Capital conundrum: Ottawa VCs still cautious

By KRYSTLE CHOW
Published in the Ottawa Business Journal newspaper and website.
July 23, 2007 (July 25 on OttawaBusinessJournal.com)

Click here to view this article on OttawaBusinessJournal.com.

While the Ottawa Centre for Research and Innovation (OCRI)’s second-quarter venture capital report released last week showed that local investment rebounded from a sluggish first quarter that saw a single disclosed financing deal, the investment community says there is still a funding gap.Ottawa’s startups may have to tighten their belts a little further or look outside of the venture capital community for funding, as venture capitalists (VCs) continue to look for safer investments with faster payouts.

“The VC community is having trouble raising money, and they are not at the pace they were years ago,” says Robert Ford of law firm Gowlings, who notes that the latest quarter’s performance is somewhat expected.

“VC funds, by their very nature, have a short life, and they have to get some return on their investment at the wind-up of their partnerships. But we’re not seeing a lot of big mergers and acquisitions and initial public offerings here, so new money is being invested in good safe returns such as oil and gas, China and India, instead of in ventures.”

There’s definitely less money in the marketplace, Mr. Ford says, and even good companies with interesting technology are getting funded on a smaller scale in Ottawa.

“It’s always a tough environment, especially for new ventures like ourselves, but it’s even more competitive right now with lots of great companies out there competing for a smaller and smaller amount of money,” says Kenton White, chief technology officer of new media company Distil Interactive, which bagged $2.2-million worth of financing in its second quarter.

“We were able to make it work, and it happened in a timely manner for us, but what would make us more optimistic would be if it was easier for VCs to raise money in Ottawa and in Ontario, because it doesn’t do the province a service to see only the top one or two companies getting funded,” Mr. White adds.

Dave Scollon, manager of OCRI’s Ottawa Capital Network, says the local industry is going through a “transition period,” with funding being very tight for early-stage companies and VCs continuing to support portfolio investments which are more likely to produce a payout, and more likely to have a bigger return on investment.

“For all of Ontario, only $250 million was raised in 2006 by VC firms, which is less than what they put in Ottawa alone,” says Mr. Scollon, underlining the fact that there just isn’t enough money – or optimism – to go around to smaller, riskier ventures.

This is true for angel investors like Ottawa Angel Alliance Network member Caroline Somers, who says she is still waiting for returns from several of her ventures.

“I have eight or nine companies which are still outstanding in terms of return on investment, and until I get that capital back, I’m not likely to invest more money,” she says. “The angels are still willing to invest, but there are companies which have been waiting for an exit for greater than 10 years now ¬– they’re still around and still very promising – and in the meanwhile, the capital is still tied up in those few investments … There’s a bit of fatigue in Ottawa; we need positive returns before there’s an uptake in capital.”

VC TRENDS

  • Investments concentrated in one or two larger deals
  • More American funds coming in
  • More bootstrapping for early-stage companies
  • A focus on building up portfolio investments, life sciences and clean tech

However, Celtic House managing partner Andrew Waitman says the second quarter VC numbers aren’t really an indication of the health of the investment community here.

“Venture capital is a business you measure not by volume, but by quality and success of the output, and so the input is irrelevant. When you look at it that way, private equity performance in Ottawa is actually exceeding expectations and continues to be very robust,” Mr. Waitman says. “Many companies are building good business, growing on their own cash and going public at a healthy pace … The underlying environment, the forest, is actually growing quite well.”

Mr. Waitman does admit, however, that Ottawa will need to see more large successes like Cognos and Waterloo’s Research in Motion in order for more money to come in to the city.

He notes that VCs might seem more cautious now than during the boom, but the fact is that money was poured into companies which shouldn’t have been funded.

“A lot of companies in Ottawa are cool, but have to be funded differently, because once you take VC money it’s all about scale and velocity,” he says. “What you’re going to see is a healthy ecosystem of mom-and-pop-type smaller companies bootstrapping with no VC money for a few years, then we’ll discover them and inject funds to grow them fast and furious.”

One thing that the investment community agrees on is that companies focusing on clean technology and life sciences are going to be the big winners in the near future, a suggestion supported by a recent PricewaterhouseCoopers survey that stated that 68 per cent of life sciences firms nationally are expecting profits within the next five years.

“The return on investment is looking pretty good on these companies, and they’re very exciting investments. We’re already seeing more VC money flowing to clean tech companies here, and it will continue,” says Mr. Ford. “It makes a lot of sense given the world we live in, and the good news is that there will be some great companies in this space coming out of Ottawa in the next few years.”

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