Deal activity in the Canadian venture capital market continued to slow in 2009, to reach its lowest level since the mid 1990s, according to the industry’s statistical report released today by CVCA – Canada’s Venture Capital & Private Equity Association and research partner Thomson Reuters.

A total of $1.0 billion was invested across the country, a 27% drop from the $1.4 billion invested in 2008.

The number of VC-backed entrepreneurial firms in Canada also dropped in 2009, though not to the same extent as dollars invested. Companies financed totaled 331, or 15% below the 388 companies financed the year before. Amounts invested per company averaged $3.1 million last year, as compared to $3.5 million in 2008 and $5.1 million in 2007.

Consequently, Canadian-based firms secured less than 40% of the dollars secured by counterpart firms based in the United States, on average, in 2009. This is the widest the competitive gap in Canada-U.S. company financing sizes has been since 2005.

From a regional perspective, 2009 saw a significant shift of the regional ordering in favor of Quebec relative to Ontario. The Quebec VC market has benefited from concerted efforts by the provincial government, institutional investors, and an ongoing robust retail environment. This support began to manifest itself in 2009, boosting Quebec’s North American ranking to 9th place overall.

“The nation-wide statistics demonstrate the lack of capital in the venture capital industry.” says Gregory Smith,pPresident of the CVCA. “The availability of VC dollars has been eroding for years. We are failing to capitalize on the potential of our entrepreneurs and small growth companies, which have traditionally been vital drivers of jobs and prosperity for Canadians.”

Domestic VC trends

The overall decline in domestic VC activity in 2009 was partly offset by a countervailing market trend in Quebec, where disbursement levels actually grew on a year-over-year basis. A total of $431 million was invested in Quebec, up 10% from the $392 million invested in 2008, giving it a leading 43% share of the Canadian total last year.

In sharp contrast, deal activity in Ontario fell in both absolute and relative terms, with $288 million invested in 2009, or 50% below the $575 million of one year ago. As a result, Ontario accounted for only 28% of all disbursements nationwide, which is its lowest market share since the early 1990s.

The pace of British Columbia-based VC activity was also sub-par, with $141 million invested last year, down 46% from the $260 million of 2008. The province nonetheless held onto an historically above-average share of Canadian disbursements, or 14% of the total amount.

Future Steps

The CVCA has called for the development of a comprehensive innovation strategy for Canada to address the growing technology deficit. In this regard, the government should consider establishing a blue chip, limited-life panel comprised of company executives, university presidents, entrepreneurs and venture capitalists with the express mandate to devise a road map for Canada’s technology industries.

The CVCA has proposed a commercialization support program to help address these venture industry trends and to increase the availability of venture capital for high-growth small businesses.

“As a country we are dropping the innovation ball. Our considerable investments in R&D .are not being matched by effective commercialization. Entrepreneurs spend a disproportionate time and effort on securing financing to finance their companies’ growth. Foreign investors run into needless obstacles at the Canadian border,” says Smith.

“And, venture capital fundshave have suffered from a lack of portfolio exit opportunities. With the partial exception of encouraging developments in Quebec, we are falling behind in the race to create the sustainable jobs we need in the high value added, high export and high growth industries which are increasingly the focus of the U.S., India, China and Israel. The time to act is now,” Smith concludes.

IE