Venture capital activity put in one of its weakest showings ever in the third quarter, according to a new report from Canada’s Venture Capital & Private Equity Association and its research partner, Thomson Reuters.

The CVCA reported that just $191 million was invested in the quarter, down 51% from $388 million invested during the same period in 2008. For the first nine months of the year, $682 million has been invested, down 36% from the same period in 2008. The CVCA said this suggests that, for the full year, investments might well slip below the $1 billion dollar mark for the first time since 1995.

“Canada’s venture capital industry is facing severe challenges,” said Gregory Smith, president of the CVCA. “We must work to improve the ecosystem and funding levels for entrepreneurs and small businesses.””

The trend was felt in most regions, the CVCA said, with Ontario hit particularly hard as disbursements there saw a year-over-year drop of 87%. Additionally, it said that $38 million was invested in non-resident companies in Q3, down from $151 million a year ago.

The CVCA also reported that the average investment per firm was $2 million, down from $3.2 million last year, adding that firms in the U.S. continue to receive three times the level of venture capital support than their Canadian counterparts.

The third quarter was also the worst fund-raising quarter on record, with a total of $65 million of new supply going to fund managers, or exactly half of the $131 million committed the year before.

“Fundraising levels are a leading indicator of investment activity for the next one to three years,” noted Smith, “The current level of fundraising in 2009 predicts investment in technology, including cleantech through life sciences, will continue to erode in the years ahead unless corrective action is taken immediately.”

To address the weakness in the VC market, the CVCA has called for the federal government to develop a comprehensive innovation strategy, and it has called for a panel comprised of company executives, academics, entrepreneurs and venture capitalists to devise a road map for Canada’s technology industries.

It has also called on the federal and provincial governments to make a variety of policy moves to support the VC industry, including: establishing and growing fund of funds structures; making improvements to tax credit programs; improving the incentives for corporations to invest in venture capital funds; actively promoting investment in Canadian VC funds as part of the offset agreements that are negotiated with major government contractors ; and, improving measures taken make VC appeal to retail investors.

“Growing the supply of venture capital to support the growth of new and emerging companies will require all stakeholders to work together to build a solid foundation,” said Smith, “We need to work with governments to ensure all potential sources of venture capital dollars are available for Canadian companies, from institutional investors to retail and angel investors, from domestic investors to foreign investors.”

IE