Entrepreneurs hoping Canada will continue bucking the plunge in venture capital investment in the U.S. got bad but not unexpected news Tuesday.

According to Macdonald & Associates, VC funding in the third quarter dropped to $1.38 billion, down 73 per cent from the same period last year. It was the first drop after two quarters of increases, but not unexpected considering the fall of financial markets.

It brought the total venture funding this year to $3.8 billion, down 15 per cent from $4.4 billion first nine months in 2000.

However, the Canadian Venture Capital Association was quick to point out that VC funding in the U.S. has dropped 63 per cent.

There’s also another bright spot: U.S. venture capital funding here is increasing. Americans contributed $432 million of the $1.38 billion. Thirty per cent of the VC investments here are coming from outside the country, mainly from the U.S., up from 25 per cent last year.

“That suggests Canada is very well regarded by the foreign investment community,” said John Eckert, the association’s president and managing partner of McLean Watson Capital.

He isn’t worried that there’s a slackening of investing from Canadian sources. VCs here are cautious, but there’s lots of money available, he said. Deals are taking longer to complete and at lower valuations, he added.

He also noted that the companies Americans are investing in were first backed by Canadians, who then introduced these firms to U.S. money.

The third quarter numbers here were boosted by three big deals in September. In the biggest, software developer DWL Inc. of Toronto said it had raised $31 million (US) in third round funding lead by Insight Venture Partners of New York.

Also in September, YottaYotta Inc. of Edmonton, a storage specialist, said it had completed a $26 million (US) third round, mainly from American investors. Meanwhile Edgeflow Inc. of Ottawa, metro optical networking manufacturer, secured $24 million (US) in first round financing, again lead by American VCs.

The figures also showed continuing troubling news for startups. While 58 per cent of investments went into early stage deals, much of it was devoted to portfolio companies already supported by a VC. Sixty-four per cent of the money went to follow-on deals, up from 60 per cent last year.

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