Fewer venture capitalists are investing in Canadian companies this year compared with 2005, according to second-quarter results. Canada’s Venture Capital and Private Equity Association said quarterly investment in the venture capital market was $496 million.

Although it was an improvement on first-quarter investment of $371 million, the figures represent a 25% decline compared with the same period last year.

Investors appear to be focusing their financial resources more tightly.While the number of companies receiving venture capital declined, the average investment jumped to $3.8 million, the highest average investment in the past five years.

“The tighter focus by Canadian venture capital investors in Q2 is a very positive sign,” noted Rick Nathan, president of the CVCA and managing director of Kensington Capital Partners, “Canadian companies must be sufficiently funded to successfully challenge their U.S. based competitors, who frequently have access to much higher levels of investment capital.”

Through the first half of 2006, foreign investors accounted for 36% of the venture capital market in Canada, a significant increase from the traditional level of 25%.

“Canada is becoming increasingly reliant on foreign investment for the financing of our most innovative new companies, as we see the proportionate share of Canadian venture capital investment taken up by foreign funds to be rising substantially,” Nathan added, “This reflects a shortage of risk capital available from Canadian domestic sources relative to the quality of available opportunities.”