Venture financing in freefall

In nominal dollars, 2009 Q2 had the lowest amount of venture activity in the past 14 years. In fact, investments in the sector for the first six months of the year were well below historical par.

“The data conclusively demonstrates that there is a venture capital crisis in Canada,” says Gregory Smith, president of the CVCA. “We have a structural problem and this means Canada’s ability to drive innovation will weaken and we will see the overall economy suffer.”

These trends point to the greater influence of small venture capital deal sizes in the current market environment. The average amount invested per firm was $1.9 million between April and June, which represents a substantial drop from the $2.9 million average of both Q2 2008 and Q1 2009. Consequently, firms in Canada are now capturing only 38% of the dollars going to similar firms in the U.S.

Although venture capital activity was generally reduced across the board in Q2 2009, there was significant decline by American venture capital funds and other foreign investors. Since Q2 2003, venture capital investments by foreign investors had not been as low.

In response to the venture capital crisis, the CVCA is calling the federal and provincial government to re-invigorate this sector. The proposal recommends the government provides better funding, improvements to tax credits and for better strategies to promote venture capital.

In related news, the CVCA together with its research partner, Thomson Reuters, reported that there is also a slowdown in private equity buyout.

In the first half of 2009 the number of transactions was low but remained stable. There were 24 deals this year, compared to 21 in the same period last year.

The economic slowdown is believed to be the primary factor for the reduced number of buyouts worldwide. Private equity buyout investment worldwide totaled US$34.6 billion in the first half of 2009, 22% of the previous year’s first-half total.

There has also been a significant reduction in the amount American investors that have invested in Canada for the first half of this year.

In addition to there being fewer transactions, the size of the transactions has shrunk. The average size of disclosed private equity buyouts was only US$22.5 million in Q2, down from the US$59 million average deal size in Q1 2009.

Due to the smaller deal sizes, total disclosed buyout of Canadian companies completed and pending totalled only US$860 million for the first half of the year, well below the nearly US$4 billion invested in the same period in 2008.

(08/11/09)