Quebec was the hardest hit province experiencing a VC investment decline of more than half in Q2 2008 from Q2 2007. Ontario saw a slight increase in venture capital investment over Q2 2007. Yet this slight upturn in Ontario does not reflect the true picture as the number of new financings and early stage investment has declined substantially.
The sign of a healthy venture capital market is reflected in the growth of first-time and early-stage financing. This is not the case in Ontario, where first-time and early-stage investments have been declining - Ontario's VC market is ill.
Only $48 million in early stage capital was raised in Q2 2008, compared to $65 million in Q1 2008 for a grand total of $112 million for the first half of 2008. This is less than half of the total $242 million raised in 2007 and 2008 is shaping up to be far worse than 2007.
The Q2 2008 numbers indicate Ontario is "an inhospitable VC environment in Ontario, which is leading investors to other jurisdictions," said Canadian Retail Venture Funds Association president, Les Lyall.
Lyall notes that much of the decline in VC investment - especially in first-time early-stage investments - in Ontario, in the past few years is attributable to the Ontario government's 2005 decision to wind down the labour-sponsored investment fund (LSIF) program.
"If the program were reconstituted, you would see an upward trend in retail fund activity and increased VC investment in Ontario and across Canada," said Lyall. "Investors can see the end and have written off labour-sponsored and retail funds in favour of more traditional investments," he noted.
The 2011 wind down date has forced many investors to pull out of the LSIF program, precipitating a rapid decline in the activity of labour-sponsored and retail funds. Activity in these funds has hit historically low levels, with only $57 million invested in Q1 2008 compared to the $113 million invested in Q1 2007.
In light of these numbers and the slowing economy, the RVFA is calling on the Ontario government to reconsider its 2005 decision to wind-down the LSIF program. The CVCA's Q1 and Q2 numbers highlight the importance of VC investment in creating a foundation for future prosperity in these volatile economic times.
Ontario should be a leader and promote a hospitable venture capital environment for all types of investment in the province. Instead, many VC investors, as the CVCA data indicate, are moving to other jurisdictions. In Q3 2005 American investors injected $303 million in capital into VC projects in Canada; in Q1 2008, this investment has dwindled to $76 million.
LSIFs are a type of retail VC fund. They were designed to allow individuals to invest in start-up companies and receive a tax credit. The money invested, through VC investment, sponsored many innovative start-up companies, most notably Research In Motion (RIM), which has grown into one of the most successful technology enterprises in Ontario, employing thousands of Ontarians.
To date, LSIFs contribute over $2.6 billion annually to the Canadian economy and over $2.3 billion to the Ontario economy. They have created over 30,000 jobs in Ontario and provide a solid investment for over 450,000 individual Ontario investors.
The RVFA represents over 60 individual funds, such as the Canadian Medical Discoveries Fund, which supplies capital to VC investors to invest in innovative emerging enterprises.
