Green tech sector siphons VC money away from IT startups

Canada’s venture capitalists are going green, but putting less green – as in cash – into IT startups at the same time.

Second quarterVC investment in Canadian IT startups totalled $136 million, down sevenper cent from Q2 last year, according to the Canadian Venture Capital and Private Equity Association(CVCA). The trend was even more striking in Quebec specifically, wherethe $23 million disbursed overall to emerging IT firms represented a 27percent drop year over year, according to Reseau Capital, Quebec’s VC association.

Greenstartups engaged in “clean” technologies, however, got a 17 per centjump in VC dollars to $66 million on a national basis during Q2, CVCAreports, while VC investment in Quebec’s green tech sector enjoyed atenfold increase to total $31 million during the same period, accordingto Reseau Capital.

The Canadian growth spurt in green tech funding is part of a global phenomenon.

“We’reseeing the trend in the States and it’s happening everywhere. In Quebecit’s helped by the presence of (VC) funds that are dedicated to theclean technology sector itself, and that always helps a sector,” saysGenevieve Morin, co-president of Reseau Capital.

It might alsobe a case of Canada’s clean technology sector finally playing catch-upwith the rest of the world. A 2010 Conference Board of Canada studyfound that while world trade in climate-friendly technologies grew 10per cent between 2002 and 2008, Canadian exports in that categoryflat-lined with no annual growth at all. Canada’s relatively late startout of the green technology gates means it’s finally starting toattract bigger VC deals now, says CVCA president Gregory Smith.
“So just the normal life cycle stage of the (green tech) companies is starting to mature,” says Smith.

Though the latest VC figures are cause for Canada’s clean tech startups to celebrate, the numbers also seem to verify complaints that VC funding is lacking in the Canadian IT industry, particularly for early stage Internet companies.

Just weeks ago two Canadian Internet startups – Toronto’s Sprouter, a Q&A site featuring advice from business experts, and Montreal-based good deeds gaming site Akoha – announced plans to shut down partly due to lack of capital. And in the run-up to next week’s 2011 GROW Conference in Vancouver, organizer Debbie Landa recently told shecreated the event to showcase Canuck tech startups because “the ratioof investors to companies in Canada is pretty out of whack… I realizedthere’s really no early stage funding up there.”

Dot-com bubble hangover?
Could the fall in IT startup money signal a collective hangover among VCs, still waryof doing big deals since the dot-com bubble burst a decade ago? Morindoesn’t think so.

“IT is still regularly the (biggest) sectorin VC in Quebec. So it still is a very strong sector,” Morin says. Shesays today’s IT startups simply require less money to get off theground than those asking for funding years ago.

“IT used to be dominated by hardware businesses. When you’re developing that andtrying to sell it, it takes a lot of money. Now you’re seeing softwareand Web 2.0 businesses which can be (started) in a basement with$20,000 somewhere,” Morin notes.

Smith points out that while funding to IT startups was down overall, the financing trend withinthat sector isn’t all bad news: although dollar flows dropped 20per cent for software startups, they more than doubled forInternet-related firms.

“(But) Canada isn’t punching at itsweight class when it comes to VC,” Smith adds. “In the IT sector it’sbecoming more difficult to keep IT startups in Canada.”

Thepush to keep upstart IT companies from fleeing Canada for the U.S. hasled to the creation of several tech incubators and accelerators northof the border. Incubators like Ryerson University’s Media Zone provide emerging tech firms with office space, resources andmentorship, but no actual money, while accelerators such as Toronto’s Extreme Venture Partners typically contribute cash as well as work space and experienced business mentors.

Christine WongChristine Wong is a Staff Writer at Follow her on Twitter, and join in the conversation on the IT Business Facebook Page.

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