According to Thomson Reuters, Canada’s venture capital investing in 2010 was $1.1 billion, or 10% more than the $1 billion invested last year.
However, at these levels, the financing engine behind innovation in Canada is really just ticking along at a slow idle.
In contrast, venture investment in 2008 was $1.4 billion, and during the bubble years it reached $2.7 billion in 1999 and a whopping $6.3 billion in 2000. In reality, the technology venture investment in Canada in 2000 was even greater because financings on the Canadian Venture Exchange – CDNX – added another $1.2 billion, or 50% of the $2.4 billion total that was raised that year on the CDNX. Much of the CDNX investment was not picked up in the MacDonald & Associates (now Thomson Reuters stats) venture industry statistics.
The U.S. venture industry invested $21.8 billion in 2010, also a fraction of the $103 billion invested in 2000, but even though the U.S. was hammered by a much worse financial meltdown than Canada, the gap in venture investment between the two countries is widening. In 2000, the U.S. invested 16.3 times the Canadian total, but by 2010, the U.S. managed to invest almost 20 times the Canadian level. Not a good comparison for Canada’s perennially under-funded technology sector.
So what’s the problem with Canada’s venture capital industry? There must be something, because in 2010, the entire venture industry attracted only $819 million in new capital, the lowest level in 16 years.
There are two reasons.
First, Canada’s other venture capital market, now called the TSX Venture Exchange (TSX-V), has been on fire. In 2010, the TSX-V raised $9.9 billion, a staggering 12 times the amount raised by Canada’s entire private venture capital industry. The TSX-V’s year-over-year total was almost double the $5.1 billion from last year. However, the public venture capital appetite was almost exclusively reserved for the resource sectors – not technology. Tech CEOs could only stand by and weep as mining deals that might have raised $2 million a few years ago raised $20 million in 2010. As I have said before in this column, when Canada’s resource sectors are hot, the sucking sound you hear is Canada’s risk capital gleefully flowing into them.
The second reason for the private venture capital industry’s struggle is the lack of liquidity events. These are typically either acquisitions or IPOs of venture-backed portfolio companies and are the transactions that typically return profits to venture managers and their investors. Liquidity events create the enthusiasm for private venture capital investing.
In the past two years, venture capital investment went into 691 Canadian deals across the country. However, during these two years, only 56 liquidity events were achieved – 54 via mergers and acquisitions transactions and two – count’em two – via initial public offering.
This exit ratio is simply not sustainable. If only one in 12 investments generates liquidity in a comparable period, what happens with the others? If only one out of every 350 investments results in an IPO, what is the incentive to invest in this game at the pre-IPO level?
It has been a funny liquidity market, and analysts have been puzzled as to why there has been so little appetite for growing, well-matured venture capital-backed buyout opportunities, of which there are quite a number in North America today. This is happening at a time when the big multinational tech companies are literally drowning in cash for acquisitions. This is also a time when institutional investors, who would normally buy technology IPOs at reasonably high prices are paying unbelievable prices for resource IPOs instead.
But as they say, markets are cyclical, and it’s only a question of time before there’s another wave of technology liquidity events crashing over the markets, blowing open the current log jam that can be found in venture fund portfolios everywhere.
It has now been more than 10 years that the venture industry has been in its awkward protracted down cycle. As far as cycles go, this has been a long one. And is anybody saying that the world doesn’t need more technological innovation than it has ever seen before?
