Activity in Canada’s venture capital (VC) market grew in 2011, with the highest level of VC invested in four years, though still substantially below the level recorded in 2007. At the same time, the VC industry’s ability to meet strongly rising demand with further investment growth is threatened by continued weakness on the fund-raising front. These were among the findings of a statistical report released today by CVCA-Canada’s Venture Capital & Private Equity Association and research partner Thomson Reuters.
According to the report, VC invested across Canada totaled $1.5 billion in 2011, up 34% from the year before. Indeed, disbursement levels were the highest since 2008, though they remained well shy of the $2.1 billion invested in 2007. Increased dollars invested went to 444 domestic firms in 2011, up 24% year over year.
“Canadian VC investment rose in 2011 to meet surging demand for risk capital, fuelled by rising levels of entrepreneurship, the activity of business incubators, and R&D incentives, notably the Scientific Research and Experimental Development (SR&ED ) program”, said Gregory Smith, President of the CVCA and Managing Partner, Brookfield Financial Corp. “Furthermore, growth in companies financed and dollars invested was located in all key technology centres, in all regions of the country,” he added.
The report found increased Canadian VC market activity in 2011 was felt in virtually all innovation sectors of the economy. Trends were led in IT sectors, with $692 million invested last year, up 41% from 2010. In addition, life sciences received $343 million, up 15% over the same period, while clean technology received $245 million, up 43%.
“Knowledge-based industries, which are the foundation of Canada’s future economic competitiveness and productivity, were the clear beneficiaries of market trends last year”, said Mr. Smith. “The strong backing of clean-tech firms, which secured a record level of VC investment in 2011, demonstrates that Canada has the potential to become a world leader in the development of a wide range of environmental technologies.” he added.
At the same time, Mr. Smith signaled concern about the ability of VC fund-raising activity to support continued investment growth in the years ahead. The report found new commitments to Canadian VC funds were almost unchanged between 2010 and 2011, with $1.0 billion raised in the latter year, up only 2%. Funds raised in the American VC market, in contrast, rose 32% year over year. “Canada has an historic opportunity to become an innovation leader,” said Mr. Smith, “by making major investments that enable our best technology businesses to realize optimal growth and compete on a global stage.” He added: “However, in order to act decisively on this opportunity, we must first overcome challenges to supplying VC funds that, in turn, supply entrepreneurs.”
Mr. Smith observed that stalled fund-raising has contributed to low levels of Canadian VC deal capitalization. The report found that, despite the overall growth in disbursements, the gap in VC financing sizes between Canada and the United States was further eroded in 2011. Domestic innovative firms captured only 37% of the dollars going to firms south of the border last year, down from 39% in 2010.
In light of this financing gap, Mr. Smith also stressed the important contribution of the SR&ED program to keeping Canada competitive in the global race to build knowledge-based economies and create knowledge-based jobs. “The current SR&ED tax credit regime facilitates investment by domestic and international VC funds in Canadian innovative firms, and rewards risk-takers for their R&D activity,” he said. “It is an integral part of the high-technology ecosystem that we need to nurture and grow in Canada.”
The 2011 statistics reveal that Ontario and Québec were tied in VC market share this time around, with both absorbing 36% of all disbursements, or $550 million invested and $549 million invested, respectively. Deal-making was also up in British Columbia, Alberta, and Atlantic Canada last year.
The report found the activity of foreign VC funds in Canada increased in 2011. Foreign activity brought a total of $430 million to deals, up 38% from 2010, and reflecting the highest level of cross-border investment in four years.
In contrast with direct foreign VC activity in Canada, there was no record of indirect foreign limited partner (LP) commitments in the $1.0 billion raised by Canadian VC funds in 2011. The year before, foreign LPs accounted for 16% of new fund commitments.
“The absence of foreign LPs in Canadian fund-raising last year is a source of great concern,” said Mr. Smith. He added: “Improved fund-raising trends that foster more sustainable VC investment levels in Canada depends in part on our ability to attract non-resident capital to top-tier domestic fund managers.”
VC fund exits from Canadian portfolio assets held onto some post-slowdown momentum in 2011. Liquidity events totaled 27, down 13% from 2010, but numbering slightly more than events reported in 2008 and 2009. Q4 2011 activity included the largest acquisition in domestic market history, the US$1.1 billion purchase of Montréal’s Enobia Pharma Corp. by Alexion Pharmaceuticals Inc. However, IPO activity remained weak, with only two IPOs registered in 2011.