Archived — Venture Capital Monitor - Q2 2010

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Canadian high growth innovative small and medium-sized enterprises (SMEs) that commercialize research depend to a large extent on the venture capital (VC) industry for funding. Therefore, a strong VC industry is important for the growth of this segment of SMEs. The goal of this series is to provide current information about the VC industry in Canada. To this end, the series will track trends in investment activity, report on topical VC-related research and look at key technology clusters where VC investment is taking place.


Introduction

This issue covers venture capital (VC) investment and fundraising activity in Canada during the second quarter of 2010 — during the period from April to June.

VC activity overview

Summary of investment and fundraising

A total of $334M (107 deals) was invested in VC in Q2 2010, an increase of 57 percent over the $213M (108 deals) during Q2 2009. VC fundraising in Q2 2010 reached $255M, down 7 percent from the $274 million raised in Q2 2009 (Table 1).

Table 1: VC investment and fundraising, Q2 2009 and Q2 2010
Q2 2009 Q2 2010 % Change
($ millions)
Source: Thomson Reuters Canada 2010.
Investment 213 334 57
Fundraising 274 255 −7

VC investment during the quarter was at the highest level of VC activity since Q3 2008 — just before the most recent economic downturn (Figure 1). However, it was significantly lower than the quarterly average of $440M recorded over the previous five years before the downturn.

Figure 1: VC investment by quarter, Q1 2008 to Q2 2010

Figure 1: VC investment by quarter, Q1 2008 to Q2 2010
Note * of Figure 1: First half of 2010
Source: Thomson Reuters Canada 2010.
Description of Figure 1
Figure 1: VC investment by quarter, Q1 2008 to Q2 2010
Quarter 2008 2009 2010 Note * referrer of Figure 1
($ millions)
Q1 367 279 309
Q2 345 213 334
Q3 389 217
Q4 309 326
Total 1,410 1,035 643

Deal size

Increase in deal size

The size of the average VC deal in Canada was $3.1M in Q2 2010, up from $2.0M in Q2 2009. There were roughly the same number of VC deals during each of those two quarters, so the increase overall VC activity shown in Table 1 was caused by the increased average size of those deals. This is reflected in the greater share of deals worth over $5M (Figure 2).

Figure 2: Distribution of VC investment by deal size, Q2 2009 and Q2 2010

Figure 2: Distribution of VC investment by deal size, Q2 2009 and Q2 2010
Source: Thomson Reuters Canada 2010.
Description of Figure 2
Figure 2: Distribution of VC investment by deal size, Q2 2009 and Q2 2010
Deal size Q2 2009 Q2 2010
(%)
Under $1M 32 28
$1M to $4.9M 43 40
$5M and over 25 32

Stage of development

Increase across all stages

The increase in VC investment from Q2 2009 to Q2 2010 was spread across all stages (Figure 3). For instance, investment in companies at the seed and start-up stages of development increased to $35M (13 deals) in Q2 2010 from $24M (22 deals) during the same period last year. Investment in later-stage companies reached $209M (67 deals), up from $146M (54 deals) in Q2 2009.

Figure 3: VC investment by stage of development, Q2 2009 and Q2 2010

Figure 3: VC investment by stage of development, Q2 2009 and Q2 2010
Source: Thomson Reuters Canada 2010.
Description of Figure 3
Figure 3: VC investment by stage of development, Q2 2009 and Q2 2010
Stage of development Q2 2009 Q2 2010
($ millions)
Seed/start-up 24 35
Other early stages 42 90
Later stages 146 209

New versus follow-on investments

New investments drop in the early stages but increase in the later stages

In total, across all stages, there were 40 first-time VC deals in Q2 2010, which has been about the average over the previous four quarters. First-time deals at the seed and start-up stages of development, however, dropped to only 4 in Q2 2010 from an average of 12 over the previous four quarters. The drop during this quarter can be partly explained by a decline in first-time, early-stage investments in Ontario, which recorded only one new deal at the seed or start-up stage. In contrast, at the later stages of development, there were an unusually high number of first-time investments during the quarter (Table 2).

Table 2: The number of companies that received new and follow-on investment, Q2 2009 to Q2 2010
Investments Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010
Source: Thomson Reuters Canada 2010.
New Seed/ start-up 14 10 15 10 4
Other early stages 5 6 4 6 6
Later stage 18 29 23 23 30
All stages 37 45 42 39 40
Follow-on Seed/ start-up 8 9 19 10 9
Other early stages 27 19 27 21 21
Later stage 36 34 42 37 37
All stages 71 62 88 68 67

Type of investor

Increase across all types of investors

The three main types of Canadian VC investors increased their activity in Q2 2010 relative to the same quarter last year (Figure 4). However, although the amount invested by foreign funds in Q2 2010 was much higher than the amount invested last year, it was down nearly 50 percent from the quarterly average over the previous four years (2005 to 2008).

Figure 4: Distribution of VC investment by type of investor, Q2 2009 and Q2 2010

Figure 4: Distribution of VC investment by type of investor, Q2 2009 and Q2 2010
Source: Thomson Reuters Canada 2010.
Description of Figure 4
Figure 4: Distribution of VC investment by type of investor, Q2 2009 and Q2 2010
Type of investor Q2 2009 Q2 2010
($ millions)
LSVCC/retail funds 58 73
Private independent funds 65 82
Foreign funds 49 74

Fundraising

Quarterly fundraising down modestly year-over-year

A total of $255M was raised by VC funds in Q2 2010, down only slightly from the $274M raised during the same period the previous year. Private independent funds raised $152M and LSVCC/retail funds raised $97M during the quarter. The value of VC funds raised for the year ended June 30, 2010, totalled about $1.2B, roughly the same as the annual average from 2005 to 2008.

Regional distribution

Increase in VC investment in British Columbia, Ontario and Quebec

In Q2 2010, the value of VC invested in each of Canada's three most populous provinces increased compared to the same period in 2009. The largest increase was in British Columbia, which accounted for $99M in VC during the quarter due in part to three deals each worth between $13M and $17M. Ontario and Quebec each counted $100M worth of VC investment during Q2 2010, which is slightly above the average amounts of the previous four quarters of $90M and $95M, respectively (Table 3 and Figure 5).

Table 3: Number of companies receiving VC by province, Q2 2009 and Q2 2010
Province Q2 2009 Q2 2010 % Change
Source: Thomson Reuters Canada 2010.
British Columbia 14 17 21
Alberta 6 5 −17
Saskatchewan 1 1 0
Manitoba 4 1 −75
Ontario 30 24 −20
Quebec 47 56 19
New Brunswick 4 1 −75
Nova Scotia 2 2 0
Prince Edward Island 0 0 0
Newfoundland 0 0 0
Territories 0 0 0

Figure 5: Regional distribution of VC investment in Canada, Q2 2009 and Q2 2010

Figure 5: Regional distribution of VC investment in Canada, Q2 2009 and Q2 2010
Source: Thomson Reuters Canada 2010.
Description of Figure 5
Figure 5: Regional distribution of VC investment in Canada, Q2 2009 and Q2 2010
Province Q2 2009 Q2 2010
($ millions)
British Columbia 20 99
Alberta 37 27
Saskatchewan 0.1 0.2
Manitoba 6 3
Ontario 64 100
Quebec 69 100
New Brunswick 8 3
Nova Scotia 7 1
Prince Edward Island 0 0
Newfoundland & Labrador 0 0
Territories 0 0

Sector distribution

Increase in all technology sectors

In Q2 2010, compared to the same period last year, there was an increase in VC investment in all of the three major sectors: information technology; life sciences; and energy and environmental technologies. The information technologies sector accounted for 45 percent of VC investment during the quarter (Figure 6).

Figure 6: VC Investment by industry sector, Q2 2009 and Q2 2010

Figure 6: VC Investment by industry sector, Q2 2009 and Q2 2010
Source: Thomson Reuters Canada 2010.
Description of Figure 6
Figure 6: VC investment by industry sector, Q2 2009 and Q2 2010
Industry sector Q2 2009 Q2 2010
($ millions)
Life sciences 80 91
Information technologies 87 149
Energy and environmental technologies 12 56
Other technologies 1 9
Traditional 33 28

Government activities

During Q2 2010, the Business Development Bank of Canada (BDC) made VC commitments totalling $16M in 15 companies. These financings were worth a total of $93M including contributions by co-investors (Table 4). This activity was in addition to any investment in private independent funds made by the BDC during the quarter.

Table 4: VC activities of the Business Development Bank of Canada, Q2 2010
BDC Co-investors Total Number of deals
($ million)
Source: Business Development Bank of Canada 2010.
Seed/ start-up 2.1 6.6 8.7 2
Development 6.9 58.5 65.4 9
Later stage 7.2 11.3 18.5 4
Total 16.2 76.4 92.5 15

Notes

This publication is part of a series prepared by the Small Business Branch. The branch analyses the financial marketplace and how trends in this market impact small businesses' access to financing. Current research is focused on high-growth firms, the aspects of both Canada's VC and general business environment that affect the success of these firms, and the key players in the risk-capital market (for example, VC firms and angels).

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