Growing the Businesses of Tomorrow: Challenges and Prospects of Early-Stage Venture Capital Investment in Canada

II. Trends in Early-Stage Venture Capital Activity in Canada, 1996-2004

II.1 Overview of Statistical Analysis

The following is an overview of essential analytical points contained in Section II.2 Analysis of Venture Capital Statistics.

Early-stage activity in the Canadian VC industry witnessed exceptional growth in the latter half of the previous decade. During this time, activity in seed, startup and other early-stage deals gained considerable traction with respect to numbers of companies financed and capital invested, and even succeeded in outstripping aggregate market trends.

While activity in early-stage ventures began to decline with the slowing of the market in Canada, beginning in 2001, its relative share of total VC activity was largely sustained as compared to pre-2000 levels, at least on a national basis. In 2004, Canadian early-stage investment saw its first year-over-year growth in absolute terms in three years.

Other key points observed in the 1996-2004 data analysis of Macdonald & Associates include:

• Early-stage activity in Ontario has tended to follow the same pattern observed on a Canada-wide basis since 1996, but with even more intense activity taking place during the boom years.
• Canadian industry activity in seed and startup deals saw very robust growth in the years immediately preceding 2000, consuming unprecedented VC resources, in part because of increasingly large company financing sizes.
• Prior to 2000, early-stage activity represented approximately one-third of national industry disbursements per annum. In 2000 and thereafter, such activity captured closer to half of resources.
• Prior to 1999, seed transactions accounted for just over 1% of dollars invested annually in the industry in Canada, but have sustained over 2% in subsequent years. Similarly, in the lead-up to 2000, startups obtained just over 10% of industry cash, but have typically registered something closer to an 18% share on average since then.
• Once again, Ontario has followed the same pattern of seed, startup and early-stage investment, but with some weakening of relative shares of total VC activity in recent years.
• National activity in technology sectors, and particularly telecommunications and other IT sectors, as well as life sciences, have tended to drive early-stage trends, with large-sized company financings influencing disbursement streams in the peak years.
• Given the link between local innovative sector clusters and fledgling firms, the lion's share of early-stage activity has occurred in British Columbia, Ontario and Quebec, and in such key Canadian urban centres as Vancouver, the GTA, Ottawa and Montreal.
• Capital-intensive early-stage transactions in IT sectors gave Ontario an above average share of national activity in the boom years.
• Among Canadian industry players, LSVCC/retail funds and private-independent funds have generally been the most active in early-stage activity over market cycles in 1996-2004. Government funds have also assumed a central role, particularly since the market downturn got underway in 2001.
• Private-independent fund activity was integral to growth in seed investment up to 2000 and has remained key to trends, while LSVCC/retail and government funds have steadily increased their relative shares, especially after 2001.
• American VC funds and other foreign investors have brought substantial resources to early-stage investment syndicates in Canada since 1999, accounting for between one-quarter and one-third of total capital invested per annum. However, non-resident disbursements have tended to reach only 5-6% of all early-stage companies receiving VC.
• American and other foreign venture investors have proved especially influential in Ontario-based early-stage trends.
• The average amount invested per Canadian early-stage venture has typically been less than half that of comparable American firms.
• Ontario's early-stage deal capitalization has typically exceeded the national average on an annual basis, but still reflected a shortfall as compared to the United States.

II.2 Analysis of Venture Capital Statistics

Early-Stage VC Activity in Canada Since 1996

D

Prior to the mid-1990s, VC investment in Canada was chiefly geared to businesses that were expanding or otherwise at a late stage of development. Market orientation began to change in a significant way in the lead-up to 2000, as seed, startup and other early-stage deals began to attract more industry attention, and to consume unprecedented capital resources.

To illustrate: Over 1996-1999, early-stage company financings captured roughly one-third of total industry disbursements, however, in 2000, this share rose to 44%.

Of course, 2000 was a peak of venture activity in North America and around the globe. In Canada, rates of capital invested and deals done had been climbing steadily in the latter half of the 1990s, but in the boom time of 1999-2000, they grew to new heights. Indeed, VC dollars invested better than doubled during this time, from $2.6 billion to $5.8 billion.

Naturally in this environment, early-stage ventures were likely to prosper along with the rest of the market. However, growth rates at this end of the investment spectrum were especially robust, outstripping aggregate trends. Between 1999 and 2000, disbursements to early-stage transactions came close to tripling (from $912 million to $2.6 billion). Within this category, startup activity alone grew by a factor of 3.8 times (from $282 million to $1.1 billion).

What explains the dramatic change in the market preferences of VC activity in Canada? Several converging trends help tell the story, said professional managers interviewed for this report.

One factor was an increasing volume of deal flow favouring new generations of firms in IT, life sciences and other sectors. In the boom cycle that culminated in 2000, multiple new business formations – the product of years of R&D and entrepreneurial activity in Canada's innovation system – was matched with growth in available VC resources.

Another variable was emergence of a larger Canadian community of specialty early-stage VC funds, as well as balanced funds with significant exposure to this activity. Many such funds were formed in the years immediately preceding the boom (Macdonald & Associates data show most related fund inceptions occurring between 1995-2001).

In addition, Canadian industry players found new sources of partnership capital for early-stage syndicates. For example, the allure of red-hot technology activity led to fresh resources being pumped into the market by corporate and institutional investors. Perhaps more strategically important – and longer-term – was growth in cross-border activity, particularly as American VC funds discovered attractive deal opportunities in this country, many of them for the first time.

In the post-2000 slowdown, early-stage activity tended to decline with the whole of the market. This was less evident in the first year of the down-cycle, when factors influencing a historically high rate of activity (e.g., new funds, more cross-border activity) remained in play. Regardless, activity fell steadily on a per annum basis until 2004, when an upturn in dollars invested in startup deals signaled some potential stabilization of early-stage VC trends.

However, 2004 also witnessed the third consecutive year of reduced fund-raising in the Canadian VC industry, as new capital commitments totaled $1.7 billion, down by 15% from 2003's $2.0 billion. Industry practitioners identified the current supply situation as a critical concern for seed and other early-stage funds looking to sustain their activity into 2005 and beyond (see also Early-stage venture capital pools are too small and Too few venture capital funds focused on early-stage, in Section III.3).

Early-Stage VC Activity in Ontario Since 1996

D

When it comes to early-stage ventures, activity in Ontario between 1996 and 2004 has tended to follow the same pattern observed on a Canada-wide basis.

Up to 1999, early-stage company financings in Ontario absorbed between one-quarter and one-third of total capital invested by the industry. In 2000, disbursements to seed, startup and other early-stage transactions skyrocketed, reaching $1.5 billion, or better than three times the $424 million registered the year before, and 44% of the aggregate amount.

VC professionals interviewed for this report said that many of the same factors influencing the Canadian trend were also evident in Ontario – an enlarged community of balanced and specialty funds with early-stage mandates, matched with fresh deal opportunities in innovative sectors, and particularly in IT. However, beginning in 2000, the province would take an increased proportion of national resources flowing to early-stage activity, in large part because of above average levels of foreign participation (see Early-Stage Activity Concentrated in BC, Ontario and Quebec).

Despite steep declines in total VC activity at the time of the market downturn, early-stage activity remained a focus of the industry in Ontario in relative terms. However, while provincial activity as a whole grew in 2004, there was no accompanying growth in early-stage investment, as there was nationwide.

Major Growth in Seed, Startup Activity Prior to Slowdown

Fig. 4 highlights the particular trajectory of VC activity in seed and startup transactions in Canada in the lead-up to 2000, and in the years of the weaker market that followed.

D

Industry practitioners interviewed for this report said that an unprecedented stream of seed-related disbursements and deals done was activated during the second half of the decade by the launch of specialty funds. These included the Eastern and Western Technology Seed Investment Funds, managed by Ventures West Management, the three Quebec-based funds managed by T2C2 Capital, funds such as Foragen Technologies LP, Milestone Medica LP and Primaxis Technology Ventures that emerged from a sector-specific initiative of RBC, and activity of BDC Venture Capital Group.

Upward momentum in seed activity was first apparent in 1998, when the number of companies financed doubled on a year-over-year basis. VC invested also doubled at that time, but increased even more appreciably in 1999, and again in 2000, when disbursements hit $107 million.

Ever-larger dollar infusions into seed deals were primarily attributable to highly capital-intensive fledgling firms in IT, such as Inkra Networks of Burnaby, BC ($US26.5 million in 2000). Such transactions pushed the average company financing beyond the million-dollar mark in 1999, and to $2.3 million by 2001.

The pre-2000 growth path for company startup activity was even more impressive, also due to growing numbers of balanced and specialty VC funds prepared to undertake them, according to professional managers.

As was noted earlier, startup activity was a major driver of robust market conditions in 2000, and was hardly less influential in Canadian VC trends in 2001-2002. Once again, a key factor was larger average amounts invested per firm, which saw a dramatic rise between 1999 and 2000, from $1.9 million to $5.0 million. Also like seed deals, heftier disbursements to startups owed chiefly to cash-hungry IT companies, and particularly those in telecommunications.

Despite the post-2000 downturn, activity in seed and startup ventures stayed at fairly high levels – at least by historical standards – until 2003. By then, the climate was less hospitable, as industry players grew cautious, and in some cases, redirected their market focus. However, in 2004, capital invested in startups increased for the first time in three years, to $306 million, while seed activity also made gains, taking $40 million.

For a comparable figure highlighting related trends in Ontario, please see Fig. 16 in Appendix C.

Early-Stage Activity in Post-2000 Sustains Relative Share of Total VC

Fig. 5 sheds light on the progress of Canadian VC industry activity in seed, startup and other early-stage deals over the up-and-down market cycles of 1996-2004, as a percentage of overall activity.

D

As was noted previously, early-stage company financings secured around one-third of total dollars invested annually prior to 2000, when their take rose to 44%. Interestingly, as the market began to soften in 2001, this share nonetheless increased to 61%. As the slowdown deepened in 2002-2003, resources ear marked for early-stage ventures did not revert to pre-2000 levels – on a relative basis at least – but instead remained at close to half of all disbursements.

Moreover, while seed deals accounted for just over 1% of venture disbursements in aggregate prior to 1999, this portion increased to 2.8% in that year, and has tended to stay above the 2.0% mark ever since. Similarly, between 1996 and 1999, startup deals took over 10% of total activity, but beginning in 2000, have more often registered something closer to an 18% share, on average.

In other words, while absolute VC flowing to early-stage activity has declined since the onset of the market downturn, their share in relative terms has been, for the most part, stable.

Professional managers interviewed for this report argued that the relative share of total activity assumed by early-stage ventures has remained stable due to the continuing influence of balanced and specialty funds with mandates for this activity. Despite the serious stresses imposed on these funds in recent years, VC professionals believed they have facilitated a potentially longer-term shift in market focus.

Several industry practitioners also thought there was a backlog of fledgling firms in Canadian VC portfolios due to the slowdown, as funds have focused on survival strategies for companies financed during the boom years.

Ontario Early-Stage Activity's Share of Cash Shows Decline Recently

D

As compared to the entire Canadian VC industry, seed, startup and other early-stage activity in Ontario has responded somewhat differently to changes in market cycles in recent years.

As the down-cycle in the market took hold in 2001, early-stage company financings based in the province continued to attract a major portion of amounts disbursed by the industry, with an all-time height of 67% attained in that year. In addition, in the years that followed, Ontario's overall early-stage activity tended to stay at relatively high levels as a percentage of total VC activity, as compared to the pre-2000 period – just as it did across the country.

Initially, this was also the case for seed deals done in Ontario, which averaged between 3-4% of all industry resources in 2001-2003, or well surpassing levels in the pre-2000 market environment. However, in 2004, provincial seed activity's take dropped to 1%. Similarly, while startups captured approximately one-fifth of total capital invested over 2000-2002, these shares were much lower in 2003 (10%) and 2004 (13%).

The recent decline in seed and startup disbursements in Ontario appears to be influenced chiefly by smaller transaction sizes. In 2004, capital injections in seed ventures averaged $1.1 million, versus an average of $2.3 million the year before, while startup company financings averaged $2.8 million and $4.6 million in 2003 and 2004, respectively, as compared to $6.7 million in 2002.

Emerging Tech Sectors Drive Early-Stage VC Trends

D

The lead-up to 2000 not only entailed a movement in Canadian venture industry activity away from later-stage deals to early-stage ones, but a shift from traditional businesses to those in technology sectors. Of course, these trends were coupled, as early-stage activity since the late 1990s has typically engaged IT, life sciences and other innovative firms.

Indeed, by 1999, early-stage ventures were spread across a wide array of emerging technology sectors in Canada.

In that year, activity in biopharmaceuticals and other life sciences led in this regard, accounting for nearly one-quarter of early-stage companies financed and disbursements. Since then, this sector has held a comparable share of VC-backed firms, but in 2000-2001, encountered fiercer competition from IT sectors when it came to industry cash.

In 2002-2004, life sciences bounced back, in part because of several major early-stage company financings, such as Xanthus Life Sciences of Montreal ($US30.8 million, 2003) and Aspreva Pharmaceuticals of Victoria, BC ($US57.0 million, 2004). Prior to then, much activity in the life sciences sector was not as dollar-weighted as activity in IT sectors.

In 1999, activity in early-stage IT companies showed clear signs of growth. One of the fastest-growing sectors was internet products, which captured 21% of early-stage resources that year. However, the magnitude of this trend was short-lived, with disbursements falling to 4% by 2002.

There was also mounting industry enthusiasm for young firms in communications and networking in 1999, featuring some exceptionally large early-stage deals in the fibreoptics and photonics space. By 2000-2001, related companies, which rarely assumed more than 10% of all early-stage activity, were absorbing almost one-third of dollars invested. A good example was Tropic Networks of Ottawa, which alone secured $US60 million at the time of its startup in 2000.

In keeping with market realities, many fledgling telecommunications firms have persevered, while others (e.g., Ottawa-based Ceyba) did not survive what proved to be a volatile period in 2002. More recently, early-stage ventures in communications have witnessed some revival in industry interest, and particularly in several key sub-sectors, such as wireless products.

Trend lines for other young IT companies have fluctuated similarly. Despite cyclical swings, firms in electronics and semiconductors have reflected a fairly steady proportion of overall early-stage disbursements, as have firms in computer software.

In 2003 and 2004, market conditions for VC-backed acquisitions and initial public offerings (IPOs) appeared to have improved in North America, benefiting several Canadian technology companies with early-stage origins of only a short time ago. High profile examples include Ottawa's Akara Corporation and Catena Networks (telecommunications), Toronto's Q9 Networks (internet-related) and Workbrain Corporation (software), Mississauga's Chantry Networks (telecommunications) and Burnaby BC's QuestAir Technologies (alternative energy).

For a comparable figure highlighting related trends in Ontario, please see Fig. 17 in Appendix C.

Early-Stage Activity Concentrated in BC, Ontario and Quebec

Early-stage activity is closely linked with trends in sector clusters in key urban centres of the country, such as Montreal's life sciences cluster and the information and communications technologies clusters in Ottawa and Toronto. As sector clusters have developed over time, so too has VC deal flow.

Fig. 8 indicates some outcomes of venture activity vis-à-vis sector clusters at the provincial level.

D

Between 1996 and 2004, most early-stage ventures were concentrated in the three largest provinces: British Columbia, Ontario and Quebec. In fact, over this period, companies financed in these provinces represented 85-90% of the total in this category, as well as over 90% of total dollars invested.

Since the mid-1990s, seed, startup and other early-stage activity in the Quebec market has accounted for nearly half of companies financed on a national basis. Over the same period, comparable activity in Ontario represented 25-30% of all firms, except in 2000-2001, when burgeoning early-stage activity increased the province's share to approximately 35%.

In 1996-1998, there was almost parity between Ontario and Quebec regarding aggregate disbursements to early-stage transactions. This situation changed in 1999, when increasingly large IT deals pushed Ontario's take to 46%. In 2000, the province captured an even greater 58% of Canadian industry resources going to early-stage activity – a level that did not subside significantly until 2004.

The relative capital intensity local sectors helps to explain the discrepancy between Ontario and Quebec since 1999. With the heavier weighting of life sciences deals (which have often been smaller than telecom/IT deals) in Quebec's early-stage activity, for example, it is not surprising that at the peak of venture activity in Canada – 2000 – average capital infusions per firm stood at $3.1 million, as compared to a $8.5 million average in Ontario.

Between 1996 and 2004, the market in British Columbia has consistently reflected around 10% of early-stage company financings nationwide. The province's share of capital invested in this area has fluctuated more widely (e.g., 7% in 2003 versus 21% in 2004), but has generally averaged between 10-15%.

At approximately 10% of the national aggregate per annum, the number of venture-backed firms at an early stage of development in the Prairie provinces has also been fairly consistent over this period, while disbursements to these have tended to fall within the 5-8% zone.

In Atlantic Canada, early-stage activity was steady over 1996-2004 with respect to companies financed, with a 3-5% share of Canadian VC activity. Up to 2002, regional dollar flows rarely exceeded 2% of the aggregate, however, this level rose to 4% in both 2003 and 2004.

Major Canadian Cities Attract Most Early-Stage Dollars

Fig. 9 amplifies on the geographic distribution of early-stage activity in Canada by highlighting disbursement trends by city and region. Above all, the data point to the metropolitan character of much VC investment, which is interested in local sector clusters that have achieved some critical mass.

D

Ontario's predominant take of dollars invested in seed, startup and other early stage company financings has traditionally been based on activity in the Greater Toronto Area (GTA). In the years prior to 2000, the GTA secured around one-fifth of the national aggregate. However, during this period, it was the Montreal region that succeeded in attracting the largest fraction overall, with roughly one-quarter of disbursements.

In 2000, the landscape changed considerably, given the increasingly heated investment climate in the Ottawa Valley. In that year, and in each consecutive year until 2003, major early-stage deals in telecommunications and other IT sectors ensured that this region took around 30% of total capital invested in this realm in Canada.

In the post-boom cycle of the market, early-stage activity was more broadly diversified, with communities likes Kitchener-Waterloo and Quebec City registering larger shares of industry disbursements than in past.

After the GTA, Montreal and Ottawa regions, Vancouver has typically held the largest proportion of resources going to early-stage ventures. Not surprisingly, this city has almost always accounted for the lion's share of activity in British Columbia, as has the Calgary-Edmonton region in relation to Alberta.

Retail, Private Funds Most Active Canadian Early-Stage Investors

D

To a greater or less extent, activity in early-stage ventures has been the purview of all fund types in Canada's VC industry – corporate funds, government funds, institutional funds, labour-sponsored venture capital corporations (LSVCCs) and other retail funds, and private-independent funds.

This said, some important changes have occurred over the course of 1996-2004 concerning emphasis of seed, startup and other early-stage deals by Canadian funds, in conjunction with their domestic and foreign sources of partnership capital.

Within the industry, it is LSVCC/retail funds and private-independent funds that have been the most active early-stage investors since 1996, both in terms of VC-backed firms and disbursements.

As regards early-stage transactions, private-independent and retail funds have frequently held comparable shares of total activity. For instance, private funds led other industry players during the boom years of 2000 and 2001, with a respective 27% and 20% of total companies financed, while retail funds gradually increased their shares thereafter, from 22% in 2002 to 30% in 2004.

LSVCC/retail funds have tended to lead when it comes to the dollars invested in early-stage activity. This role was most apparent prior to 1999, and again after 2001, when retail disbursements averaged around 30% of the annual aggregate. Private funds have typically been responsible for close to one-fifth of all market resources flowing in this direction, though this activity has been slightly less robust in post-boom years.

The particular influence of retail funds in early-stage activity during the pre- and post-boom cycles is generally attributable to legislated investment pacing rules governing them. These rules have tended to keep LSVCC activity regular during times of market consolidation.

In absolute terms, both private and retail funds increased their early-stage activity in 2004, as compared to 2003.

Investment continuity has also been a role for government funds, such as the BDC Venture Capital Group has done nationwide, as well as the Innovatech funds in Quebec. In the period under examination, government funds have typically held third spot among the most active Canadian industry participants in early-stage ventures, with their capital invested experiencing its sharpest increase in 2002-2004, to around 14% of the total.

Another key trend has involved non-resident investors (see also Fig. 12). Beginning in 1999, when they first made a big splash in the Canadian market, foreign investors have added substantial capital depth to early-stage syndicates. As a result, between 1999-2001, non-residents were responsible for the single, largest per annum share of disbursements overall, and between 2002-2004, were second only to retail funds.

For a comparable figure highlighting related trends in Ontario, please see Fig. 18 in Appendix C.

Seed Activity Led by Key Community of VC Funds

D

When seed investment is considered alone, a somewhat different picture of Canadian industry participation emerges. For instance, when market momentum grew behind seed deals in 1998, it was private-independent funds that were at the forefront, with 72% of all companies financed and 61% of all capital invested. This pace was no less evident in 1999-2000, as private funds continued to lead activity.

Even in the down-cycle, private fund activity has been integral, as illustrated in 2003 and 2004, when their share of total seed-related disbursements stood at 34% and 37%, respectively.

Government and LSVCC/retail funds have also played a vital role in getting seed-deals done, and especially once the market began to weaken in 2001. Retail funds were a primary source of Canadian industry resources over 2001-2003, reflecting leading shares of 31%, 49% and 38%, respectively, while government funds proved crucial to the rate of companies financed over the same period, and into 2004, when they reflected 48% of the market total.

As discussed, seed activity of magnitude since 1998 owed in large part to the formation of balanced and specialty funds with early-stage mandates in the mid-to-late 1990s.

Some of the most active Canadian venture fund managers have included Axis Capital Corporation, BDC Venture Capital Group, Brightspark Ventures, Celtic House Venture Partners, Genesys Capital Partners, GrowthWorks, Quebec's Innovatech funds, MedTech Partners, MSBi Capital, Skypoint Capital Corporation/Venture Coaches, T2C2 Capital, Tech Capital Partners, VenGrowth Capital Partners and Ventures West Management (which includes their administration of the Eastern and Western Technology Seed Investment Funds).

This list, derived from the Macdonald & Associates' database, is based on numbers of VC-backed firms, within a range of 4-29 companies financed in seed transactions over the period 1999-2004. Topping this list was BDC Venture Capital Group.

For a comparable figure highlighting related trends in Ontario, please see Fig. 19 in Appendix C.

US VC Investors Boost Handful of High-Growth Early-Stage Ventures

As discussed, foreign investors have assumed a pre-eminent role in dollars invested in early-stage activity in Canada, at least since 1999. Since then, non-residents, originating chiefly with VC funds based in the United States, have typically accounted for between one-quarter to one-third of total disbursements going to such activity.

This substantial volume of money has reached a small minority of fledgling firms, however. Over the same period, foreign activity has tended to engage only 5-6% of all early-stage companies receiving VC. This discrepancy speaks to the particularly important capital leverage that American funds have brought as co-investors to a select number of firms in communications and other IT sectors, and in more recent years, in life sciences.

As Fig. 12 shows, the early-stage activity of American and other foreign investors has been focused on startups and other early-stage deals and, quite frequently, in syndication with one or more Canadian VC funds. Professional managers interviewed for this report agreed that this suggests something of the value of foreign participation in transactions as high-growth early-stage ventures move up the investment ladder.

D

Non-residents have been less active in seed transactions, notwithstanding some major exceptions, such as the 2000 financing of Inkra Networks, noted previously, and the 2002 financing of Ottawa-based NewStep Networks ($22.0 million).

Some of the most active foreign investors in Canadian early-stage ventures (again, based on numbers of companies financed) are situated in New England and California, and include Draper Fisher Jurvetson, Intel Capital Corporation, InterWest Partners, Kodiak Venture Partners, Menlo Ventures, Morgenthaler Ventures, Siemens Venture Capital, and Venture Investment Management Company (VIMAC).

For a comparable figure highlighting related trends in Ontario, please see Fig. 20 in Appendix C.

US VC Industry Inclines More to Late-Stage Activity

D

According to Thomson Venture Economics, seed, startup and other early-stage activity featured prominently in the American venture industry in the 1980s. However, in the 1990s, and since 2000, industry resources in the United States have generally been geared to transactions involving firms that were expanding or at still later stages of development.

Towards the end of the prior decade, American early-stage company financings represented close to half of all of the total number. This was also the case in the peak year for the market – 2000 – which saw 46% of the record 7,208 VC-backed firms in the United States at an early stage of development. In the period of market slowdown that followed, when total activity in the American industry declined very sharply, this share of companies financed also fell, to a per annum average of 35%.

Capital invested in early-stage ventures observed a similar pattern over this period. In the years immediately preceding 2000, such activity captured approximately 30% of annual disbursements, and in 2000 itself a 27% share. Thereafter, early-stage activity has tended to attract no more than one-fifth of industry cash south-of the border.

As occurred in Canada, there was an upturn in early-stage investment in the American market in 2004, as $US4.2 billion was disbursed in total, up from $US3.8 billion the year before.

Over 2X More Dollars Reach US Early-Stage Firms

Comparisons between Canadian and American VC industries of average dollars invested per company have for some time revealed a significant gap.  For example, in 2004, total company financings in Canada (i.e., combining all stages) averaged $3.0 million, or between three and four times less than the average in the United States ($CDN10.9 million).

As Fig. 14 shows, the gap in early-stage deal capitalization is somewhat narrower. Since 2000, the average capital infusion in early-stage ventures in Canada has typically been less than half of the average south-of-the-border.

D

The situation is somewhat better in Ontario, where well-capitalized transactions involving fledgling IT firms pushed the provincial average to within two-thirds of the American average in 2000, and even higher in 2001. However, in 2002-2004, the average size of Ontario's early-stage company financings has typically lagged its counterpart in the United States by 30% or more.

VC professionals interviewed for this report attached considerable significance to this issue (see Early-stage firms are undercapitalized relative to competitors in Section III.3). While some said smaller deal sizes afford the Canadian industry some benefits, due to lower-cost activity, most agreed that they resulted in major competitive disadvantages in the long run, given the importance of "time-to-market" to new innovative business formations.