Venture capitalists express confidence in IT spending

A Deloitte & Touche survey of Canadian venture capitalists sees increased IT spending as a key component of strong economic performance.

Released Tuesday, the Canadian Venture Capitalist Confidence Survey for Q4, 2002 shows VCs expect an improvement in the economic climate over the next

six months. The quarterly survey is carried out by Deloitte & Touche Corporate Finance Canada Inc. and the CVCA.

The survey shows that 47 per cent of the 800 professionals form venture capital and private equity firms across Canada believe the overall economic climate will improve, a significant jump from only 29 per cent who felt the same in Q3. The respondents named an increase in IT spending as the most important factor in that improvement.

The fact that 51 per cent of those surveyed said increased IT spending was more critical to a healthier economic performance than the recovery of the public market does not mean that they’re convinced spending will actually increase, says Deloitte & Touche partner Michael Badham.

“”I think they’re saying that’s an important factor for us and we’re waiting for it,”” Badham says. “”To me it means that we need a burning platform, a compelling reason to go out and upgrade our IT systems.””

IDC Canada Products and Service Research Group vice-president President Vito Mabrucco, says his firm’s data shows IT spending should remain fairly flat all year.

While analysts are optimistic about the IT sector, Mabrucco says, they’re holding on to a good dose of caution. He argues that while overall the Canadian economy is actually fairly healthy, but it’s being driven by consumer consumption and not business investment so critical to IT spending levels. Everyone is still waiting to see if profit levels increase and consumer demand holds at its current high before they start spending.

“”There are some early indicators coming in that show quarter over quarter… profit levels are up. But the thing is, they’re up over one of the worst quarters in history, which is the quarter that followed September 11th,”” Mabrucco says. “”So, they’re kind of meeting expectations, which is interesting, but it’s not enough to convince investors that they should go back on the business investment binge.””

What the increase in VC confidence proves though, he says, is that the IT industry has seen the depth of the downturn and is now on the way back.

“”Venture capitalists tend to want to be ahead of the curve,”” he says. “”What we’re seeing is that the VCs are saying: now’s the time to start reconsidering where to invest. Because as the market starts to pick up again they want to be invested in the companies that are going to take advantage of it.””

And when the market does turn around, Badham says, it’s going to be greeted by a more mature group of Canadian VCs with more money to invest than before.

Investment has picked up again after a very quiet 12 months, says University of Toronto’s Exceler@tor technology incubator managing director Andrew Maxwell. Both seed and second stage investments have picked up again and are coming from both new players as well as VC companies looking to invest more than in previous years.

“”In addition there are companies who have been sitting on the sidelines for the last 12 months, sort of nervous and not knowing what to do,”” Maxwell says. “”They are now saying: we’re paid to manage money and invest it. If we keep it sitting in the bank it’s not going to do anyone any good.””

There is still a wait and see attitude noticeable, he says, but funds are coming back into the market.

Confidence could drop drastically, Mabrucco says, if the U.S. decides to go to war with Iraq. The possibility of war is already influencing enterprises in their spending decisions.

“”And why would I invest?”” he said. “”If war comes along consumer sentiment will drop like a stone and therefore I’m not going to invest.””

Not surprisingly, war is preoccupying the U.S. business community, as Badham found when Deloitte & Touche conducted the same survey in Silicon Valley. In part because of the threat of war, he explains, U.S. VCs are uncharacteristically less optimistic about the economy than Canadians.

“”Normally you associate irrational exuberance with the Americans, almost arrogance. And the people I talked to in LA were really hanging their heads low,”” he says. “” The Americans, as a group, I’ve never seen them so pessimistic.””


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Jim Love, Chief Content Officer, IT World Canada

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