Archived — Venture Capital Monitor - Q4 2011

PDF Version

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 year-end issue of the Venture Capital Monitor covers venture capital (VC) activity from January 2011 to December 2011, which experienced its highest level of investments in over four years.

VC activity overview

Investment and fundraising

Increase in year-over-year investment

Canadian VC investment experienced its strongest annual performance since 2007 as $1.51 billion was invested in 504 deals. This represents a 34 percent increase over the $1.13 billion invested during 2010 (Table 1). Per quarter investment levels remained stable throughout the year with $342 million invested over Q4 2011, comparable to the three previous quarters and nearly 40 percent greater than Q4 2010. While overall investment has recovered from the historic lows experienced in 2009 it continues to remain shy of the $2.05 billion invested in 2007 (Figure 1).

Table 1: VC investment and fundraising, FY 2010 and FY 2011
FY 2010 FY 2011 % Change
($ billions)
Note * of Table 1: Numbers may not match due to rounding.
Source: Thomson Reuters Canada 2012.
Investment 1.14 Note * referrer of Table 1 1.51 34
Fundraising 1.01 1.03 2

Figure 1: VC Investment by year, 2007 to 2011

Figure 1: VC Investment by year, 2007 to 2011
Source: Thomson Reuters Canada 2012.
Description of Figure 1
Figure 1: VC Investment by year, 2007 to 2011
Year $ millions
2007 2050
2008 1406
2009 1036
2010 1130
2011 1510

In contrast to improved investment levels, VC fundraising remained relatively unchanged for fiscal year (FY) 2011 as $1.03 billion was raised (Table 1). This is 2 percent more than 2010 and is in line with the six year fundraising average (approximately $1.04 billion). Retail VC funds captured $402 million in 2011, accounting for the largest share of total new commitments, or 39 percent. After leading trends in 2010, private funds, which attracted $368 million last year, accounted for a reduced 36 percent.

Deal size

Small increase in year-over-year deal sizes

In 2011, VC investments backed 504 firms, a 23 percent increase over 2010 (Figure 2). This is the highest level of total deals completed since 2005 when 595 firms received VC financing. Despite a substantial increase in the overall value of investments, year-over-year average deal size increased by only 7 percent to $3 million in 2011 as investments were spread over considerably more deals. While total deals completed increased on both the low and high ranges, increases were most substantial in the under $1 million and $1–$4.9 million ranges.

Figure 2: Distribution of VC investment by deal size, 2009 to 2011

Figure 2: Distribution of VC investment by deal size, 2009 to 2011
Source: Thomson Reuters Canada 2012.
Description of Figure 2
Figure 2: Distribution of VC investment by deal size, 2009 to 2011
Deal size Total Deals
2009 2010 2011
Under $1M 137 147 192
$1M to $4.9M 149 158 198
$5M and over 91 104 114

Stage of development

Small decrease in value of seed/start-up investment but large increase in later-stage investments

Investments were increasingly concentrated in later-stage deals during 2011 attracting approximately 71 percent of all investment dollars. The $1.08 billion invested into later-stage deals in 2011 represented a 60 percent increase over the $672 million invested over 2010 (Figure 3). The 320 completed later-stage deals was the second highest annual figure over the past decade with foreign funds representing 31 percent of total later-stage deal value.

Figure 3: VC investment by stage of development, 2009 to 2011

Figure 3: VC investment by stage of development, 2009 to 2011
Source: Thomson Reuters Canada 2012.
Description of Figure 3
Figure 3: VC investment by stage of development, 2009 to 2011
Stage of development $ millions
2009 2010 2011
Seed/start -up 230 136 135
Other early stages 228 322 298
Later stages 578 672 1077

In fact, 2011's increase in total investment levels can be entirely attributed to increased later-stage activity as year-over-year investment levels dropped at all other stages compared to 2010. Deal sizes at the earlier stages fell as $135 million was invested into 113 seed and startup stage companies in 2011 ($1.1 million/deal) compared to $136 million into 72 companies in 2010 ($1.9 million/deal).

New versus follow-on investments

Substantial year-over-year increase in both new and follow-on deals

There were 226 first-time VC deals recorded in 2011, 52 more than during 2010 and the highest figure experienced since 2005. These new deals were worth approximately $407 million, a 14 percent year-over-year increase. New deals at the seed and start-up stages of development experienced notable growth with more than double the amount of seed/start-up deals completed than during 2010. Completed follow-on deals also experienced a substantial increase, mainly at the later-stages as 181 firms attracted follow-on VC during 2011 compared to only 128 during 2010 (Table 2).

Table 2: Number of companies that received new and follow-on investment, 2009 to 2011
Total Investment 2009 2010 2011
Source: Thomson Reuters Canada 2012.
New Seed/ start-up 48 33 74
Other early stages 17 24 13
Later stage 82 117 139
All 147 174 226
Follow-on Seed/ start-up 39 39 39
Other early stages 79 68 58
Later stage 112 128 181
All 230 235 278
Total All 377 409 504

Type of investor

Increase among all investor types with foreign funds pacing activity during 2011

Virtually all investor types were more active in the market during 2011 than during 2010. For the eighth consecutive year foreign funds were the most active investors in Canadian VC having invested $431 million in 89 deals compared to $311 million in 74 deals over 2010. As a result, cross-border activity accounted for nearly 28 percent of total dollars invested, which is higher than the traditional market share. Private independent funds also experienced a notable increase in activity having invested their highest single year amount since 2001 with $377 million placed into 179 companies. Labour-sponsored venture capital corporations (LSVCC) and retail fund activity remained virtually the same having invested $4 million more in 2011 than during 2010 (Figure 4).

Figure 4: Distribution of VC investment by type of investor, 2009 to 2011

Figure 4: Distribution of VC investment by type of investor, 2009 to 2011
Source: Thomson Reuters Canada 2012.
Description of Figure 4
Figure 4: Distribution of VC investment by type of investor, 2009 to 2011
Type of investor $ millions
2009 2010 2011
Other 162 208 285
Government 114 111 178
LSVCC/Retail funds 251 236 240
Private independent funds 198 266 377
Foreign funds 311 311 431

Fundraising

Fundraising stable as total raised approximates six year trend

New supply raised by Canadian VC funds remained virtually unchanged over the year as $1.03 billion was raised. Fundraising over the year was largely buoyed by a strong second half of the year during which nearly $600 million in new capital was brought into the market. After leading trends in 2010, private independent funds, which attracted $368 million last year, accounted for a reduced 36 percent. Twenty-seven domestic VC funds were responsible for new commitments last year, 11 of which reflected initial or final partnership closings. This compares against 33 funds that were comparably active in 2010. Individual contributions into LSVCCs raised $402 million.

Regional distribution

Increase in VC investment in Quebec and Ontario

In 2011, the value of VC invested in each of Canada's active provinces increased over 2010. Quebec led Canada in the amount of deals completed (284), accounting for more than half of all completed Canadian deals but Ontario attracted the greatest value of VC ($550 million) (Table 3 and Figure 5). Close to three quarters of all VC investment activity occurred in Quebec and Ontario with the largest increase in investments occurring in Quebec, where companies received 48 percent more in 2011 than in 2010. British Columbia continued its recent strong performance buoyed by high levels of life sciences and environmental technologies investments.

Table 3: Number of companies receiving VC by province, 2010 and 2011
Province 2010 2011 % Change
Source: Thomson Reuters Canada 2012.
British Columbia 52 47 −10
Alberta 22 18 −18
Saskatchewan 5 7 40
Manitoba 8 5 −38
Ontario 117 127 9
Quebec 192 284 48
New Brunswick 7 6 −14
Nova Scotia 6 7 17
Prince Edward Island 0 0 0
Newfoundland & Labrador 0 3 n/a
Territories 0 0 0

Figure 5: Regional distribution of VC investment in Canada, 2009 to 2011

Figure 5: Regional distribution of VC investment in Canada, 2009 to 2011
Source: Thomson Reuters Canada 2012.
Description of Figure 5
Figure 5: Regional distribution of VC investment in Canada, 2009 to 2011
Province $ millions
2009 2010 2011
British Columbia 161 220 226
Alberta 62 67 74
Saskatchewan 33 13 16
Manitoba 7 16 25
Ontario 296 426 550
Quebec 429 370 549
New Brunswick 26 11 21
Nova Scotia 25 10 47
Prince Edward Island 0 0 0
Newfoundland & Labrador 18 0 2
Territories 0 0 0

Sector distribution

Substantial growth in ICT driven by new investments into software and internet-based companies

Nearly all sectors experienced year-over-year growth in terms of dollars invested in 2011. Investments into information and communication technology (ICT) firms continued to pace financing with $692 million invested into 194 firms, or 46 percent of all VC (Figure 6). This represents a 41 percent increase of the $491 million invested in ICT in 2010. Growth in ICT VC has largely been driven by investments into internet and software companies, growing from $201 million invested to $435 million in just two years.

Figure 6: VC investment by industry sector, 2009 to 2011

Figure 6: VC investment by industry sector, 2009 to 2011
Source: Thomson Reuters Canada 2012.
Description of Figure 6
Figure 6: VC investment by industry sector, 2009 to 2011
Industry sector $ millions
2009 2010 2011
Life Sciences 216 299 343
Information Technologies 497 492 692
Energy and Environmental Technologies 122 171 245
Other Technologies 14 32 28
Traditional 187 137 202

The $245 million attracted by the energy and environmental technologies sector was the strongest year for the sector on record. This performance was primarily driven by financings into alternative energy companies in Quebec, Ontario and British Columbia as a result of several very large deals. In particular Enerkem Technologies Inc. of Montréal, Quebec closed a $59 million deal in June.

Capital invested in Canadian life sciences firms increased by about 15 percent over 2010. Notably Ontario, Quebec and British Columbia attracted $106 million, $104 million and $93 million respectively.

Government activities

Business Development Bank of Canada activities

The Business Development Bank of Canada (BDC) made seventeen VC commitments totalling $13.0 million during the fourth quarter of 2011. These financings were worth a total of $53.7 million including contributions by co-investors (Table 4). On top of direct financings, the BDC contributed nearly $41 million to three private independent funds in Toronto and Montréal, which had cumulative closings of approximately $350 million.

Table 4: VC activities of the Business Development Bank of Canada, Q4 2011
BDC Co-investors Total Number of deals
($ millions)
Note: Numbers may not add up due to rounding.
Source: Business Development Bank of Canada.
Seed/ start-up 2.7 3.1 5.8 2
Development 9.2 34.6 43.8 11
Later stage 1.1 3 4.1 4
Total 13 40.7 53.7 17

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).

To be added to the distribution list for this quarterly publication, please make your request at the Subscribe to Publications page.

For questions related to its content, please email SBB-DGPE.

Date modified: