VC investment plummets in first quarter as high-tech market contraction continues

Investment by Canada’s venture capital industry took a steep dive in the first three months of this year, managing disbursements of just $305 million – the lowest level of activity since 1998. The absence of larger deals in the telecommunications and other information technology sectors was cited as a major reason for the precipitous decline which has hit the Ottawa region particularly hard.

But telecom and IT were not the only areas experiencing weak VC investment, according to the most recent data prepared by Macdonald & Associates Ltd for the Canadian Venture Capital Association. Semiconductor, electronics, computer hardware, computer software and Internet-related firms were also down.

The bleak data were a major disappointment after an apparent upswing in VC investment activity in the last quarter of 2002 (R$, March 7/03). But the slump brings Canada in line with the depressed US VC industry, which collapsed last year and continues to struggle against the contraction in the high-tech sector.

Not surprisingly, US VC investment in Canada is also extremely weak, managing only $22 million in Q1/03, down 76% from the previous quarter. That accounts for just 7% of the quarterly total, compared to a 26% share of 2002 activity.

The sole bright sector in Canada so far this year is life sciences, particularly in Quebec. Life sciences firms attracted $79 million or 26% of all disbursements, roughly on par with activity in the same quarter one year ago. Its concentration in Quebec-based firms helped the province secure 54% of all quarterly investment with $165 million going to 110 companies. That easily outdistanced the 53 Ontario-based firms which received a total of $98 million, down 80% from the $498 million that flowed into the province the previous quarter.

VC fundraising was also down in Q1/03, with a disappointing season for labour sponsored venture capital funds (LSVCCs). Total capital raised was $1 billion, down from $1.5 billion in Q4/02. LSVCCs raised $888 million while private limited partnerships accounted for just $74 million. FMI www.canadavc.com.

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