Canadian venture capital firms continue to stick close to home, with 58% of Canadian respondents to Deloitte’s 2006 Global Venture Capital Survey citing they have no plans to expand investments outside the country over the next five years, compared to 47% of U.S.-based VCs and 44% of investors overall globally.
“Adequate deal flow in existing markets” was cited by Canadian firms as the primary reason for not pursuing global investments (33%), followed by “contractual” and “legal restrictions” (22% each).
The Canadian component of the global survey conducted jointly by Deloitte and the CVCA – Canada’s Venture Capital & Private Equity Association, measured attitudes, intentions and investment focus of more than 500 venture capitalists worldwide.
“Canadian VCs appear to take a more focused approach to investment compared to their global peers. The combination of a Canadian focus and the strong rally of the local economy over the past few years has fuelled the VCs’ domestic focus, Canadian VCs and private equity groups have chosen to focus on North America and have not developed their expertise in emerging markets,” said Mike Badham, partner, Deloitte. “As the VC industry around the world continues to move towards global investing networks, Canadian VCs should start re-evaluating their strategies to capitalize on international opportunities. As Canadian technology and manufacturing companies become more global, they will look to their VC and private equity sponsor to become more global as well.”
On the other end of the spectrum, of those Canadian VCs who do plan to expand investments beyond the border, the United States (27%) followed by China (23%) and the U.K. (20%), were cited as the top three investment destinations. “Higher quality of deal flow” and “access to quality entrepreneurs” were quoted by two-thirds (67% each) of respondents as the primary reasons for investing in the United States. For Canadian VCs pursuing investments in China, “emergence of entrepreneurial environment in non-traditional locations” (100%), “access to foreign markets” (50%) and “higher quality of deal flow” (33%) were cited as the key investment drivers.
“The U.S. is considered a lucrative investment market for Canadian VCs, not only because of its close trade relationship and geographic proximity, but also because of its global leadership in key technology sectors,” said Rick Nathan, president of the CVCA and partner at Kensington Capital Partners.
Currently, nearly half (48%) of Canadian respondents invest in Canadian companies with key operations outside the country. In particular, the U.S. houses key operations of their portfolio companies including R&D (53%), engineering (44%) and manufacturing (42%) operations. Following the U.S., are India (18% R&D, 25% manufacturing) and China (22% engineering).
The 2006 Global Venture Capital Survey was conducted jointly in Canada by Deloitte & Touche LLP and the CVCA. The global survey was administered to venture capitalists in the Americas, Europe and the Middle East and Asia Pacific. Deloitte received 505 responses from general partners with assets under management ranging from less than US$100 million to greater than US$1 billion. The survey was conducted between April and May 2006.