January 12, 2001

This year, the venture capital market catches its breath

Pool of VC money doesn't dry up nearly as quickly as public markets

Jill Vardy

Financial Post

OTTAWA - Can Ottawa this year match its record venture capital performance of 2000? Does it matter?

So far, there aren't many signs the white-hot VC market in Ottawa has cooled. There have been six financings announced so far this year worth more than $140-million. Internetivity Inc. ($10-million), Zucotto Wireless Inc. (US$35-million), DragonWave Inc. ($12-million), Watchfire Corp. (US$25-million), Solidum Systems Corp. (US$16.5-million) and Killdara Corp. ($1.5-million).

It's too early to say if this early spurt means we'll achieve the record $1.2-billion in VC money that flowed into this region last year, said Ted Liu, founder of a new Web site called peNews.com. The site calls itself the only online private equity financing information source in Canada, with a free database of mergers, private financings, IPOs and public share offers.

According to Mr. Liu's preliminary research, investors poured $5.7-billion into Canadian private technology companies last year. That doesn't count the billions that were invested -- and pulled out of -- the publicly traded technology firms.

Mr. Liu said the pace of Canadian VC financings started to slow in the fall, in lockstep with the public market meltdown in technology stocks. It's not clear yet if that slowdown was sustained in late 2000 and into this year.

Denzil Doyle, chairman of Capital Alliance Ventures Inc., a local labour-sponsored fund, doesn't think 2001 will be the blockbuster 2000 was. The poor market may slow the pace of new startups. And local firms will be sustained by the ton of cash they raised last year. "The next big bump will come when these companies need their second rounds of investment, and that doesn't usually happen within a one-year time frame," Mr. Doyle said.

Some of the recipients of recent VC largesse agree that entrepreneurs looking for money in this city will find it tougher than they did. "I think the market is generally taking a nosedive both in private venture capital rounds and certainly in the public rounds," said Richard White, Solidum's chief executive. Other CEOs agree the stakes are higher, investors more wary and the time to completion of a financing round is longer than it was.

But even a dismal VC market, as long as it's brief, won't cause any lasting harm to Ottawa or to the technology industry. Duncan Stewart, a technology fund manager and partner at Tera Capital Corp. (and fellow FP eWorld columnist), said venture capital is, in his reckoning, an infrastructure component of the sector, just like a highway is to a city. "You can go a year or two without building highways without a deleterious effect on the road system if you built a lot before and plan to build a lot after," he said.

It's more important to look at the venture capital environment over a five-year period, because VC investments mature at widely varying times -- dot-coms bring a return in a few quarters, while investors in biotechs may wait years for a payoff. By that measure, there's little to worry about.

What's more, the pool of VC money doesn't dry up as quickly as public markets. Stock market investors, especially technology investors, are proving themselves a skittish bunch. They pull their cash at the merest whiff of a profit warning or slowdown.

But VCs are holding large amounts of money in their funds, money that was raised when the market was hot. For example, the Venture Coaches fund in Ottawa was launched last fall with a target of $50-million. Only a fraction has been invested.

Skypoint Capital Corp., another local fund, has invested US$35-million out of its fund of US$54-million. Most of the balance is targeted for follow-on rounds by its existing portfolio companies. But Skypoint is raising US$200-million in a second fund, with money available for investment within weeks.

The recent technology meltdown means VCs may be facing fewer quality choices about where to put that money. But that's a good thing, Mr. Stewart argues. "The VC sitting around with money he was going to put into an e-tailer may end up giving it to someone who might actually invent something useful," he said. "It's like the peace dividend the Americans had when the Soviet Union fell apart. There's all this money now sitting around that VCs can spend on more useful stuff."

That pool of money also means that VCs are able and willing to put more money into second rounds of companies already in their portfolio, said Jaswinder Kaur, a partner at Venture Coaches. "I think the sources of money for startups are not going to be as available as they were last year ... but it's still going to be a good market for early stage technology companies."