Global Trends in Venture Capital 2007 Survey January 31, 2008 John Ruffolo , Partner, National leader of the Technology, Media and Telecommunications Industry Group François Sauvageau , Partner, Technology, Media and Telecommunications Industry Group and Montreal Leader of Life Sciences Group Robert Nardi , Senior Manager, Technology Media and Telecommunications Industry Group

Agenda Summary of Deloitte’s 2007 Global Trends in Venture Capital Survey Overview of the Canadian VC landscape Overview of the Québec VC landscape Some Solutions Q&A Global Trends in Venture Capital 2007 Survey

Summary of Deloitte’s 2007 Global Trends in Venture Capital Survey

Overview of the Canadian VC landscape

Overview of the Québec VC landscape

Some Solutions

Q&A

About the survey The 2007 Survey is sponsored by Deloitte, in cooperation with the Canadian Venture Capital Association (CVCA) and numerous other VC associations internationally. Conducted in the Americas, Asia Pacific, Europe, the Middle East, and Africa. Based on 528 responses from general partners of venture capital firms (with assets under management ranging from less than $100 million to greater than $1 billion). Global Trends in Venture Capital 2007 Survey Figure 1. Location of respondents

The 2007 Survey is sponsored by Deloitte, in cooperation with the Canadian Venture Capital Association (CVCA) and numerous other VC associations internationally.

Conducted in the Americas, Asia Pacific, Europe, the Middle East, and Africa.

Based on 528 responses from general partners of venture capital firms (with assets under management ranging from less than $100 million to greater than $1 billion).

Purpose of the survey Discover the degree to which venture capitalists are expanding their worldwide investment strategy. Is the venture capital community serious about implementing the strategy of investing on a broader global basis? The survey also addressed the following areas: Identify countries or regions most attractive to venture capitalists interested in foreign investment. Better understand how VC business practices are changing in order to facilitate a more global investment approach. Identify the impediments and challenges VCs encounter when investing in various geographic markets. Determine the incentives that motivate VCs to overcome the challenges of foreign investing and encourage them to grow these investments. Global Trends in Venture Capital 2007 Survey

Discover the degree to which venture capitalists are expanding their worldwide investment strategy.

Is the venture capital community serious about implementing the strategy of investing on a broader global basis?

The survey also addressed the following areas:

Identify countries or regions most attractive to venture capitalists interested in foreign investment.

Better understand how VC business practices are changing in order to facilitate a more global investment approach.

Identify the impediments and challenges VCs encounter when investing in various geographic markets.

Determine the incentives that motivate VCs to overcome the challenges of foreign investing and encourage them to grow these investments.

Global VC investment Today Half of the venture community has made a commitment to a global investment strategy 51 percent of global respondents are currently investing outside of their home country European respondents (63 percent) APAC countries (58 percent) U.S. (46 percent) However, it should be noted that most respondents indicated they had fewer than five deals outside of their home country. Global Trends in Venture Capital 2007 Survey

Half of the venture community has made a commitment to a global investment strategy

51 percent of global respondents are currently investing outside of their home country

European respondents (63 percent)

APAC countries (58 percent)

U.S. (46 percent)

However, it should be noted that most respondents indicated they had fewer than five deals outside of their home country.

Global VC investment 5 year outlook Of the 51 percent of investors currently investing globally, 83 percent plan to expand their investments in the next five years. Of the 49 percent of investors currently investing globally, 67 percent have no plans to invest globally in the next five years. Global Trends in Venture Capital 2007 Survey

Of the 51 percent of investors currently investing globally, 83 percent plan to expand their investments in the next five years.

Of the 49 percent of investors currently investing globally, 67 percent have no plans to invest globally in the next five years.

Global VC investment Adequate deal flow in their home country was the reason indicated most frequently for this lack of interest, although a sizeable number (23 percent) are hindered by resource constraints, such as the lack of partners, capital, and time. VCs around the world are essentially dabbling in global markets, with the majority of VC respondents indicating that less than five percent of their capital is invested overseas, generally in less than three deals per fund. VCs are making the majority of their foreign investment in areas with higher quality deal flow, entrepreneurial environments, and access to foreign markets, as well as places where they have experience and thus greater comfort levels. Global Trends in Venture Capital 2007 Survey

Adequate deal flow in their home country was the reason indicated most frequently for this lack of interest, although a sizeable number (23 percent) are hindered by resource constraints, such as the lack of partners, capital, and time.

VCs around the world are essentially dabbling in global markets, with the majority of VC respondents indicating that less than five percent of their capital is invested overseas, generally in less than three deals per fund.

VCs are making the majority of their foreign investment in areas with higher quality deal flow, entrepreneurial environments, and access to foreign markets, as well as places where they have experience and thus greater comfort levels.

Global VC investment increasing… Global Trends in Venture Capital 2007 Survey Figure 4. Percentage of venture capitalists indicating an increase in expanding global investment focus (all respondents)

… But growth is slow and cautious “ There is a small but dedicated group of venture capital pioneers who have embarked upon a global strategy and are driving the growth in these regions. But as a whole, the venture capital industry in the U.S. has not embraced direct global investment yet,” Mark Heesen, president of the National Venture Capital Association. Global Trends in Venture Capital 2007 Survey Figure 6. Foreign investments currently held by VC firms (all respondents)

“ There is a small but dedicated group of venture capital pioneers who have embarked upon a global strategy and are driving the growth in these regions. But as a whole, the venture capital industry in the U.S. has not embraced direct global investment yet,”

Mark Heesen, president of the National Venture Capital Association.

Global VC investment But those VCs who are looking beyond their borders are not necessarily looking very far beyond them. Those in the Asia Pacific region and Europe primarily are selecting other countries in their own regions. Asia Pacific investors, for instance, are primarily targeting China for their investments, followed by the U.S., and then other Asian countries. European VCs look to Central and Eastern Europe first; then the cluster of Austria, Germany, Liechtenstein, and Switzerland; and then finally the U.S. Investors in the Americas (excluding the U.S.) are looking at neighboring countries in the Americas and the U.S. Only U.S. investors are going halfway around the world to focus on China and India. Asia Pacific, European and non-U.S. Americas investors are still sticking fairly close to home. Global Trends in Venture Capital 2007 Survey

But those VCs who are looking beyond their borders are not necessarily looking very far beyond them.

Those in the Asia Pacific region and Europe primarily are selecting other countries in their own regions.

Asia Pacific investors, for instance, are primarily targeting China for their investments, followed by the U.S., and then other Asian countries. European VCs look to Central and Eastern Europe first; then the cluster of Austria, Germany, Liechtenstein, and Switzerland; and then finally the U.S.

Investors in the Americas (excluding the U.S.) are looking at neighboring countries in the Americas and the U.S.

Only U.S. investors are going halfway around the world to focus on China and India. Asia Pacific, European and non-U.S. Americas investors are still sticking fairly close to home.

US Perspective Canada: one of the primary target countries for U.S. venture capitalists. Global Trends in Venture Capital 2007 Survey Figure 49. Primary locations where investors would like to expand investment focus (U.S. respondents)

Canada:

one of the primary target countries for U.S. venture capitalists.

Canada perspective Global Trends in Venture Capital 2007 Survey Figure 60. Top locations with an unfavorable tax environment (all respondents)

Canadian landscape “ The outlook for the Canadian venture capital industry is bleak given its ecosystem is broken and there is no immediate solution at hand. The Canadian government and the domestic VC community must join forces to bring the industry back from the brink of collapse” Global Trends in Venture Capital 2007 Survey

“ The outlook for the Canadian venture capital industry is bleak given its ecosystem is broken and there is no immediate solution at hand. The Canadian government and the domestic VC community must join forces to bring the industry back from the brink of collapse”

The Canadian venture capital funding ecosystem Global Trends in Venture Capital 2007 Survey

The seven phases of venture capital funding 1. Start Up Phase Self-funding based on savings, credit cards and early revenues reinvested in the company. 2. Friends and Family Round (Up to $500,000) Friends and family are an important source of capital for many small entrepreneurs. They are a readily accessible source of funds, with less complexity compared to formal lending institutions and formal investors. Health of this capital source in Canada: GOOD – Favourable federal tax rules that allow for low capital gain tax rates and a lifetime total capital gains exemption of $750,000 support this critical initial level of funding. Global Trends in Venture Capital 2007 Survey 1. Start Up Phase 2. Friends and Family Round (Up to $500,000) 3. Angel Investor Round ($500,000 to $2 million) 4. “A Round”: Retail Venture Capital Funds ($2 million to $5 million) 5. “B Round”: Private Venture Capital Funds ($5 million to $10 million) 6. “C Round”: Usually co-investment with U.S. partners ($10 million to $25 million) 7. Initial Public Offering: ($25 million and up)

1. Start Up Phase

Self-funding based on savings, credit cards and early revenues reinvested in the company.

2. Friends and Family Round (Up to $500,000)

Friends and family are an important source of capital for many small entrepreneurs. They are a readily accessible source of funds, with less complexity compared to formal lending institutions and formal investors.

Health of this capital source in Canada: GOOD – Favourable federal tax rules that allow for low capital gain tax rates and a lifetime total capital gains exemption of $750,000 support this critical initial level of funding.

The seven phases of venture capital funding 3. Angel Investor Round ($500,000 to $2 million) Working with angel investors means acquiring venture capital from wealthy individual investors or pools of angel investors. Angel investors look for companies that exhibit high-growth prospects, have a synergy with their own business or compete in an industry in which they have succeeded. Health of this capital source in Canada: FAIR – Lower capital gains tax rates have played a role in this important second level of funding. Angel investment sets the stage for a company to prove its growth potential as part of attracting more formal sources of venture capital funding from banks or investment firms in later phases. Global Trends in Venture Capital 2007 Survey

3. Angel Investor Round ($500,000 to $2 million)

Working with angel investors means acquiring venture capital from wealthy individual investors or pools of angel investors. Angel investors look for companies that exhibit high-growth prospects, have a synergy with their own business or compete in an industry in which they have succeeded.

Health of this capital source in Canada: FAIR – Lower capital gains tax rates have played a role in this important second level of funding. Angel investment sets the stage for a company to prove its growth potential as part of attracting more formal sources of venture capital funding from banks or investment firms in later phases.

The seven phases of venture capital funding 4. “A Round”: Retail Venture Capital Funds ($2 million to $5 million) Retail Venture Capital Funds (RVCF) are similar to mutual funds but generally invest in high-risk smaller businesses and are open to investment by the general public. Investors in RVCFs are eligible for fairly generous tax credits that are not available to mutual fund investors. Health of this capital source in Canada: POOR – Investments in LSIFs qualify for a federal RVCF tax credit. Seven provinces (Nova Scotia, New Brunswick, Quebec, Ontario, Manitoba, Saskatchewan and British Columbia) also support the industry by offering an additional tax credit of 15 percent credit, bringing the total benefit to 30 percent of their RVCF investment. However Ontario’s plans to phase out the RVCF tax credit by 2011 puts the health of this critical stage of venture capital investment in jeopardy (particularly in Ontario) as poor returns on investment have made it difficult for such funds to attract new sources of investment capital from the public. Global Trends in Venture Capital 2007 Survey

4. “A Round”: Retail Venture Capital Funds

($2 million to $5 million)

Retail Venture Capital Funds (RVCF) are similar to mutual funds but generally invest in high-risk smaller businesses and are open to investment by the general public. Investors in RVCFs are eligible for fairly generous tax credits that are not available to mutual fund investors.

Health of this capital source in Canada: POOR – Investments in LSIFs qualify for a federal RVCF tax credit. Seven provinces (Nova Scotia, New Brunswick, Quebec, Ontario, Manitoba, Saskatchewan and British Columbia) also support the industry by offering an additional tax credit of 15 percent credit, bringing the total benefit to 30 percent of their RVCF investment. However Ontario’s plans to phase out the RVCF tax credit by 2011 puts the health of this critical stage of venture capital investment in jeopardy (particularly in Ontario) as poor returns on investment have made it difficult for such funds to attract new sources of investment capital from the public.

The seven phases of venture capital funding 5. “B Round”: Private Venture Capital Funds ($5 million to $10 million) Private venture capital funds invest in companies that have demonstrated a continued track record of success. These funds are generally structured as limited partnerships and investors are typically large tax exempt entities (i.e. pension funds) or large financial institutions (i.e. banks or insurance companies). Health of this capital source in Canada: POOR – This sector has suffered as a result of the technology bubble and is still trying to rebuild. Poor returns have made it very difficult for such funds to attract new sources of investment capital from limited partners. Global Trends in Venture Capital 2007 Survey

5. “B Round”: Private Venture Capital Funds

($5 million to $10 million)

Private venture capital funds invest in companies that have demonstrated a continued track record of success. These funds are generally structured as limited partnerships and investors are typically large tax exempt entities (i.e. pension funds) or large financial institutions (i.e. banks or insurance companies).

Health of this capital source in Canada: POOR – This sector has suffered as a result of the technology bubble and is still trying to rebuild. Poor returns have made it very difficult for such funds to attract new sources of investment capital from limited partners.

The seven phases of venture capital funding 6. “C Round”: Usually co-investment with U.S. partners ($10 million to $25 million) Once a company has proven itself to a venture capital firm in Canada, the next step is to attract new rounds of investment from a syndicate of partners that often includes U.S. venture capital firms. This level of investment would usually see a Canadian venture capital firm act as lead investor by coordinating funding deals and representing the group’s members. Health of this capital source in Canada: POOR The Canadian industry is often unable to lead international co-investment initiatives because there are neither enough syndicates or funds in Canada. As a result U.S. companies, often become the lead syndicate, which can result in Canadian companies moving to the U.S. to be closer to their source of funding. Global Trends in Venture Capital 2007 Survey

6. “C Round”: Usually co-investment with U.S. partners

($10 million to $25 million)

Once a company has proven itself to a venture capital firm in Canada, the next step is to attract new rounds of investment from a syndicate of partners that often includes U.S. venture capital firms. This level of investment would usually see a Canadian venture capital firm act as lead investor by coordinating funding deals and representing the group’s members.

Health of this capital source in Canada: POOR The Canadian industry is often unable to lead international co-investment initiatives because there are neither enough syndicates or funds in Canada. As a result U.S. companies, often become the lead syndicate, which can result in Canadian companies moving to the U.S. to be closer to their source of funding.

The seven phases of venture capital funding 7. Initial Public Offering ($25 million and up) An initial public offering (IPO) is the first sale of stock to the public by a private company. IPOs are only possible after a company has proven itself through several successive rounds of funding, and is seen as having long-term potential. To reach this phase, a company must have had several successful rounds of financing. Health of this capital source in Canada: FAIR TO GOOD – Several Canadian technology companies have achieved some success in 2007, but if systemic problems are not fixed in earlier stages of VC funding in Canada, companies won’t have the financial backing to make it to this stage in the future. Global Trends in Venture Capital 2007 Survey

7. Initial Public Offering ($25 million and up)

An initial public offering (IPO) is the first sale of stock to the public by a private company. IPOs are only possible after a company has proven itself through several successive rounds of funding, and is seen as having long-term potential. To reach this phase, a company must have had several successful rounds of financing.

Health of this capital source in Canada: FAIR TO GOOD – Several Canadian technology companies have achieved some success in 2007, but if systemic problems are not fixed in earlier stages of VC funding in Canada, companies won’t have the financial backing to make it to this stage in the future.

The Problem – Foreign Based Venture Capital Withholding and Section 116 Certificate process Requirement to file Canadian tax returns by foreigners who don’t owe taxes creates hundreds of pages of unnecessary paperwork Barriers to liquidity for cross border mergers However, the Federal government did: Recognize US LLCs under the Canada-US Treaty Eliminate withholding taxes on cross-border interest Question: Does the Canadian taxation system support or discourage the mobility of international capital? Global Trends in Venture Capital 2007 Survey

Withholding and Section 116 Certificate process

Requirement to file Canadian tax returns by foreigners who don’t owe taxes creates hundreds of pages of unnecessary paperwork

Barriers to liquidity for cross border mergers

However, the Federal government did:

Recognize US LLCs under the Canada-US Treaty

Eliminate withholding taxes on cross-border interest

Question: Does the Canadian taxation system support or discourage the mobility of international capital?

The Problem – Domestic Based Venture Capital This is the real problem; foreign venture capital could fill some of the gap BUT strong domestic venture capital is critical Need to look at the entire financing ecosystem Address issues at each stage of the ecosystem The ultimate problem! Canadian entrepreneurs receive much less capital funding than their U.S. competitors (3X less) Canadian companies that don’t have access to capital are unlikely to evolve into globally competitive enterprises While the best Canadian entrepreneurs continue to raise funds, the financing process increasingly encourages emerging new businesses to leave Canada. Global Trends in Venture Capital 2007 Survey

This is the real problem; foreign venture capital could fill some of the gap BUT strong domestic venture capital is critical

Need to look at the entire financing ecosystem

Address issues at each stage of the ecosystem

The ultimate problem!

Canadian entrepreneurs receive much less capital funding than their U.S. competitors (3X less)

Canadian companies that don’t have access to capital are unlikely to evolve into globally competitive enterprises

While the best Canadian entrepreneurs continue to raise funds, the financing process increasingly encourages emerging new businesses to leave Canada.

Québec landscape Global Trends in Venture Capital 2007 Survey

Venture capital investment in Q3 Tops $500 MM Dollars invested and companies financed Global Trends in Venture Capital 2007 Survey Amount Invested ($ Millions) # Companies Financed 128 168 $347 $508 $611 131 $438 146 $512 141 Source: Thomson Financial

Venture capital investment trending slightly higher Dollars invested and companies financed – Four quarter rolling averages Global Trends in Venture Capital 2007 Survey Amount Invested ($ Millions) # Companies Financed Source: Thomson Financial

North american context: Ontario, Québec and BC finish in 5 th , 13 th and 20 th place overall Q3 2007 VC disbursements ranking by province and state (CAD$ MM) Global Trends in Venture Capital 2007 Survey US data as per the MoneyTree ™ Report by PWC/NVCA based on data by Thomson Financial Source: Thomson Financial

Financing sizes continue to exceed historical averages Average amount invested per company Global Trends in Venture Capital 2007 Survey Average Amount Invested (CAD$ Millions) Average $2.7 MM Source: Thomson Financial

2.2x more invested in US firms in 2007 differential narrowing Amounts invested per company, Canada & US Global Trends in Venture Capital 2007 Survey Amount Invested ($ CAD Millions) Source: Thomson Financial

Foreign investment into Canada outpacing Canadian investment abroad Dollars flowing into Canada vs. Dollars flowing out Global Trends in Venture Capital 2007 Survey Amount Invested ($Cdn Millions) * 2007 Annualized Source: Thomson Financial

Life sciences investment up from Q2, down from Q1 Dollars invested and completed transactions in life sciences Global Trends in Venture Capital 2007 Survey Amount Invested (CAD $ Millions) # Financings Source: Thomson Financial

Follow-on financings continue to dominate Dollars invested, new vs. follow-on Global Trends in Venture Capital 2007 Survey Source: Thomson Financial

69% of Q3 investments directed to later stage companies Dollars invested by stage Global Trends in Venture Capital 2007 Survey Source: Thomson Financial

Top (disclosed) VC deals of Q3 2007 Foreign investment focused on larger deals Global Trends in Venture Capital 2007 Survey * Includes foreign participation Source: Thomson Financial Company City Province $CAD MM Invested Sources of Capital OANDA Corporation* Toronto ON $104.6 Enobia Pharma Inc.* Montreal QC $40.1 Neuraxon Inc.* Toronto ON $33.5 Topigen Pharmaceuticals Inc.* Montreal QC $26.0 BlueStreak Technology Inc.* Montreal QC $20.9 QuickPlay Media Inc.* Toronto ON $15.7 Vantrix Corporation* Montreal QC $12.6 BTI Photonic Systems Inc.* Ottawa ON $12.5 Strangeloop Networks Inc. Vancouver BC $11.5 NowPublic Technologies Inc.* Vancouver BC $11.6

Ontario’s share jumps; B.C. shows greatest decline Dollars invested by region Global Trends in Venture Capital 2007 Survey Q2 2007 $438 Million Q3 2007 $512 Million Source: Thomson Financial

Ontario sees lead over Québec and B.C. in Q3 Quarterly investment in Ontario and Québec Global Trends in Venture Capital 2007 Survey Amount Invested (CAD$ Millions) Source: Thomson Financial

Québec contributed 80% of fundraising in first nine months of 2007 New capital commitments by province Global Trends in Venture Capital 2007 Survey Amount Raised (CAD$ Millions) Source: Thomson Financial

VC-backed IPO and M&A exit trends # of exits and average disclosed transaction sizes Global Trends in Venture Capital 2007 Survey # VC-Backed Exits Average Disclosed Offering/Transaction Sizes ($ MM) IPO M&A Source: Thomson Financial

Some Solutions Friends and Family Further decreases in the capital gains tax rate Angels Further decreases in the capital gains tax rate Flow-through shares Angel tax credit for direct investment Retail venture capital program – tax credit for investment in funds Matching co-investment angel funds A Round (Retail Venture Capital Funds) Retail venture capital program – tax credit for investment in funds Matching co-investment venture capital funds Global Trends in Venture Capital 2007 Survey

Friends and Family

Further decreases in the capital gains tax rate

Angels

Further decreases in the capital gains tax rate

Flow-through shares

Angel tax credit for direct investment

Retail venture capital program – tax credit for investment in funds

Matching co-investment angel funds

A Round (Retail Venture Capital Funds)

Retail venture capital program – tax credit for investment in funds

Matching co-investment venture capital funds

Some Solutions (continued) B Round (Private Venture Capital Funds) Matching co-investment venture capital funds C Round (Domestic and Foreign Venture Capital Funds) Matching co-investment venture capital funds Change tax legislation (Section 116, etc.) Exit (IPO/M&A) Prescribed stock exchange tax change Cross border merger tax rules Global Trends in Venture Capital 2007 Survey

B Round (Private Venture Capital Funds)

Matching co-investment venture capital funds

C Round (Domestic and Foreign Venture Capital Funds)

Matching co-investment venture capital funds

Change tax legislation (Section 116, etc.)

Exit (IPO/M&A)

Prescribed stock exchange tax change

Cross border merger tax rules

Questions? Global Trends in Venture Capital 2007 Survey

Questions?

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