Nothing ventured: Recent VC gains reflect ‘rising of the tides’

Published in the Ottawa Business Journal newspaper and website.
Feb. 21, 2011 (March 2 on

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The tight venture capital climate appears to be easing, with reports showing an increase in deal flow over the past year, but observers are skeptical it’s an indicator of any long-term growth or that recent investment-boosting initiatives are having their desired effect.

Venture capital investments in Canada grew 10 per cent to $1.1 billion and the number of companies financed rose five per cent in 2010, according to data from Canada’s Venture Capital & Private Equity Association and its research partner, Thomson Reuters.

However, the report also showed fundraising activity slowing to a 16-year low, with venture funds bringing in only $819 million in new commitments. That’s down 24 per cent from the previous year, CVCA said.

And that difficult environment will likely continue for a while, especially in Ottawa, says Ogilvy Renault lawyer Geoffrey Gilbert.

“I think the private equity and venture capital market in the past three to four years has been a wasteland. I’m talking Clint Eastwood as The Man with No Name walking by the carcasses of the labour-sponsored venture funds,” Mr. Gilbert says. “The last parts of different VC empires are now being sold off, and the number of players has been dramatically reduced.”

With the loss of research and development powerhouses like Nortel, Mr. Gilbert says Ottawa has lost its pillars of innovation and is still struggling to find and maintain a niche that will bring it back to the dominance of a decade ago.

“Those things companies like JDS Uniphase and Nortel brought – the spotlight, commitment and resources – I think it’s a loss,” he comments, adding the local circumstances have exacerbated the financing drought.

“I think the private equity and venture capital market in the past three to four years has been a wasteland. I’m talking Clint Eastwood as The Man with No Name walking by the carcasses of the labour-sponsored venture funds.”

– Geoffrey Gilbert, Ogilvy Renault.

That’s not to say there isn’t financing to be had; Mr. Gilbert says his firm has private equity clients who’ve raised $300 million to $400 million for tech funds, something that wouldn’t have happened just a few months before.

J.P. McAvoy, a lawyer with Kelly Santini, notes his firm is definitely seeing a renewed appetite for private capital deals as pent-up demand is now making its way to the markets.

“Things got quiet for a while … Companies are now coming forward and want to begin pursuing funding,” Mr. McAvoy says. “In the public markets, we’ve seen tremendous returns in the last little while, so I think people are now in the spot where they have more money and more confidence to invest.”

Ogilvy Renault’s Mr. Gilbert adds the recent risk capital rebound is more of a “general rising of the tides” brought on by the economic recovery.

Michelle Scarborough, OCRI’s vice-president of investment and commercialization, adds, “(Investors) are starting to breathe a little easier, but whether it’s longer-term, I don’t know … Companies that are trying to build a business are still going to have a tough time finding capital.”

Government initiatives such as Ontario’s Emerging Technologies Fund are beginning to take effect, Ms. Scarborough says, and there’s been a bit of early interest from foreign investors due to the 2010 federal budget’s amendments to Section 116 of the Income Tax Act.

The new rules eliminate the withholding tax foreign investors previously had to pay when they sold Canadian assets, and reduce some of the associated paperwork.

Mr. McAvoy says non-resident clients have responded positively to the fact that they no longer have to wait for the Canada Revenue Agency to determine if they need to file a Canadian tax return before going ahead with a sale. The changes also mean non-residents won’t have 25 per cent of a sale’s proceeds tied up while awaiting CRA clearance, a lengthy process that could sometimes last up to a year.

“When we talk with clients, we can talk about one less restriction, and another indication that Canada is open for business,” he says. “Removing this impediment makes it more attractive to invest here.”

Mr. Gilbert argues the Section 116 amendment has no meaningful impact in terms of spurring investment, since it mostly affects deals that are near completion. In any case, a back-to-basics approach is needed to boost investment levels, he says.

One need only look at online shopping platform Shopify, which in December scored a $7-million series-A round involving three U.S. funds, as an example of the kind of companies the city needs to nurture to attract more financing, says Ms. Scarborough.

“Shopify has customers and revenues, so from the VC perspective it had all the right criteria to make an investment,” she notes. “Let’s build good companies and they’ll get the right amount of investment capital.”

Mr. Gilbert adds Ottawa needs to find that space in which it can become a dominant player again, pointing to clean tech or mobile technology as possible avenues, although he admits he doesn’t know where the city is headed.

“We need to find out what it is that will keep us being the centre of innovation. I’m confident and hopeful that we have young, smart people here who still love Ottawa and will lead us to another collection of companies that represent innovation at its finest and keep us at that reputation, but I don’t know the answer.”

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