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Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
Canada's VC Challenge - A statistical overview - August 2012
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Canada's VC Challenge - A statistical overview - August 2012

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  • 1. Canada’s Venture Capital Challenge Prepared for Canada’s Venture Capital & Private Equity Association Kirk Falconer, Director of Research, Private Equity Thomson Reuters (Canada) August 2012
  • 2. Canada’s Venture Capital Challenge What the data tell us• Canada’s venture capital industry is young by US standards, as market-shaping investor groups & entrepreneurial firms reached a critical mass only in the late 1990s• Post 2000, continuous deal-making that builds innovative sectors has been undermined in Canada by a growing crisis 2000 on venture capital’s supply side• The data indicate that weak fund-raising has contributed to flat or declining levels of Canadian venture capital fund activity in recent years• This has reduced domestic capacity to support high-growth technology companies & respond to new opportunities as they emerge• The data suggest that sustained supply challenges have created or reinforced market gaps• Among the most important is under-funding of high-growth companies going head-to-head with international competitors*• Deal capitalization levels are integrally linked with the issue of Canadian fund sizes• The data also point to lagging activity in market segments that most depend on Canadian funds, such as first-time financings & seed-startup financings * Related studies from the perspective of Canadian entrepreneurs include: ICAP-Strategic Counsel, 2004; Equinox Management Consultants, 2006
  • 3. Venture Capital Invested in Canada, 1998-2011 (C$ Mil), % of Domestic GDP $7,000 0.6% 0.54% $6,000 $6 000 0.5% $5,000 0.4% $4,000 0.3% 0.34% $3,000 0.12% 0.2% 0 2% $2,000 0.07% 0.1% $1,000 $- 0.0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 VC invested in Canada % of GDPAs % of GDP, Canadian venture capital invested has steadily decreased since 2000Venture capital disbursements to domestic economic output (GDP) peaked during the internet boom, reaching 0.5%Since then, disbursements to GDP have fallen, averaging less than 0.1% over the period 2008-2011
  • 4. Venture Capital Invested, % of GDP, Canada & the US, 1998-2011 1.20% 1.00% 0.80% 0.60% 0.40% 0 40% 0.20% 0.00% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Canada United StatesVenture capital invested to GDP in the US is more than double Canada’sMarket activity to GDP in the United States hit 1.1% in 2000, & then briefly converged with indicators in Canada (2002)However, per-annum US disbursements to GDP have typically been more than twice Canadian rates, averaging 0.2% inrecent years
  • 5. Venture Capital Invested in Canada, Total & Domestic Funds, 1998-2011 (C$ Mil) $7,000 $5.87B $6,000 $5,000 $3.75B $4,000 $3,000 $ $2.05B $1.68B $1 68B $1.60B $2,000 $1.04B $1,000 $- 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 VC invested in Canada VC invested by domestic fundsPost-2000 venture capital invested in Canada has not increased substantially during growth cyclesA key factor has been flat levels of investment activity on the part of domestic fundsRecent years of market growth (e.g., 2007) relied more on foreign funds, which have gradually increased their share of alldisbursements: from 20% in 1999 to 30% in 2011
  • 6. Venture Capital Invested in Canada by Fund Type, 1998-2011 (C$ Mil) $4,000 $3,500 $3 500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $- 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 VC invested by non-private Canadian funds VC invested by private Canadian funds VC invested by US & other foreign fundsCanada’s mix of active venture capital investors has changed dramatically over the past decadeSince 2000, the domestic fund-management industry has seen major consolidation, as large numbers of corporate,government & retail venture capital funds have merged or wound upThis has placed a greater onus on Canadian private-independent funds & cross-border investors
  • 7. Venture Capital Invested Across North America, 1998-2011 (C$ Bil) $180.0 $160.0 $140.0 $120.0 $100.0 $80.0 $60.0 $60 0 $40.0 $20.0 $- 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 VC invested in Canada VC invested in United StatesWell-established US venture capital market activity dominates in North AmericaIn the early-to-mid 2000s, Canadian market activity accounted for approximately 6-7% of all disbursements in North AmericaIn more recent years, the Canadian share has been reduced to 4-5% of all disbursements, on average
  • 8. New Commitments to Venture Capital Funds, Canada & the US, 1998-2011 (C$ Bil) $180.0 $ $160.0 $140.0 $120.0 $100.0 $80.0 $60.0 $60 0 $40.0 $20.0 $- 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 VC funds raised in Canada X 10 VC funds raised in USUS venture capital market benefits from a more resilient fund-raising environmentPost 2000, American fund-raising bounced back in 2003, grew annually until 2008, & showed growth again at the time of themarket smarket’s renewal in 2011Over the same period, Canadian fund-raising has been comparatively flat, contributing to flat investment activity
  • 9. Canadian Venture Capital Invested by Sector, Domestic Funds, 2004-2011 16% 10% 2% 25% 47% Clean-tech IT Life sciences Other tech Non-techCanadian venture capital fund profileOf the C$8.5 billion invested by Canadian funds over 2004-2011, 47% went to IT firms, 25% to life sciences firms & 10% toclean-tech firmsDue to their broad coverage of Canadian regional sub-markets, domestic funds have also accounted for a high proportion of ynon-tech investment activityIn the same period, 57% of domestic dollars went to expansion & other late-stage firms, while 43% went to early-stage firms
  • 10. Canadian Venture Capital Invested by Sector, Foreign Funds, 2004-2011 1% 3% 10% 32% 54% Clean- tech IT Life sciences Other tech Non-techForeign venture capital fund profileOf the C$3.9 billion invested by US & other foreign funds in Canada over 2004-2011, 54% went to IT firms, 32% to lifesciences firms & 10% to clean-tech firmsCross-border investors usually partner with Canadian funds in follow-on financing syndicates backing companies based inurban technology sector clusters gyConsequently, 66% of foreign dollars went to expansion & other late-stage firms, while 34% went to early-stage firms
  • 11. Canadian First-Time Financings, Domestic vs. Foreign Funds, 1998-2011 600 500 400 300 200 100 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Canadian VC funds US/Foreign VC funds95% of Canadian first-timers go to Canadian fundsFirst-time financings: Deals involving firms utilizing venture capital for the first time & a vital indicator of future trendsAs domestic funds are close to local sector clusters, they can effectively evaluate & leverage new opportunities; most foreigninvestors lack this capability
  • 12. Canadian First-Time Venture Capital Invested & Deals Done, 1998-2011 (C$, Mil) $2,500 600 500 $2,000 400 $1,500 $1 500 300 $1,000 200 $500 100 $- 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total VC invested Total financingsFirst-time deal-making has been flat or in decline for much of the past decadeParticularly in dollar terms, first-time investment activity has shown little or no upward movement over recent market cyclesWithout better-capitalized Canadian funds, it will be difficult to address this market gap
  • 13. Canadian Seed & Startup Financings, Domestic vs. Foreign Funds, 1998-2011 400 350 300 250 200 150 100 50 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Canadian VC funds US/Foreign VC fundsCanadian funds also account for 95% of seed & startup financingsLike first-time deals, financings of seed & startup activity are driven by domestic funds operating locally & with knowledge ofinnovative ecosystemsMost foreign funds are not well-positioned to assist Canadian firms at their earliest stages of development
  • 14. Canadian Seed & Startup Venture Capital Invested & Deals Done, 1998-2011 (C$, Mil) $1,400 400 $1,200 350 300 $1,000 250 $800 200 $600 150 $400 100 $200 50 $- 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Total VC invested Total financingsDollar flows to seed & startup deals have been particularly weak in recent yearsFor a variety of reasons (including fund-raising conditions), many venture capital funds increasingly focus on later-stage deal-makingClosing this gap requires more supply directed to local balanced & specialty funds with early-stage investment mandates
  • 15. Venture Capital Invested per Company, Canada & the US, 2004-2011 (C$ Mil) $12.0 $11.2 $10.2 $9.7 $9 7 $9.9 $9 9 $10.0 $9.2 $9.0 $8.7 $8.1 $8.0 $6.0 $5.1 $4.2 $4.0 $4 0 $3.6 $3 6 $3.5 $3 5 $3.1 $3.1 $3.1 $3.2 $2.0 $- 2004 2005 2006 2007 2008 2009 2010 2011 United States CanadaRelative to competitors, Canadian venture capital-backed firms are under-fundedIn recent years, Canadian companies have secured, on average, less than 40% of the dollars going to counterparts in theUnited StatesThis trend reflects a major gap, as high-growth innovative firms must go head-to-head with competitors in a global economy
  • 16. Venture Capital Invested per Communications & IT Firm, Canada & the US 2004-2011 (C$ Mil) $12.0 $10.3 $10 3 $10.0 $9.4 $8.8 $8.7 $8.1 $8.0 $7.6 $7.2 $6.9 $6 9 $6.0 $5.5 $4.8 $4.3 $3.8 $3.8 $3.8 $ $3.9 $4.0 $4 0 $3.6 $3 6 $2.0 $- 2004 2005 2006 2007 2008 2009 2010 2011 United States CanadaCanadian IT attracts only 50% of venture capital invested in US ITThough under-funded, Canadian IT firms obtain slightly higher average infusion levels than firms in other sectorsA key factor: Foreign deal-making in Canada is weighted to activity in communications, software, internet-focused & other ITsectors
  • 17. Venture Capital Invested per Life Sciences Firm, Canada & the US, 2004-2011 (C$ Mil) $16.0 $14.4 $14.0 $14 0 $13.3 $ 33 $12.6 $12.3 $11.7 $12.0 $11.2 $11.0 $10.0 $10 0 $9.4 $8.9 $8.0 $6.2 $6.1 $6.0 $5.1 $5.3 $4.7 $4 7 $3.7 $3.7 $4.0 $2.0 $- 2004 2005 2006 2007 2008 2009 2010 2011 United States CanadaUS life sciences firms take more than twice the cash injected in Canadian competitorsCapital-intensive companies in Canada have recently seen, on average, only 45% of dollar flows to companies south of theborderThis has occurred despite increased foreign disbursements to domestic biopharmaceuticals sectors since the early 2000s
  • 18. Venture Capital Invested per Clean Technology Firm, Canada & US, 2004-2011 (C$ Mil) $20.0 $18.0 $18.0 $16.0 $14.0 $14.0 $13.1 $13.0 $12.8 $12.0 $12.0 $12 0 $10.0 $9.5 $8.5 $8.0 $6.7 $6.0 $6.2 $6.0 $5.6 $5 6 $4.8 $5.1 $4.0 $2.4 $2.3 $2.0 $- 2004 2005 2006 2007 2008 2009 2010 2011 United States CanadaCanada-US deal capitalization gap especially wide in clean technologyOn average, venture capital-backed companies in the United States receive 2.5 times more financing than counterparts inCanadaThis gives American firms a major advantage in fast-emerging alternative energy, conservation & other clean-tech sectors
  • 19. Venture Capital Invested per Early-Stage Firm, Canada & the US, 2004-2011 (C$ Mil) $7.0 $6.5 $6.6 $6.2 $6.0 $5.8 $5 8 $5.8 $5 8 $5.5 $5.6 $5.5 $5.0 $4.0 $4.0 $3.5 $3.4 $3.2 $3.0 $2.9 $2.9 $3.0 $2.8 $2.0 $1.0 $- 2004 2005 2006 2007 2008 2009 2010 2011 United States CanadaGetting started, young Canadian firms also face a funding discrepancyDomestic seed projects & company startups have recently seen average funding at less than half of the US levelThis trend is closely linked to supply-strapped Canadian venture capital funds, given their essential role in early-stage deal-making
  • 20. Venture Capital Invested per Expansion & Late-Stage Firm, Canada & the US 2004-2011 (C$ Mil) $16.0 $14.0 $13.6 $13 6 $12.1 $12.4 $12.1 $11.9 $12.0 $11.4 $10.3 $10.3 $10.0 $10 0 $8.0 $5.8 $6.0 $4.8 $4 8 $4.1 $3.8 $4.0 $3.4 $3.1 $3.1 $2.9 $2.0 $0.0 2004 2005 2006 2007 2008 2009 2010 2011 United States CanadaShortfall in Canadian late-stage financings is particularly substantialLate-stage firms in the United States garner triple the venture capital going to comparable Canadian firms, on averageThis points to an inability of some domestic companies to complete full cycles of growth & development & the potential forpremature exits
  • 21. Average Early- & Late-Stage Investment Sizes, Domestic vs. Foreign Funds 2004-2011 (C$ Mil) $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $- 2004 2005 2006 2007 2008 2009 2010 2011 Early-stage/domestic Early-stage/foreign Late-stage/domestic Late-stage/foreignCross-border investments play a major role in Canadian financing sizesForeign fund investments in early- & late-stage firms have recently been 3X larger than domestic fund investments, onaverage; this contribution is vital to high-growth financing syndicatesAcross the spectrum, Canadian funds encounter limits to maximizing deal capitalization levels
  • 22. New Commitments to Canadian Venture Capital Funds, Private & Retail Fund-Raising 1998-2011 (C$ Mil) $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1 500 $1,000 $500 $- 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 VC funds raised in Canada Private funds raised Retail funds raisedLower levels of Canadian fund-raising activity linked to major fund typesFrom its 2001 peak level, retail fund-raising has steadily declined due to legislative changes & perceived performance issuesAs the result of an eroded supply base, private fund-raising has largely been unable to offset this trend
  • 23. New Commitments to Canadian Venture Capital Funds by Source, 1998-2011 (C$ Mil) $4,000 $3,500 $3,000 $2,500 $2 500 $2,000 $1,500 $1,000 $500 $- 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Corporations Governments Individuals Pensions Other domestic sources Foreign sourcesMix of supply sources to Canadian venture capital has changed over timeA key aspect of lower fund-raising levels has been the reduced market exposure of individual & institutional sourcesGovernment sources have recently played a more important role, while corporate & foreign sources have backed selectprivate funds (Note: pension spike in 2011 due to launch of OMERS Ventures)
  • 24. Canadian Venture Capital Under Management by Fund Type, 2010 4% 8% 4% 31% 53% Corporate funds Government funds Institutional funds Private funds Retail fundsCanada’s venture capital pool continues to contractAs a result of on-going consolidation & flat fund-raising activity, the domestic venture capital industry has experienced netcapital outflows of over $3 billion in recent years (since 2003)Outflows have primarily been accounted for by corporate, government, institutional & retail funds (outside of Quebec)
  • 25. Venture Capital Funds Managers & Funds, Selected Characteristics, Canada & the US, 2010 (C$) Number of fund managers: 124 833 Number of funds: 166 1,240 Capital under management: $14.9 billion $187.5 billion (US$182.2 billion) Average firm size: $119.4 million $225.0 million (US$218.7 million) Average fund size: $89.4 million $151.2 million (US$146.9 million) Note: Estimates of fund managers & funds include both those making new investments & those primarily managing existing portfolio assets.Canadian venture capital funds are less well supplied than US fundsVenture capital firms in Canada manage j p g just over half of the resources of firms in the United States, while Canadian funds are ,41% smaller than US funds; these 2010 results are comparable to previous findingsFund sizes are a key determinant of minimum/maximum investment & deal sizes in a given market
  • 26. Active Canadian Venture Capital Fund Managers (i.e., Investing $1 Million or More Per Annum), 1998-2011 160 136 active VC’s 140 120 81 active VC’s 100 65 active VC’s 80 60 40 20 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Canadian fund managers investing > $1 millionNumber of active Canadian venture capital investors has been in declineActive investors: Firms that have invested $1 million+ annually (in the United States, the measure is $5 million+ annually)Active Canadian investors have fallen in tandem with fund-raising, with the result that only 52% of existing fund managers fitthis definition in 2010; a decade ago, this share was closer to 80%
  • 27. Deloitte 2011 Canadian Technology Fast 50, Percentage Financed with Venture Capital 38% 62% VC Financed Not VC FinancedCanada’s fastest-growing innovative firms rely on venture capitalA number of technology indices point to a very high proportion of domestic firms with risk financing historiesFor example, 62% of companies in the Deloitte 2011 Canadian Technology Fast 50 are currently backed, or were previouslybacked, by venture capital
  • 28. Information used in this report derive from VC Reporter & PricewaterhouseCoopers/NVCA MoneyTree databases of Thomson ReutersThese databases are the source of official statistics of Canada’s Venture Capital & Private Equity Association & the National Venture Capital Association in the United States Sources of Gross Domestic Product (GDP) data are Statistics Canada & the US Department of Commerce’s Bureau of E B f Economic A l i i Analysis

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