Venture capital industry slides again

(February 17, 2004) Venture capital (VC) activity continued to decline in 2003, with both the total value of disbursements and the number of deals sagging, according to a report from the Canadian Venture Capital Association (CVCA).

“Reduced capital raised by funds, together with uncertain market outlooks for portfolio companies, has made venture investors cautious,” says Dr. Robin Louis, president of both the CVCA and Ventures West Management. “Also, some investors have noted a lack of attractive investment opportunities.”

VC financing has been in decline since 2000, when 1,006 companies shared in disbursements of almost $5.9 billion. Most of that investment was in the IT sector, and when the tech bubble burst, financings dropped as well.

The VC industry had trouble attracting capital in 2003, raising $2 billion, down from $3.2 billion in 2002. While inflows waned, liquidity also declined, with uncommitted capital dropping to $6.2 billion from $8.3 billion.

The total value of disbursements sank to $1.5 billion from $2.5 billion in 2002, a drop of about 40%. The drop in the number of deals made was less precipitous, falling from 681 to 616, or about 9.5%.

With this disparity in declines, deal size dropped dramatically. The number of “mega-deals” — those worth more than $10 million — dropped to 43 from 71 in 2002. The total value of the top 10 deals was less than half that of the top 10 in 2002.

“It’s easy to look at these numbers and be pessimistic,” says Louis. “But the anecdotal evidence clearly shows a fair amount of optimism in the Canadian industry today. I think it’s safe to say that activity in the industry is going to go up in the next few quarters.”

He says there is light at the end of the tunnel, as the U.S. VC market is starting to flatten out, rather than continue to decline. The Canadian VC industry tends to lag that of the U.S., so he suspects 2004 will see a turnaround.

“We are cautiously optimistic as investment activity has started to pick up and several types of technology markets are seeing marked improvement,” Louis says. “Recent public market interest in technology company initial public offerings is particularly heartening.”

Life sciences firms received the most of any single sector in the venture capital markets, passing the IT sector for the first time.

Other shifts in the industry include the source of funding, with labour-sponsored venture capital companies (LSVCCs) now making up the largest group of investors, as funding from other groups has contracted — most notably foreign investors.

Funding is more heavily concentrated on follow-on financing, as venture capitalists invest in companies to which they are already committed, keeping them afloat rather than adding new companies and risk to their portfolios.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com