This document analyzes data on Canada's venture capital industry and identifies several challenges it faces: 1) Venture capital investment as a percentage of GDP has steadily decreased in Canada since 2000, while it remains over double the rate in the US. 2) Domestic venture capital fund activity in Canada has remained flat in recent years, while foreign funds have increased their share of investments. 3) Weak fundraising has contributed to flat or declining levels of activity from Canadian venture capital funds, reducing support for high-growth technology companies.

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

4. 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 GDP
As % of GDP, Canadian venture capital invested has steadily decreased since 2000
Venture 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

5. 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 States
Venture capital invested to GDP in the US is more than double Canada’s
Market 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% in
recent years

6. 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 funds
Post-2000 venture capital invested in Canada has not increased substantially during growth cycles
A key factor has been flat levels of investment activity on the part of domestic funds
Recent years of market growth (e.g., 2007) relied more on foreign funds, which have gradually increased their share of all
disbursements: from 20% in 1999 to 30% in 2011

7. 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 funds
Canada’s mix of active venture capital investors has changed dramatically over the past decade
Since 2000, the domestic fund-management industry has seen major consolidation, as large numbers of corporate,
government & retail venture capital funds have merged or wound up
This has placed a greater onus on Canadian private-independent funds & cross-border investors

8. 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 States
Well-established US venture capital market activity dominates in North America
In the early-to-mid 2000s, Canadian market activity accounted for approximately 6-7% of all disbursements in North America
In more recent years, the Canadian share has been reduced to 4-5% of all disbursements, on average

9. 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 US
US venture capital market benefits from a more resilient fund-raising environment
Post 2000, American fund-raising bounced back in 2003, grew annually until 2008, & showed growth again at the time of the
market s
market’s renewal in 2011
Over the same period, Canadian fund-raising has been comparatively flat, contributing to flat investment activity

11. Canadian Venture Capital Invested by Sector, Domestic Funds, 2004-2011
16% 10%
2%
25%
47%
Clean-tech IT Life sciences Other tech Non-tech
Canadian venture capital fund profile
Of the C$8.5 billion invested by Canadian funds over 2004-2011, 47% went to IT firms, 25% to life sciences firms & 10% to
clean-tech firms
Due to their broad coverage of Canadian regional sub-markets, domestic funds have also accounted for a high proportion of
y
non-tech investment activity
In the same period, 57% of domestic dollars went to expansion & other late-stage firms, while 43% went to early-stage firms

12. Canadian Venture Capital Invested by Sector, Foreign Funds, 2004-2011
1%
3% 10%
32%
54%
Clean- tech IT Life sciences Other tech Non-tech
Foreign venture capital fund profile
Of the C$3.9 billion invested by US & other foreign funds in Canada over 2004-2011, 54% went to IT firms, 32% to life
sciences firms & 10% to clean-tech firms
Cross-border investors usually partner with Canadian funds in follow-on financing syndicates backing companies based in
urban technology sector clusters
gy
Consequently, 66% of foreign dollars went to expansion & other late-stage firms, while 34% went to early-stage firms

13. 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 funds
95% of Canadian first-timers go to Canadian funds
First-time financings: Deals involving firms utilizing venture capital for the first time & a vital indicator of future trends
As domestic funds are close to local sector clusters, they can effectively evaluate & leverage new opportunities; most foreign
investors lack this capability

14. 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 financings
First-time deal-making has been flat or in decline for much of the past decade
Particularly in dollar terms, first-time investment activity has shown little or no upward movement over recent market cycles
Without better-capitalized Canadian funds, it will be difficult to address this market gap

15. 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 funds
Canadian funds also account for 95% of seed & startup financings
Like first-time deals, financings of seed & startup activity are driven by domestic funds operating locally & with knowledge of
innovative ecosystems
Most foreign funds are not well-positioned to assist Canadian firms at their earliest stages of development

16. 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 financings
Dollar flows to seed & startup deals have been particularly weak in recent years
For a variety of reasons (including fund-raising conditions), many venture capital funds increasingly focus on later-stage deal-
making
Closing this gap requires more supply directed to local balanced & specialty funds with early-stage investment mandates

18. 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 Canada
Relative to competitors, Canadian venture capital-backed firms are under-funded
In recent years, Canadian companies have secured, on average, less than 40% of the dollars going to counterparts in the
United States
This trend reflects a major gap, as high-growth innovative firms must go head-to-head with competitors in a global economy

19. 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 Canada
Canadian IT attracts only 50% of venture capital invested in US IT
Though under-funded, Canadian IT firms obtain slightly higher average infusion levels than firms in other sectors
A key factor: Foreign deal-making in Canada is weighted to activity in communications, software, internet-focused & other IT
sectors

20. 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 Canada
US life sciences firms take more than twice the cash injected in Canadian competitors
Capital-intensive companies in Canada have recently seen, on average, only 45% of dollar flows to companies south of the
border
This has occurred despite increased foreign disbursements to domestic biopharmaceuticals sectors since the early 2000s

21. 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 Canada
Canada-US deal capitalization gap especially wide in clean technology
On average, venture capital-backed companies in the United States receive 2.5 times more financing than counterparts in
Canada
This gives American firms a major advantage in fast-emerging alternative energy, conservation & other clean-tech sectors

22. 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 Canada
Getting started, young Canadian firms also face a funding discrepancy
Domestic seed projects & company startups have recently seen average funding at less than half of the US level
This trend is closely linked to supply-strapped Canadian venture capital funds, given their essential role in early-stage deal-
making

23. 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 Canada
Shortfall in Canadian late-stage financings is particularly substantial
Late-stage firms in the United States garner triple the venture capital going to comparable Canadian firms, on average
This points to an inability of some domestic companies to complete full cycles of growth & development & the potential for
premature exits

24. 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/foreign
Cross-border investments play a major role in Canadian financing sizes
Foreign fund investments in early- & late-stage firms have recently been 3X larger than domestic fund investments, on
average; this contribution is vital to high-growth financing syndicates
Across the spectrum, Canadian funds encounter limits to maximizing deal capitalization levels

26. 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 raised
Lower levels of Canadian fund-raising activity linked to major fund types
From its 2001 peak level, retail fund-raising has steadily declined due to legislative changes & perceived performance issues
As the result of an eroded supply base, private fund-raising has largely been unable to offset this trend

27. 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 sources
Mix of supply sources to Canadian venture capital has changed over time
A key aspect of lower fund-raising levels has been the reduced market exposure of individual & institutional sources
Government sources have recently played a more important role, while corporate & foreign sources have backed select
private funds (Note: pension spike in 2011 due to launch of OMERS Ventures)

28. Canadian Venture Capital Under Management by Fund Type, 2010
4%
8% 4%
31%
53%
Corporate funds Government funds Institutional funds Private funds Retail funds
Canada’s venture capital pool continues to contract
As a result of on-going consolidation & flat fund-raising activity, the domestic venture capital industry has experienced net
capital 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)

29. 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 funds
Venture 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 findings
Fund sizes are a key determinant of minimum/maximum investment & deal sizes in a given market

30. 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 million
Number of active Canadian venture capital investors has been in decline
Active 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 fit
this definition in 2010; a decade ago, this share was closer to 80%

32. Deloitte 2011 Canadian Technology Fast 50, Percentage Financed with Venture Capital
38%
62%
VC Financed Not VC Financed
Canada’s fastest-growing innovative firms rely on venture capital
A number of technology indices point to a very high proportion of domestic firms with risk financing histories
For example, 62% of companies in the Deloitte 2011 Canadian Technology Fast 50 are currently backed, or were previously
backed, by venture capital

33. Information used in this report derive from VC Reporter & PricewaterhouseCoopers/NVCA MoneyTree databases
of Thomson Reuters
These 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