First round VC funding on the rise: CVCA

TORONTO — Canadian venture capital investment dropped significantly last year, but first round financing is increasing, according to a survey released Monday.

The survey of 150 venture capitalists conducted by the Canadian Venture Capital Association

(CVCA) and Macdonald & Associates Ltd. revealed that overall spending fell from $6.6 billion in 2000 to $4.8 billion in 2001, but the market is still healthy, said CVCA president John Eckert.

Canada did experience a correction from the speculative frenzy of 2000, but VC spending is well above 1998 levels of $1.75 billion. “”If you want to draw a trend line, it’s still very dramatic growth,”” said Eckert. Moreover, he added, the Canadian market correction is nothing compared to the U.S. where VC spending dropped precipitously from $160 billion to less than $60 billion last year.

The correction marks a return to traditional decision-making among Canadian VCs. Canada, which has a mature and diversified market, has fared much better than American investment, which was driven by dot-com speculation, said Eckert.

While the overall pool of VC money in Canada has dropped, investors are paying more attention to start-up companies in the high-tech sector. The report notes that 60 per cent of capital invested ($2.9 billion) is going to these firms, up from 46 per cent in 2000.

That isn’t to say first round financing is easy to come by, stressed Eckert. “”There will always be people telling us we’re not directing enough capital to early stage (financing). But you know what? A lot of them don’t deserve it.”” He said that only about 10 per cent of companies looking for financing will find a VC backer.

Joshua Druckman, owner of Toronto-based NorthLogic New Media Consulting, said he attended some VC conferences last year but hasn’t seriously approached a backer yet. “”I believe there’s always funding out there for the right idea,”” he said. “”For our chances? Well, we’re still defining our product so I couldn’t even predict that yet. It really depends on the timing and the product.””

According to Druckman, it was much easier to secure $10 million or more in financing than have a VC commit to 10 per cent of that. “”I think investors are interested in the bigger pay-off and it’s probably too much work to manage smaller amounts of money.””

Cambridge, Ont.-based Web design firm Digital Wizard has attempted to grow gradually rather than in leaps and bounds through venture capital. “”We’re hearing from everyone that the market was not a very warm one to financing,”” said Digital Wizard president Diane Williams. “”We thought we’d better just focus on delivering the business that we already have and growing through our own earnings.””

Finding a VC to provide financial backing is a full-time job in itself, she said. To grow its client base, the company merged with Internet marketing firm Two Shoes Communications in Dec. 2001 and is now known as Xynapse Inc. “”Probably the people who are making investments are in a better position to select the best fit for them and for their money,”” she said.

The largest amount of financing is going to Ontario-based companies (42 per cent), according to Mary Macdonald, president of Macdonald & Associates. That has remained relatively stable over 2000 rates (44 per cent). Ottawa is by far the most attractive Canadian city for VCs, accounting for 24 per cent of the national total. Second is the Greater Toronto Area with 13 per cent.

Eckert said he was surprised by the lack of VC growth in Ontario’s Kitchener/Waterloo region, which accounts for only one per cent of overall financing. That may change in the coming years, however. Ottawa was in a similar situation five years ago, said Macdonald, but has since become Canada’s largest IT cluster. “”History is starting to give us some sense of where we’ll be heading down the road,”” she said.

Entrepreneurs like Terry Matthews have driven VC interest in the Ottawa area, said Eckert. Matthews has been associated with a number of Ottawa companies including March Networks, Mitel Networks and Newbridge. The fortunes made by K/W companies like Research in Motion and OpenText haven’t yet been recycled into the market, he added.

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