“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.