Canadian venture capitalists are optimistic about their industry, with 56% expecting it to improve over the next six months and 59% predicting current investment levels to increase by the fourth quarter or later.

In joint study released Thursday by Deloitte & Touche and the Canadian Venture Capital Association, 90% of respondents expect exit valuations to improve or remain the same, showing continued incline in expectations compared with previous surveys.

The vast majority of venture capitalists (95%) see M&A transactions as the only viable exit alternative, with only 2% of respondents expecting to exit investment through initial public offerings, down from 5% last quarter. This clearly indicates the window for IPOs will remain firmly shut in the near future.

For the first time since 2000, venture capitalists are shifting their attention to new deals and raising new funds. Forty-five percent of respondents expect to spend more time cultivating new deals, and 16% plan on raising new funds, compared to 10% in the first quarter of 2002, suggesting most feel their portfolios are in reasonable condition and capital markets are more conducive to fund-raising activity.

Interestingly though, venture capitalists claim that relative to 2001, deals are taking longer to close, and more than half (55%) expect the time frame will be even further extended in 2002. This can be explained by a greater emphasis on due diligence and syndication of deals that is becoming the norm.

“A shift in focus to new deals, raising new funds, and evidence of some competition for deal flow, are encouraging signs for companies seeking investment capital”, says Michael Badham, Deloitte & Touche. “The confidence of Canadian venture capitalists is consistent with that of their Silicon Valley counterparts as many North American venture capitalists, private and public companies are beginning to emerge from survival mode and embark on the next phase of growth”.

Biotechnology remains the most attractive sector for the third consecutive quarter, with more than two-thirds of respondents intending to increase or maintain the same volume of investments in this field. Medical/Healthcare (44%), Manufacturing (48%) and Computer Software (38%) are also areas poised prosper according to the survey, with repsondents planning to increase volume of investments in them over the next two quarters. Communications remains the least attractive area with 70% of respondents planning to decrease or maintain momentum in the sector for the remainder of the year.

The quarterly Canadian Venture Capital Confidence Survey was conducted between May 9 and May 23, and surveyed over 800 members of the CVCA and Quebec Venture Capital Association.