Canadian, U.S. venture capital funds set sights on Canada's information technology sector

There's been resurgence in the Canadian IT sector's private equity market.

There's been resurgence in the Canadian IT sector's private equity market.

According to Canada's Venture Capital and Private Equity Association, venture capital invested across the sector in 2011 totalled $1.5 billion, the highest since the recession began in 2008. Although this figure was still short of the $2.1 billion in venture capital investments in 2007, it's an early indicator that things could be looking up for startup ventures in Canada, and in no sector was this more true than information technology.

Indeed, since 2010 there have been many signs of positive things to come in Canada's IT industries. For one, the Canadian government has zeroed in on technological innovation as a central element of its plan for economic recovery and long-term stability. Many expect that the Canadian government will look to subsidize or in some way drive technological innovation in its 2012 budget.

According to a Research Infosource, Inc. report, the Canadian tech sector experienced a 4.7% year-over-year increase in combined revenue from 2009 to 2010. Moreover, the sector put this additional revenue to good use. Exempting the now defunct Nortel from the R&D spend equation, R&D spending in Canada's tech industry rose 3.5% year over year from 2009 to 2010. RIM increased its R&D spend by more than 26% over the same period.

Renewed focus on research and development, coupled with the resurgence of Canadian venture capital (VC) investment, has spurred renewed interest from entrepreneurs and technologists in pursuing new technology ventures, a trend evidenced by the surge in demand for risk capital that took place in 2011. The information technology sector led the way in this demand, and it paid off in spades. Of the $1.5 billion in venture capital invested last year, information technology sectors garnered more than a third of the total with $692 million in investments. This figure represented a 41% year-over-year increase in venture capital investment in the information technology sector between 2010 and 2011, the largest such gain made by any Canadian industry. Although Canadian VC funds haven't experienced significant gains over the past few years, the information technology industry has become their clear investment priority.

Canada's tech sector is also poised to benefit from cross-border investment, particularly from U.S. VC funds, private equity investors and strategic investors. We expect to see this interest in Canadian technology companies reflected in the investments made by U.S. VC funds in 2012. U.S. VC funds have grown 32% over the past few years, and they are increasingly looking at Canadian companies as strong investment targets. The U.S. investor landscape has become extremely competitive in recent years, and many are now looking to innovative Canadian companies as the next hot technology investment. To the extent Canadian companies are looking to raise capital, they would be wise to look beyond Canadian VC funds and pursue available cross-border opportunities as well.

The increasing attention Canadian VC funds are placing on information technology investment, coupled with a strong U.S. venture capital market looking for top-tier cross-border opportunities, puts Canadian tech startups in an excellent position in the near term, and possibly in the long term as well. Any gap in supply and demand for venture capital in Canada is likely to be addressed by U.S. investors. •

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