Venture capital industry struggles in Q3

The rate of venture capital investment must rise if Canada is to compete on the global stage, according to the head of the industry association.

“The Canadian venture capital industry remains undercapitalized,” said Rick Nathan, president of Canada’s Venture Capital and Private Equity Association (CVCA) and managing director of Goodmans Venture Group.

Third quarter venture financing fell to $261 million, down 59% from the $635 million invested in the second quarter. The industry had been optimistic that 2005 would mark a turnaround in financing following Q2’s strong numbers, but year-to-date activity is now slightly below that of comparable periods in 2004.

So far this year, venture capitalists have deployed $1.23 billion, down 10% from $1.36 billion in 2004. These investments have been mostly concentrated in relatively small deals, with an average investment size of $2.3 million, on a year to date basis. In the third quarter, that average deal size slipped to just $1.6 million. In the U.S. the average deal has been valued at more than $10 million over the same period.

Compared to last year, the number of firms receiving investment has changed very little, with 551 firms receiving funding compared to 560. The third quarter was also marked by an absence of foreign investors, which tend to prefer larger financings.

“It is increasingly important for our domestic venture industry to address this chronic underfunding, if we wish to successfully finance the best emerging growth companies and entrepreneurs in Canada,” Nathan said. “This is the top priority of the CVCA, and we have a number of initiatives underway in this area.”

If the rate of investment is to increase, venture capitalists will need to raise more funds themselves, as they attracted 20% less investment capital in the third quarter, just $229 million compared to $286 million in Q3 of 2004.

Staff

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