Yaletown going strong in tough Canadian market

Yaletown Venture Partners, a Candian tech and cleantech investor, has closed on an initial $65 million for its second fund.

The Vancouver, B.C.-based firm is shooting for $100 million, considerably more than the $42 million it raised for its first fund in 2003.

Yaletown’s news will hopefully brighten the day of Canadian VCs, who’ve been confronted by tough economic times. Recently, 20-year-old Vancouver-based Ventures West Management announced that is winding down its operation after it was unable to raise new funds.

Meanwhile, 10-year-old, Ottawa-based Skypoint Capital has suspended fund-raising for a second fund. Skypoint raised its first fund in 2001. It hopes to raise a second fund at a later date.

Activity in Canada’s venture capital market has been slowing all year, according to data from the Canadian Venture Capital Association and Thomson Reuters (publisher of VCJ). For the first nine months of the year, just over $1 billion has been invested in 296 Canadian companies, down 33% from the $1.5 billion that went to 336 companies during the first nine months of 2007.

For the third quarter alone, Canadian VCs invested $372 million in 123 startups, down 26% from the $501 million they invested in 140 companies in Q3 2007.

Making matters worse, the average amount Canadian VCs invested per company in the first nine months of 2008 was $3.5 million, down from an average of $4.6 million in the same period a year earlier. In contrast, U.S.-based venture firms invested an average of $9 million per company in the first nine months of 2008.

The situation could get even worse, says Yaletown General Partner Hans Knapp. “In Canada, there are very few large endowments and family offices,” he notes. “Institutional money comes from pension fund managers and there’s been disappointment with the performance with the Canadian venture industry as a whole.”

Indeed, says Knapp, pensions had already begun reducing their allocations to the asset class before the global economy went into a tailspin this fall. “It remains to be seen how many managers will balance their allocations going forward,” he says. “There may well be less money available.”

In Canada, there are very few large endowments and family offices. Institutional money comes from pension fund managers, and there’s been disappointment with the performance with the Canadian venture industry as a whole.

Hans Knapp

No wonder Yaletown—which primarily invests in IT and cleantech in the Pacific Northwest and Canada—reached out to U.S. investors when it began making fund-raising calls. It was successful, too, raising 40% of its first close, or $26 million, from one U.S. institutional investor and one U.S. family office, collectively. The remainder came from one of Canada’s largest pension fund managers and a Canadian fund-of-funds, says Knapp.

Yaletown has not enjoyed any exits yet, but apparently LPs like the stakes that the firm has assembled thus far.

Yaletown’s portfolio includes Austin, Texas-based Microstag, which designs and markets intelligent fluid control microsystems and has raised $14.5 million since its 2000 launch; Seattle-based Mixpo, a video software startup that sells to enterprises and has raised $6.5 million from Yaletown and Madrona Venture Group; and Zeugma Systems, a Vancouver-based telecommunications startup that has raised nearly $40 million since its founding in 2003.“Activity on the exit front is happening,” adds Knapp. “It’s not as if the LPs were looking at a blank portfolio.”Yaletown’s successful fund-raising is all the more remarkable given the harsh environment. The Canadian Venture Capital Association reports that Canadian venture funds raised just $886 million in the first nine months of the year. While that’s on par with the $889 million raised during the first nine months of last year, that isn’t saying much since the CVCA says 2007 fund-raising was the slowest on record since the mid-1990s. —Constance LoizosDEALWATCH: Five recent investments by Yaletown Venture Partners

GaleForce Solutions Inc._Customer relationship management solutions

GenoLogics Life Sciences Software Inc._Bioinformatics software

Microstaq Inc._Intelligent fluid control microsystems

Mixpo Inc._Video marketing solutions for SMBs

Zeugma Systems Inc._Telecommunications infrastructure

Note: Investments made between April 11, 2006, and Sept. 19, 2008. Source: Thomson Reuters