Deal activity in the Canadian venture capital market slowed significantly in 2008, to reach its lowest level in 12 years, Canada’s Venture Capital & Private Equity Association (CVCA) said Tuesday.

Across the country, $1.3 billion was invested, a drop of 36% from the $2.1 billion invested in 2007, according to the industry’s statistical report released by CVCA and research partner Thomson Reuters.

There were also comparatively fewer Canadian companies financed in 2008, though the year-over-year decline was not as sharp as the decrease in dollars invested. A total of 371 firms secured VC financing in 2008, which was 10% fewer than the 412 firms that were financed in 2007.

Market activity was especially slow between October and December with $302 million in investments, which was down 43% from the $526 million invested in the fourth quarter of 2007.

The data for 2008 reflect an investor shift away from large transactions. Company financings averaged $3.6 million compared with an average of $5.0 million in 2007. This contributed to a widening gap in Canada-United States deal capitalizations, with Canadian companies capturing on average just 38% of the VC dollars invested in companies south of the border.

“These statistics demonstrate the declining availability of capital in the venture capital industry, which has real repercussions for Canada’s ability to drive innovation and to develop the knowledge-based economy we need to compete effectively on the global stage,” says Gregory Smith, president of the CVCA and president of Macquarie Capital Funds Canada Ltd.

The CVCA has developed a four-point commercialization support program that would help the government to effectively address the primary systemic obstacles to increasing VC investment. The recommendations include:

> improving the Scientific Research and Experimental Development (SR&ED) tax credit program;

> setting up a third-party managed fund of funds to invest in promising Canadian companies;

> enabling greater use of government procurement/offsets to encourage domestic and foreign investment; and

> creating a tax incentive for Canadian companies to invest in Canadian VC funds.

A pronounced downturn in VC market activity was visible across the United States in 2008, the report says. Like Canada, annual disbursements in the United States fell for the first time since 2003 but at a more moderate rate, with US$28.3 billion invested in 3182 companies, which was 8% less than the US$30.9 billion invested in 2007.

IE