Canada venture capital drawing big-name investors

TORONTO, CANADA: Canada's venture capital industry is neither dead nor dying. Major U.S. and Canadian companies are catching on to what some are already calling a sea change in Canada, where transactions were quietly announced in recent weeks by powerhouses like Google, Microsoft and Canada's own Research In Motion.

"I think we are really kick-starting a new cycle, and it's refreshing," Chris Arsenault, managing partner and chief operating officer at iNovia Capital Inc, said at the Canadian Venture Capital and Private Equity conference last week.

The venture capital sector, which typically invests in small start-up or developing private companies with the aim of taking them public, turned in some of its lowest investment figures ever in Canada in the past two years.

According to data compiled by the Canadian Venture Capital and Private Equity Association (CVCA) and Thomson Reuters, only C$276 million ($267 million) was invested in the sector in the first three months of the year, lower even than last year, when venture capital investing was at its lowest since 1996.

The drop has been squarely blamed on the global financial crisis, which choked off the market for initial public offerings and triggered a broader retreat from risk investing.

Yet venture capitalists, buoyed by growing Canadian government support for the sector, say the figures are misleading, hiding the potential for huge success.

Arsenault said a changing of the guard among investors and investment managers is adding momentum and bringing new strategies to the sector in Canada, where venture capital activity has historically been well below U.S. levels.

"We are right in the phase now where the older guys are retiring from the business while the new guys are going for deeper domain expertise, instead of trying to be one for all and just jump on any opportunity," said Arsenault, whose C$112 million ($106 million) iNovia II fund is invested mostly in digital media, mobile Internet and communications.

The fund did nine deals last year, four in the year to date and is expecting to close on four more by December.

High Profile Attention

Industry veterans say publicly traded companies who scaled back on research and development during the global financial crisis are increasingly looking at Canadian companies to jump-start new venues for growth.

"Similar to the last recession, companies cut innovation spending in the crisis," said Chris Albinson, a Canadian native and the managing director of Panorama Capital, a Silicon Valley investor in venture capital. "The problem for those companies ... is they don't have anything to drive future growth."

Just days ago the Swedish meditech company Elekta, active in cancer care and neurosurgery, bought Montreal-based Resonant Medical Inc, which makes ultrasound imaging technology for treating cancer, for C$30 million.

Google bought Toronto-based start-up Bumptop, which makes a 3D application that changes the way people interact with computers by making screens look more like an actual desk.

Research In Motion, which invented the BlackBerry smartphone thanks in part to venture capital, recently bought software developer Viigo, also a Toronto-based start-up technology firm.

And Microsoft recently bought Toronto's Opalis Software.

These were just the latest in a series of deals that, though small, show bustling activity amid Canadian start-ups ready to take the next step from having an idea to having a product ready for market.

New Cycle

Canadian venture capitalists say the new cycle is changing the industry from head to toe, from the way start-up technologies are born to the kinds of investors they attract.

Change is driven by the economic adversity of the recession -- forcing inventors to do more with less -- and by the hope that comes with recovery and the innovation of post-recession economies again focused on growth, rather than survival.

"I love it, I am very bullish right now," said Rob Chaplinsky, a Canadian venture capital investor based in Silicon Valley whose firm, Bridgescale Partners, provides equity to high growth information technology companies.

"I'd say we're in the best growth cycle in information technology in 12 years."

Chaplinsky points to three areas of technology as the drivers of innovation: cloud, or Internet-based computing that allows all applications to be handled via a Web browser instead of in-house; the widespread adoption and growth of smartphones; and social media applications in consumer and corporate environments.

"Entrepreneurs are not sitting around in a grumpy mood. They are excited. They are building leaner companies," said Chaplinsky, likening the capital-starved industry to vineyards in time of drought.

"These roots are going to be deeper, stronger, and should create a great vintage for start-ups from this era."