Q-News

July 2008

It's Not All Bad News

Posted in Mike's Commentary

As we move into the last two weeks of the summer Canada’s venture sector is unlikely to rebound like our Olympic medal count.  For those interested, as of August 18th, the US has 67, China has 66 medals and Canada earned 8 over the weekend bringing us to 15th place tied with Romania, Kazakhstan and Spain.  Also unlike venture sector, there is great optimism for Canada to ramp our medal count over the next week.  Then it’s only two years to the Vancouver Winter Olympics when Whistler Chalets will be renting for $100,000 / month. 

 

Plenty of news coming out of the CVCA and NVCA this month with the reporting of second quarter and first half numbers.  Rather than blather on about the dire state of the Canadian venture capital universe I’ll just let the numbers speak for themselves.

 

  • CVCA reports Q2 2008 as lowest level of VC activity in almost three years

  • Canadian investment levels decline 31% year-over-year and 10% compared to Q1

  • US VC investment levels equal Q2 2007 and decline 1% compared to Q1

  • US Internet-related investment at $1.5 billion reaches highest quarterly level since 2001

  • Canadian Internet-related investment declines 44% to $27 million versus $49 million in Q2 2007

  • US investment in Canada at $106 million declines 14% year-over-year for Q2/08 while increasing from $81 million in Q1

  • Year-to-date, US VCs have invested $979 million in 81 China-based companies, $846 million in 80 India-based companies and a total of $187 million in Canada

This week the Canadian Venture Capital & Private Equity Association (CVCA) released second quarter results for Canada’s venture capital market which supported our monthly reporting.   The industry experienced a year-over-year decline of 31% with $302 million invested last quarter versus $436 for the comparable 2007 period.  For the first six months of the year the results are even worse with total investments down 39% to $636 million versus $1 billion for the first half of 2007.

 

The number of firms receiving capital also declined by 28% with only 105 companies being funded (average of $2.87 million) as opposed to 145 companies receiving capital (average of $3.0 million) in Q2/07.  Ontario garnered the lion’s share of investment capital with $155 million (51% of total) being invested in 42 companies (40% of total).  This compares favorably with the $132 million invested in Ontario companies in Q2 2007.  Quebec and BC experienced sharp declines in funding activity with $67 million being invested in 32 companies in Quebec ($153 million in Q2/07) and $57 million ($112 million in Q2/07) being invested in 17 companies in BC.

 

U.S. VCs invested $106 million in Canadian companies in the second quarter, representing a decline of 14% from the $124 million invested by foreign investors in Q2 2007.  The quarter-over-quarter comparison was more favorable with US investment increasing by $25 million from the $81 invested in Q1.  By comparison, US-based VCs invested $583 million into 47 deals in China representing an increase of 97% over the first quarter of 2008 where $296 million was invested in 34 transactions.  Meanwhile, US VC investment in India increased an impressive 27% to $473 million in 40 transactions as compared to $373 million invested in 40 companies in the first quarter.

 

Second quarter results in the U.S. were certainly more favorable than in Canada but on a year-over-year basis were essentially flat with $7.4 billion being invested across 990 transactions.  With six months results in the bag, PWC is calling for U.S. VC investing to complete the year at $30 billion as compared to 2007’s $30.7 billion in investments.  Software companies led the way with 219 companies (22%) receiving $1.25 billion.  Internet-specific companies experienced a 14% increase in funding versus the first quarter with $1.5 billion being invested in 238 transactions.  Interestingly, the NVCA made note that the investment levels for internet-related companies marked the fourth consecutive quarter with over 200 deals being funded,  representing the highest quarterly level of Internet investing since 2001.  In comparison, Canadian software and internet-related investments came in at about half prior year’s levels at $44 million and $27 million, respectively.

 

The amount of investment dollars going into first-time deals declined 12% to $1.6 billion for 301 companies, representing the lowest amount of money invested in this category since the fourth quarter of 2004.  Compared to Canada where the average deal size across all deals was $2.87 million, U.S. first-time investee companies received an average of $5.3 million with Seed/Early stage companies receiving the bulk of first-time investments with 55% of the dollars ($880 million) and 69% of the deals (207 companies).  U.S. investors continue to see opportunities in Seed/Early stage companies, investing $1.6 billion in 351 companies, accounting for 35% of the total deal volume for the second quarter.  The average Seed deal was $3.8 million while the average Early Stage deal was $5.4 million.

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