Canadian VC Activity Drops 26% in Q3

TORONTO (Reuters) – Fewer Canadian companies are on the receiving end of venture capital investments this year, and those that manage to get funding are getting fewer dollars, according to data released by an industry group on Tuesday.

Entrepreneurial firms are caught in the financing slowdown generally and the venture capital slowdown in particular, but the “worrisome” decline underscores the country’s poor track record in spurring innovation, according to Canada’s Venture Capital and Private Equity Association, known as CVCA.

A total of C$372 million ($303 million) was deployed by venture capital funds in the third quarter, down 26 percent from the same period in 2007, the group said. The number of young Canadian companies getting funding fell to 123, down 12 percent.

In the first nine months this year, just over C$1 billion was invested in 296 companies, down 33 percent in dollar terms from a year ago.

“These investment numbers, which ultimately reflect the availability of capital in the venture capital industry, are worrisome, in that they further confirm Canada’s ongoing weakness in driving innovation,” said Gregory Smith, president of the CVCA and president of Macquarie Capital Funds Canada Ltd.

The association wants the federal government to improve tax credits and other incentives to lift investments in venture capital funds.

The average amount that venture capitalists invested in a Canadian company was C$3.5 million during the first nine months of 2008, down from C$4.6 million a year earlier.

That means firms in Canada are now getting less than 40 percent of the average amount that is flowing to businesses in the United States, where venture capital disbursements have also slowed, the CVCA said in a statement.

On the fundraising front, new capital committed to Canadian VC funds in the nine months to Sept. 30 was C$886 million, similar to the amount raised last year — but 2007 total fundraising was the slowest year on record since the mid-1990s, the CVCA noted.

With a lack of Canadian merger and acquisition activity, and the virtual disappearance of initial public offerings, “exit opportunities” for venture capital investors seeking to realize gains in their portfolio companies remain limited, the group said. ($1=$1.23 Canadian)

(Reporting by Lynne Olver; editing by Rob Wilson)