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The sky is falling

“we have a structural problem and this means Canada’s ability to drive innovation will weaken and we will see the overall economy suffer.” – Gregory Smith, President of the CVCA

The CVCA has released their Q2 2009 Venture Investment data.

  • Venture investment down 42% from 2008. $179M in 2009 compared to $309 at the same point in 2008. This includes a $50M placement from OMERS for PublicMobile, which when removed makes the numbers even worse.
  • Average deal size decreased to $1.9M from $2.9M, this means that Canadian companies have less available resources than US competitors. 

So it’s bad. Really bad. This is not the first time. It probably won’t be the last time we hear about the troubles of Canadian VCs. Anybody really surprised?

The VC industry in Canada has been in turmoil for a long period of time. There are regulatory and structural hurdles, which the CVCA is actively lobbying politicians for the support. This includes lobbying for support to SR&ED tax credit programs, offset agreements, incentives for investment, etc. I’m not sure that “establishing a blue chip, limited-life panel comprised of company executives, university presidents and venture capitalists with the express mandate to devise a road map for Canada’s technology industries” will provide the solutions necessary to Canadian entrepreneurs. And while I think that VCs are an important part of the ecosystem to support and nurture entrepreneurs, they are only part of solution. It is the entrepreneurs and startups that will save venture capital in Canada

What does all of this mean?

  • Number of investors will continue to decrease
  • Valuations will continue to decrease
  • Customer uptake will be slower
  • Need to become cash flow positive
  • Acquiring entities will favour profitable companies

Does this sound familiar? It’s pretty much verbatim out of Sequoia Capital’s R.I.P. Good Times presentation or Ron Conway’s email to his portfolio. This is not new or news to Canadian companies. Raising money has been difficult for a while in Canada. Our investors have preferred later stage investments, in the H1 2009 just over 60% of all of the capital when to later stage deals (Series B and later). We’ve seen a need for companies to be able to demonstrate a product, customers and market potential just to raise early funding.  

There are Canadian ventures that are growing and successfully operating on revenues. Along with a set of emerging technology ventures that have closed non-traditional funding rounds. Well.ca raised $1.1M from angels. J2Play was acquired by Electronic Arts. It’s possible to raise money, to get acquired, to operate successfully during tough times. You just have to execute better than your competitors.

So what is an entrepreneur supposed to do?

  1. Read How Startups will save Venture Capital in Canada.
  2. Read R.I.P. Good Times. and Ron Conway’s email to his portfolio.
  3. Stop worrying about the state of Venture Capital in Canada.
  4. Start building real businesses with real customers driving real revenues (if you need to raise money there are other sources of capital).
  5. Look for growth in markets outside of Canada (while this includes the US, it should not be limited to US only growth).
  6. Execute, execute, execute. You’re only as good as your last deal. So find customers, keep them happy, and keep innovating.
  • tpurves

    This has a lot to do with the economy. Venture investing looks a less attractive as an asset class when even the “safe” bets in the large cap equity or debt markets are in turmoil. I think that the first half of this year the bulk of angel or institutional money was being kept far too busy just trying to hang on to their own pants rather than thinking of taking a flyer on high-risk new ventures or new venture funds.

    Public funds might have stepped in to fill the gap like they did in other sectors. But again, it was easier to put money into things they could understand, like saving GM jobs millions of dollars a job, or moving ubisoft employees around the country at >350k a job.

    If there is good news though, it is that even though a bunch of wealth has been destroyed, there’s also a lot still on the sidelines, and it’s been piling up there. Recent signs of a few deals, and M&As starting to flow here and there is encouraging (not to mention the performance of any index in the last few months).

    Barring further calamities, it would be hard for the deal flow in the second half of this year not to be at least a lot better than the first.

    And from the supply side, there’s no excuse but to get out there and build truly awesome stuff despite the impossible. The truly awesome stuff has a tendency to find the smart money (or vice versa) eventually, whatever the economy.

  • tpurves

    This has a lot to do with the economy. Venture investing looks a less attractive as an asset class when even the “safe” bets in the large cap equity or debt markets are in turmoil. I think that the first half of this year the bulk of angel or institutional money was being kept far too busy just trying to hang on to their own pants rather than thinking of taking a flyer on high-risk new ventures or new venture funds.

    Public funds might have stepped in to fill the gap like they did in other sectors. But again, it was easier to put money into things they could understand, like saving GM jobs millions of dollars a job, or moving ubisoft employees around the country at >350k a job.

    If there is good news though, it is that even though a bunch of wealth has been destroyed, there's also a lot still on the sidelines, and it's been piling up there. Recent signs of a few deals, and M&As starting to flow here and there is encouraging (not to mention the performance of any index in the last few months).

    Barring further calamities, it would be hard for the deal flow in the second half of this year not to be at least a lot better than the first.

    And from the supply side, there's no excuse but to get out there and build truly awesome stuff despite the impossible. The truly awesome stuff has a tendency to find the smart money (or vice versa) eventually, whatever the economy.

  • jkmacr

    And to the south and west – Government is killing Silicon Valley innovation
    http://blogs.zdnet.com/Foremski/?p=673&tag=nl.e539

  • http://www.eben.ca ceben

    If only we could quantify the number of projects that don’t get off the ground because of the financial and psychological impact that this sort of news has on the entrepreneurial community. If we continue down this path, Canada is certainly at risk of leaving innovation and R&D to the U.S. and those countries that support venture investing and finding ourselves retreating to the traditional approach of creating value by digging for resources in the ground.

  • http://www.eben.ca ceben

    If only we could quantify the number of projects that don't get off the ground because of the financial and psychological impact that this sort of news has on the entrepreneurial community. If we continue down this path, Canada is certainly at risk of leaving innovation and R&D to the U.S. and those countries that support venture investing and finding ourselves retreating to the traditional approach of creating value by digging for resources in the ground.

  • http://startupcfo.ca/ Mark MacLeod

    Hey David, no question, its been a rough two quarters so far in ’09. No surprise when it comes to Canadian VC deals – We can count on one hand the Canadian funds that are doing new deals. Hope that will change over the next few quarters (I expect it will Teralys starts deploying capital).

    The US numbers (15% of $ invested, vs. 42% previously) are alarming though because on the surface this speaks not to an absence of capital, but a lack of interest in our companies. Hope that trend reverses, because for B rounds and up, we need US funding sources.

    There are still bright spots. Deals are getting done. Angels are active. And if you have a young fund (such as Blackberry Partners fund) its a great time to be a VC, because you have lots of capital and values are low.

  • http://startupcfo.ca startupcfo

    Hey David, no question, its been a rough two quarters so far in ’09. No surprise when it comes to Canadian VC deals – We can count on one hand the Canadian funds that are doing new deals. Hope that will change over the next few quarters (I expect it will Teralys starts deploying capital).rnrnThe US numbers (15% of $ invested, vs. 42% previously) are alarming though because on the surface this speaks not to an absence of capital, but a lack of interest in our companies. Hope that trend reverses, because for B rounds and up, we need US funding sources.rnrnThere are still bright spots. Deals are getting done. Angels are active. And if you have a young fund (such as Blackberry Partners fund) its a great time to be a VC, because you have lots of capital and values are low.

  • http://startupcfo.ca startupcfo

    Hey David, no question, its been a rough two quarters so far in '09. No surprise when it comes to Canadian VC deals – We can count on one hand the Canadian funds that are doing new deals. Hope that will change over the next few quarters (I expect it will Teralys starts deploying capital).

    The US numbers (15% of $ invested, vs. 42% previously) are alarming though because on the surface this speaks not to an absence of capital, but a lack of interest in our companies. Hope that trend reverses, because for B rounds and up, we need US funding sources.

    There are still bright spots. Deals are getting done. Angels are active. And if you have a young fund (such as Blackberry Partners fund) its a great time to be a VC, because you have lots of capital and values are low.

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