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TECHNOLOGY REPORTER

When BlackBerry Partners Fund invested in a mobile game developer called SocialDeck, they decided to think small.

Instead of the millions of dollars venture capital firms used to throw at promising technology industry startups, the fund wrote SocialDeck a cheque for $250,000.

"If we'd given them $3-million, they wouldn't have known what to do with the money," said Kevin Talbot, co-managing partner of BlackBerry Partners Fund.

Call it bite-size venture capital. A confluence of economic and technological trends has morphed the tech investment industry into something much more thrifty. The aftershocks of the global recession have greatly reduced the amount of money big funds are willing to give venture capital firms, and how much money those firms are willing, in turn, to give startups. But with the rise of mobile platforms and Web 2.0, the cost of starting up a tech company today are often much lower than just a few years ago, and venture capital firms are increasingly handing out cash with the expectation that it doesn't take as much money as it used to, to launch the next technology powerhouse.

The Canadian venture capital industry has seen much of its activity wiped out over the past 18 months, largely as a result of the global recession. Venture capital firms invested only $179-million across the country during the second quarter of this year, down 42 per cent from the $309-million at the same time last year, according to the Canadian Venture Capital and Private Equity Association. In nominal terms, it was the worst quarter for venture capital funding in 14 years, the association said.

But even as the money dried up, the amount of startups receiving funding remained much more stable, decreasing just 12 per cent compared with the second quarter of last year and virtually unchanged through the first half of 2009. "These trends point to the greater influence of small [venture capital] deal sizes in the current market environment," the association said in its second-quarter report.

Mr. Talbot said many of the big funds that typically invest in venture capital firms have suffered from a denominator effect as a result of the economic downturn - the value of their public equity investments has dropped sharply, and their correlated spending on private equity has dropped as a result.

But the recession only accelerated, rather than prompted, a wider shift among venture capital firms to smaller-money deals. Whereas investing huge sums may have made sense when companies were trying to build technology infrastructure such as broadband and mobile connectivity, the tech startup community's most recent success stories - such as YouTube and Twitter - have instead capitalized on that infrastructure.

"The great outcomes aren't as linked to money-in," said Amar Varma of Extreme Venture Partners. "There's an expectation now that $250,000 should result in traction, meaning a product and a real user base."

Venture capital firms are also changing the way they value monetization. In an age of social networks and downloadable applications, Mr. Varma said many firms now want startups to focus on building a loyal user base first, and making money second. He points to Skype as a prime example - the Internet phone company started small and free, built up a huge following, and then offered extra services for a price.

But even as the venture capital industry becomes leaner, the dwindling cash flow has had a significant impact. For example, Mr. Varma said, the days of big money meant administrative staff or small equipment purchases could easily be taken care of. Now, he said, everything that isn't at the very heart of the company is being cut back. He pointed to one startup founder he worked with who refused to replace his years-old laptop until it finally crashed on him in the middle of a developers' conference.

"When you write big cheques, money can solve small problems," he said. "But downturns force innovation."