The anemic venture capital environment in Canada is finally improving, based on the second-quarter industry results announced recently by Thomson Reuters. A startling revelation was that new venture capital committed in the quarter amounted to $683 million, a greater than four-fold increase over the $154 million committed in Q2 2011.
Canada’s venture capital industry may have bottomed out in Q1 2012, after which Greg Smith, Canada’s Venture Capital and Private Equity Association president, sombrely summed up industry performance as disappointing. Only $263 million was invested, down 34% from Q1 last year. A good sense of how bad it was was captured by PwC. Out of 150 CEOs of emerging technology companies it surveyed, 44% didn’t even attempt to raise capital over the last two years, and 17% tried and failed.
A telling finding was that 32% chose to raise money from angel investors.
Things are starting to look much better. Fundraising between April and June continued to be led by Canadian limited partnerships or institutional venture funds. Some of the major closings included the:
•$150 million-first close of TVM Life Science Ventures VII (Montreal);
•$105 million-first close of Celtic House Venture Partners Fund IV (Toronto/Ottawa);
•$100 million-first close of Rho Canada Venture Fund II (Montreal); and
•$50 million-first close of Pangaea Ventures Fund III LP (Vancouver).
Avrio Ventures also raised more new capital for its Avrio Ventures LLP II, with disclosed commitments to date totalling $64 million (Calgary).
As of June 30, institutional funds had raised $1.1 billion, which has already surpassed amounts raised by them in all of 2011. Retail fundraising accounted for much of the rest ($347 million). In aggregate, new commitments to Canadian funds totalled $1.4 billion in 2012’s first half, or better than triple the $460 million from the year before.
On the disbursement side in Q2, $438 million was invested across the country, or 17% more than the $374 million invested at the same time in 2011.
On an annualized basis, this represented a disbursement rate of $1.75 billion, a rate not seen in Canada for years. Disbursement levels in Q2 2012 were 52% greater than the $287 million invested three months earlier.
However, it’s very interesting to note where 2012’s investments came from. Leaving aside foreign investors, the largest single domestic investor type, with more than 20% of the investments made in the first half of the year, was a combination of management teams and angel investors.
Private institutional funds were about 16%, government about 15%, retail funds about 12% and institutions directly invested about 7%.
Deal-making in B.C. made the largest percentage gain in the country, with $87 million invested between April and June, up 71% from $50 million invested the year before, giving B.C. one-fifth of all disbursements.
The biggest venture deals get the most media coverage, and the top venture capital deal in Canada in Q2 was also from B.C.: Burnaby’s D-Wave Systems Inc., which raised $36 million. Investors included BDC Venture Capital, Draper Fisher Jurvetson, Fractal Capital, Growthworks’ Working Opportunity Fund and BC Discovery Fund.
So what do these industry results after 2012’s second quarter mean for B.C.?
Well, off the top, it’s good to see the relatively strong venture capital disbursement level here – one-fifth of Canada’s total. However, B.C.’s disbursements are running well ahead of the new venture capital formation. On a comparative basis, if B.C. wanted to be home to 20% of Canada’s current $2.8 billion annualized capital formation rate, it should be on track to raise $560 million of new capital this year, and it’s not even close.
Another source of concern is the relatively poor aggregation of new retail venture funds. Typically, over the past 15 years, B.C. has funded more than half of its venture investing from retail venture funds, but this investment sector has been underperforming in recent years.
The retail bright spot here is the solo angel investors in B.C., which are leading Canada’s angel community, aided by the province’s angel tax credit program. Hopefully, B.C.’s small retail investors will soon join the angels and the institutional investors who are leading this brave new wave of venture capital investing in Canada.
