2008 gave new meaning to the word "brutal" for Canada's Innovation Economy

The venture capital stats are now out for 2008, and the message is only getting worse for Canada’s VC industry. This isn’t a new topic in this corner of the blogosphere (see prior representative posts “Brutal venture capital stats for H1 2007” August 1-07, “Solving the Start-up & VC malaise” January 18-08), but I’m saddened to report that we are having little impact on the people with the levels of power. In too many cases only the Ministerial staff or public servants will agree to meet with a representative group of Canada’s leading VCs; that’s rarely a good sign.

Here’s an excerpt from today’s CVCA press release:

“Deal activity in the Canadian venture capital (VC) market slowed significantly in 2008, to reach its lowest level in 12 years. Across the country, $1.3 billion was invested, a drop of 36% from the $2.1 billion invested in 2007. There were also comparatively fewer Canadian companies financed in 2008, though the year-over-year decline was not as sharp as the decrease in dollars invested. A total of 371 firms secured VC financing in 2008, which was 10% fewer than the 412 firms that were financed in 2007.

Market activity was especially slow between October and December with $302 million in investments, which was down 43% from the $526 million invested in the fourth quarter of 2007.

The data for 2008 reflect an investor shift away from large transactions. Company financings averaged $3.6 million compared with an average of $5.0 million in 2007. This contributed to a widening gap in Canada-United States deal capitalizations, with Canadian companies capturing on average just 38% of the VC dollars invested in companies south of the border.”

The so-called drop in the average deal size is statistically wrong, as I’ll guess that the two large deals (Geosign and OANDA) in 2007 skewed the averages up for that single year. Although Q4 was particularly bad in Canada, the U.S. venture capital market saw US$5.5 billion go into deals that quarter (see prior post “U.S. Q4 VC investments join CDN swoon“). We are now punching well below our traditional level of 1/11th the U.S. market (our relative GDP).

As the recent Federal Budget demonstrated, the Canadian Angel investor and venture capital industry clearly needs to do a better job of explaining to the media and retail politicians why the Innovation Economy is more than just Scientific Research. As one saw in the DTM just today, primary research is much easier for some folks to understand and put a face-to-a-budget-cut.

Somehow, venture=poor returns=bad, even if any specific medical research project so rarely leads to a particular groundbeaking outcome in any given year. The public understandably likes it if “we are big into research”. The fact that there is little money to commercialize whatever findings come out of primary research is either i) irrelevant, as so few research projects can actually be commercialized in any event, or ii) secondary, as other centres around the world can move our good ideas to their shores.

Credit Canadian Business Magazine for being on the “VC Crisis” story last March (see prior post “Venture Capital Crisis in Canada?” March 12-08). Sadly, i) few of our elected officials are reading these pieces, or ii) their public servants are doing a poor job convincing their elected masters and mistresses that without a robust venture capital industry, the billions of dollars that go into the R&D ecosystem each year might be for naught.

MRM