Venture capital flowing to emerging Canadian companies plunged nearly 70 per cent in the second quarter as the rout in the telecommunications sector and continuing economic uncertainty scared off domestic and international investors.
"There is a lot of money on the sidelines waiting to see what's what," Andrew Katz, a partner at Kanata, Ont.-based Skypoint Capital Corp., said yesterday.
Capital invested between April and June plummeted to $416-million, down 69 per cent from the $1.3-billion invested in the second quarter of last year. Capital from foreign investors -- primarily U.S. venture funds and corporate groups -- sank to $79-million during the second quarter, down by 75 per cent from the $316-million invested in the same period of 2001.
The figures were released yesterday by Macdonald & Associates Ltd. and the Canadian Venture Capital Association, both based in Toronto.
Foreign investors accounted for 19 per cent of investments during the second quarter, compared with $316-million or 23 per cent in the second quarter of 2001 -- and to $337-million or 45 per cent in the first quarter of this year.
Much of the foreign investment in recent years flooded into companies in the telecommunications or other information technology areas. The second-quarter decline was not unexpected, as the telecommunications sector is now awash in accounting scandals and other problems, said Macdonald & Associates president Mary Macdonald.
"The Canadian market could not remain unscathed indefinitely," Ms. Macdonald said yesterday, "particularly given our strong focus on communications and networking and the drubbing this sector has been taking in the public markets."
Until the second quarter, the Canadian venture capital scene had been holding up better than its counterpart in the United States, where the amount of capital began to fall sharply in late 2000.
Canadian second-quarter figures show the telecom meltdown was particularly evident in Ottawa, where financings fell by 91 per cent to $28-million in the second quarter of 2002 from $321-million a year earlier.
Financings were even higher in the first quarter of this year.
In the first quarter, a handful of big deals by Ottawa telecommunications companies helped push Ontario to the top of the financing charts with a first-quarter tally of $378-million: Innovance Networks Inc. closed an $88-million financing in February, for example, and Catena Networks Inc. landed $75-million (U.S.) in a fourth-round financing in January.
Today, deals are being signed, but they tend to be smaller, take longer to close and feature companies that emphasize customers and cash flow, said principals at several Canadian firms.
Mississauga-based Chantry Networks Inc. recently signed a $9-million (Canadian) financing with a syndicate of three Canadian venture capital firms.
Chantry founder Brian Collie said it took about six months to finalize the deal, which he credits to a solid business plan focusing on a segment of the telecommunications sector that is still showing some growth and to tentative agreements with big-name customers.
Founded by two former employees of Nortel Networks Corp., Chantry is developing products for use in wireless local area networks.
"It was my first time out raising capital, but everybody told me that the [venture capital firms]can take more time now for due diligence," Mr. Collie said.
Other observers agreed with that assessment.
"In 2000 and 1999, there was a lack of due diligence and a rush to do deals, and that hurt everybody," said Brent Holliday, principal with Vancouver-based Greenstone Venture Partners.
Greenstone's first deal, in early 2000, took a little over a month from start to finish, he said.
The firm's most recent -- a $4.3-million (U.S.) financing by Greenstone and other investors for Vancouver-based startup JGKB Photonics Inc. -- took the better part of a year.
Similarly, Skypoint's Andrew Katz said his firm has focused in recent months on helping existing companies in its portfolio, rather than on making new investments.
But the firm recently closed a new $100-million fund, and plans to begin looking at new deals in coming months, Mr. Katz said.
Mr. Katz, whose firm has done syndicated deals with U.S. partners, said the U.S. venture capital scene is in the midst of a shakeup as some players leave the business and others struggle with poorly-performing investments or investors that want to withdraw their funds.
However, he expects U.S. firms will continue to look north for deals.
"We are seeing less and less of U.S. venture capital firms. But they are opportunistic and there is still a lot of money. So I think when things start to pick up again, we'll see them."
Wendy Stueck