOs on Canadian exchanges has dropped from 14 in the first half of 2000 to four this year. Many companies are having to bide their time and go back for more rounds of financing before going public, Macdonald explained.

“Now is the time to invest,” opined Eckert. “VCs don’t want to invest when the markets are roaring. Now is the time to make your bets because valuations are way cheaper, which means that the amount of equity you receive when you invest is far greater, sometimes two or three times greater. That’s what it’s all about.”

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