Two weeks from now in Deloitte's downtown Toronto office towers, 14 Canadian technology entrepreneurs will go on a dream date of sorts, hoping to hook up with eight Boston-based venture capitalists flying in for the day to scope out the talent.
The Bostonians have money to spend and "a propensity to invest in Canada" - welcome news to emerging Canadian tech companies frustrated by the prolonged slump in domestic venture capital activity, said charted accountant John Ruffolo, national leader of Deloitte's technology practice and an organizer of the invitation-only event.
The coming "mini venture fair" is a first for Deloitte in Canada and a sign of the times, said Mr. Ruffolo, who also plans to lead a delegation of Canadian tech firms to meet venture capitalists in California's Silicon Valley later this year.
"It's the first time we have done this, just because of how difficult the situation has become," Mr. Ruffolo said.
The recent federal budget reduced the tax barriers for foreign venture capital investment in Canada, and already this is attracting renewed interest in Canadian technology from U.S. investors, he said.
However, the domestic venture capital market remains in the doldrums, and raising money from Canadian investors "has never been so tough," Mr. Ruffolo said. Venture capital deal-making activity in Canada fell to $1-billion in 2009, the lowest level of activity since the mid-1990s, and down 27 per cent from the amount invested in 2008.
"We try to help Canadian technology, [digital]media and telecommunications companies find financing, whether it be domestically in Canada or anywhere in the world. The real problem has been that domestically there are very, very few VCs left that actually have the capital - which has forced a number of people to go outside of Canada," Mr. Ruffolo said.
"The ones that actually have the money are non-Canadian based," with the deepest pool of venture capital money concentrated in Silicon Valley, followed by Boston.
"But, when you think about it, if you're a relatively small company, and you have to go outside of Canada to look for capital, it's a really tough, challenging task."
Deloitte, which had pushed hard for the tax changes affecting foreign venture capital investment, is now working with the federal government to find ways to support the domestic venture capital industry through tax policy or other measures, Mr. Ruffolo said. (The firm has not considered setting up its own investment arm to bolster venture capital spending in Canada, primarily because "we're not experts in actually running the funds themselves, we're experts in providing advisory work to the funds or to the investee companies," he added.)
In the meantime, Deloitte is following the money, looking for tech-savvy venture capital firms in Boston and Silicon Valley to provide the cash infusions that Canadian companies need to develop to their full potential. Mr. Ruffolo said investors are particularly interested in "technology dealing with mobility or wireless, digital media and clean tech - these are the three biggies."
In preparation for April's venture capital fair, Mr. Ruffolo sent an "e-mail blast" to more than 300 Canadian companies that were on the firm's radar as a result of its annual Fast 50 awards program, which ranks the 50 fastest growing technology companies in the country. While 45 companies asked to be included, Deloitte whittled the list down to 14. "We have screened for the venture capitalists what we think are the top companies that they should be taking a look at," Mr. Ruffolo said.
Chartered accountant and business valuator Jennifer Chasson of Toronto said that, although the credit crunch is easing, "it's still not a robust market for startups - that's the bottom line."
There has been a pickup in investment activity for mid-level companies that weathered the economic downturn. "An established business has a lot more legs than a new business," said Ms. Chasson, president of Chasson Financial.
However, most early-stage companies will likely have to wait until 2011 before they see a noticeable pickup in available funding, she added.
Jim Hjartarson, chief executive officer of Ottawa-based OneChip Photonics Inc., feels it is particularly difficult for technology firms to raise venture capital, given that investors "lost a ton of money" in the tech sector meltdown earlier this decade.
Nonetheless, his firm has raised $19.5-million (U.S.) in two rounds of financing - with initial investments from two Canadian venture capital firms, followed up by investments from two Silicon Valley firms last spring. OneChip develops and manufactures optical transceivers that are smaller and less power-hungry than the photonic integrated circuit products currently on the market .
The company says its new technology will enable new business and consumer broadband applications. "The technology works. We have working transceivers. We're in the final stages of engineering," Mr. Hjartarson said.
"Once we got the venture financing, we were off to the races."
Mr. Ruffolo hopes his venture capital fair next month will lead to many more successful match-ups.
BEFORE YOU PITCH
When Toronto's BlueCat Networks needed money to expand its IP address-management business, chief executive officer Michael Hyatt took one look at the "terrible VC market" in Canada and headed south instead, securing an $11-million (U.S.) investment from Silicon Valley's Bridgescale Partners last October. But entrepreneurs should be prepared before taking their show on the road, Mr. Hyatt said. "Are the dogs eating the dog food? If you have sales, you're ahead of most." He offers these pointers:
Be candid Venture capitalists do their homework and will test you.
Set a valuation, justify it If you always let a venture capitalist make up a value you'll be disappointed.
Set your terms
The terms of the deal are as important, or more important, than the valuation. A VC can buy 20 per cent of your firm and effectively control it through terms that, for example, stop you from raising debt, changing the board or selling the company.
Pick people you like
Choose venture capitalists you like and trust. Business is about people. It's a long road to be stuck with a business partner you don't really like.