Toronto, July 19, 2006 — Canadian VCs continue to stick close to home, with more than half (58%) of Canadian respondents to Deloitte’s 2006 Global Venture Capital Survey citing they have no plans to expand investments outside the country over the next five years, compared to 47% of U.S.-based VCs and 44% of investors overall globally. ‘Adequate deal flow in existing markets’ was cited by Canadian VCs as the primary reason for not pursuing global investments (33%), followed by ‘contractual’ and ‘legal restrictions’ (22% each). The Canadian component of the global survey, conducted jointly by Deloitte and the CVCA - Canada’s Venture Capital & Private Equity Association, measured attitudes, intentions and investment focus of more than 500 venture capitalists worldwide.

“Canadian VCs appear to take a more focused approach to investment compared to their global peers. The combination of a Canadian focus and the strong rally of the local economy over the past few years has fuelled the VCs’ domestic focus, Canadian VCs and private equity groups have chosen to focus on North America and have not developed their expertise in emerging markets,” says Michael Badham, partner, Deloitte. “As the VC industry around the world continues to move towards global investing networks, Canadian VCs should start re-evaluating their strategies to capitalize on international opportunities.  As Canadian technology and manufacturing companies become more global, they will look to their VC and private equity sponsor to become more global as well.”

On the other end of the spectrum, of those Canadian VCs who do plan to expand investments beyond the border, the U.S. (27%), followed by China (23%) and the U.K. (20%), were cited as the top three investment destinations. ‘Higher quality of deal flow’ and ‘access to quality entrepreneurs’ were quoted by two-thirds (67% each) of respondents as the primary reasons for investing in the United States. For Canadian VCs pursuing investments in China, ‘emergence of entrepreneurial environment in non-traditional locations’ (100%), ‘access to foreign markets’ (50%) and ‘higher quality of deal flow’ (33%) were cited as the key investment drivers.

“The U.S. is considered a lucrative investment market for Canadian VCs, not only because of its close trade relationship and geographic proximity, but also because of its global leadership in key technology sectors,” says Rick Nathan, President of the CVCA – Canada’s Venture Capital & Private Equity Association and Partner at Kensington Capital Partners.

Currently, nearly half (48%) of Canadian respondents invest in Canadian companies with key operations outside the country. In particular, the U.S. houses key operations of their portfolio companies, including R&D (53%), engineering (44%) and manufacturing (42%) operations. Following the U.S. are India (18% R&D, 25% manufacturing) and China (22% engineering).

“It is worth noting that just under half of Canadian funds invest in companies with a substantial international presence,” Nathan continues. “This is quite impressive considering the restrictions on foreign investments that affect a significant percentage of our industry -- the Labour Sponsored Investment Funds -- and the smaller size of our funds relative to others.”

The flow of current and future VC dollars
According to survey findings, VCs in Canada and worldwide are continuing to focus on technology sectors including software and communications & networking as their primary target industries. Two-thirds (65%) of Canadian VCs (60% globally) confirmed having current investments in the software sector, followed by 42% of Canadian respondents who have invested in communications & networking as well as in energy/environment clean technology sectors. The strong presence of tech companies in VCs’ portfolios provides a further indication of the industry’s rebound from the days of the dot-com bubble burst.

Looking toward VCs’ future investment focus, energy/environment clean technologies along with healthcare services and consumer business were identified as the industry sectors most likely to enjoy an increase in Canadian VCs’ investments over the next five years (6% each).

“Moving forward, Deloitte’s survey findings indicate investment attention will likely move into three main industry sectors over the next few years. First, within clean technology sectors, which is a positive sign that Canada is closing the gap with its U.S. and European peers in advancing more environmentally friendly alternative energy technologies such as wind, tide and solar power. Second, more investment in healthcare services as we continue to see the implications of an aging population. Third, and of most encouragement, a flurry of future investments in the consumer business markets, which indicate investors’ continued optimism for Canada’s flourishing economy in fuelling consumers disposable cash and buying power for goods and services,” adds Badham.  

Investment and impediments - home and abroad
‘Unfavourable tax environment’ and ‘restrictive environment’ for early-stage companies to be successful were the top two impediments to local investments in Canada, according to two-thirds of Canadian VCs who participated in the survey (68% and 63% respectively).

“One of the main impediments, referring to a ‘challenging business environment for start-up companies to be successful,’ is mainly driven by more restrictive access to bigger markets such as Europe, Asia and the U.S. To eliminate this barrier, trade organizations and governments should continue promoting Canadian products overseas and help local companies access global markets,” adds Badham.

“Canadian companies with interests in the U.S. continue to face a number of technical barriers that impede growth and investment, and ultimately, the success of Canadian entrepreneurs and investors,” adds Nathan. “In addition, the U.S. is generally perceived as a more favourable corporate tax environment for many Canadian companies, although certain kinds of Canadian companies can take advantage of tax credits and other incentives not available in the U.S.”

The main obstructions identified by Canadian VCs for investing in the U.S. include ‘litigation environment that creates additional financial risk’ (60%), ‘high cost of employees’ (31%) and ‘cost of complying with corporate governance’ (29%).

From a global perspective, Canada is attracting increasing numbers of U.S. and other foreign venture capitalists who have recently entered the market. In 2005, according to the CVCA, international and local VCs invested $1.844 billion in approximately 800 companies across Canada. In particular, Deloitte’s study illustrates that Canada continues to appeal to VCs from the U.S., with 8% of U.S. respondents indicating an interest in increasing their investment focus here. 

“The survey findings show that Canada is not only viewed as an investment hot spot with abundant opportunity from domestic VCs, but it is also on the radar for investors around the globe,” says John Ruffolo, National Leader, Technology, Media & Telecommunications, Deloitte. “These findings are very encouraging for the Canadian market and indicate that investors around the globe are enthused by Canada’s economic prospects by continuing to fund emerging companies.”

Deloitte’s study also reveals that global VCs consider ‘travel time and effort’ along with ‘lack of knowledge/expertise of business environment’ as the main investment barriers Canada presents to foreign investors.

About the survey
The 2006 Global Venture Capital Survey was conducted jointly in Canada by Deloitte & Touche LLP and the CVCA. The global survey was administered to venture capitalists in the Americas, Europe and the Middle East (EMEA) and Asia Pacific (APAC). Deloitte received 505 responses from general partners with assets under management ranging from less than US$100 million to greater than US$1 billion. The survey was conducted between April and May 2006. Of the total number of respondents, 278 were based in the Americas (31 in Canada), 141 in EMEA and 86 in APAC.

About Deloitte
Deloitte, one of Canada’s leading professional services firms, provides audit, tax, consulting, financial advisory and enterprise risk services to a wide range of Canadian and international clients. Deloitte is the Canadian member firm of the Deloitte Touche Tohmatsu Verein, which is an association of firms operating in almost 150 countries. Together, DTT member firms have approximately 135,000 employees around the world. In Québec, Deloitte operates as Samson Bélair/Deloitte & Touche.

About the CVCA
The CVCA - Canada’s Venture Capital & Private Equity Association, was founded in 1974 and is the association that represents Canada’s venture capital and private equity industry. Its over 1,100 members are firms and organizations which manage the majority of Canada’s pools of capital designated to be committed to venture capital and private equity investments. The CVCA fosters professional development, networking, communication, research and education within the venture capital and private equity sector and represents the industry in public policy matters.