Global Trends in Venture Capital 2007 Survey January 31, 2008 John Ruffolo, Partner, National leader of the Technology, Media and Telecommunications Industry Group François Sauvageau, Partner, Technology, Media and Telecommunications Industry Group and Montreal Leader of Life Sciences Group Robert Nardi, Senior Manager, Technology Media and Telecommunications Industry Group
“The outlook for the Canadian venture capital industry is bleak given its ecosystem is broken and there is no immediate solution at hand. The Canadian government and the domestic VC community must join forces to bring the industry back from the brink of collapse”
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Global Trends in Venture Capital 2007 Survey January 31, 2008
John Ruffolo, Partner, National leader of the Technology, Media and Telecommunications Industry Group
François Sauvageau, Partner, Technology, Media and Telecommunications Industry Group and Montreal Leader of Life Sciences Group
Robert Nardi, Senior Manager, Technology Media and Telecommunications Industry Group
• The 2007 Survey is sponsored by Deloitte, in cooperation with the Canadian Venture Capital Association (CVCA) and numerous other VC associations internationally.
• Conducted in the Americas, Asia Pacific, Europe, the Middle East, and Africa.
• Based on 528 responses from general partners of venture capital firms (with assets under management ranging from less than $100 million to greater than $1 billion).
• Adequate deal flow in their home country was the reason indicated most frequently for this lack of interest, although a sizeable number (23 percent) are hindered by resource constraints, such as the lack of partners, capital, and time.
• VCs around the world are essentially dabbling in global markets, with the majority of VC respondents indicating that less than five percent of their capital is invested overseas, generally in less than three deals per fund.
• VCs are making the majority of their foreign investment in areas with higher quality deal flow, entrepreneurial environments, and access to foreign markets, as well as places where they have experience and thus greater comfort levels.
“There is a small but dedicated group of venture capital pioneers who have embarked upon a global strategy and are driving the growth in these regions. But as a whole, the venture capital industry in the U.S. has not embraced direct global investment yet,”
Mark Heesen, president of the National Venture Capital Association.
53%
23%
10%
4%
10%
1-2 investments
3-5 investments
6-10 investments
11-15 investments
16+ investments
Figure 6. Foreign investments currently held by VC firms (all respondents)
• But those VCs who are looking beyond their borders are not necessarily looking very far beyond them.
– Those in the Asia Pacific region and Europe primarily are selecting other countries in their own regions.
Asia Pacific investors, for instance, are primarily targeting China for their investments, followed by the U.S., and then other Asian countries. European VCs look to Central and Eastern Europe first; then the cluster of Austria, Germany, Liechtenstein, and Switzerland; and then finally the U.S.
• Investors in the Americas (excluding the U.S.) are looking at neighboring countries in the Americas and the U.S.
• Only U.S. investors are going halfway around the world to focus on China and India. Asia Pacific, European and non-U.S. Americas investors are still sticking fairly close to home.
“The outlook for the Canadian venture capital industry is bleak given its ecosystem is broken and there is no immediate solution at hand. The Canadian government and the domestic VC community must join forces to bring the industry back from the brink of collapse”
• Self-funding based on savings, credit cards and early revenues reinvested in the company.
2. Friends and Family Round (Up to $500,000)
• Friends and family are an important source of capital for many small entrepreneurs. They are a readily accessible source of funds, with less complexity compared to formal lending institutions and formal investors.
– Health of this capital source in Canada: GOOD – Favourable federal tax rules that allow for low capital gain tax rates and a lifetime total capital gains exemption of $750,000 support this critical initial level of funding.
1. Start Up Phase2. Friends and Family Round (Up to $500,000)
3. Angel InvestorRound ($500,000to $2 million)
4. “A Round”:Retail VentureCapital Funds($2 million to $5 million)
5. “B Round”:Private VentureCapital Funds($5 million to$10 million)
6. “C Round”:Usually co-investmentwith U.S. partners($10 million to $25 million)
7. Initial PublicOffering: ($25 millionand up)
1. Start Up Phase2. Friends and Family Round (Up to $500,000)
3. Angel InvestorRound ($500,000to $2 million)
4. “A Round”:Retail VentureCapital Funds($2 million to $5 million)
5. “B Round”:Private VentureCapital Funds($5 million to$10 million)
6. “C Round”:Usually co-investmentwith U.S. partners($10 million to $25 million)
• Working with angel investors means acquiring venture capital from wealthy individual investors or pools of angel investors. Angel investors look for companies that exhibit high-growth prospects, have a synergy with their own business or compete in an industry in which they have succeeded.
– Health of this capital source in Canada: FAIR – Lower capital gains tax rates have played a role in this important second level of funding. Angel investment sets the stage for a company to prove its growth potential as part of attracting more formal sources of venture capital funding from banks or investment firms in later phases.
1. Start Up Phase2. Friends and Family Round (Up to $500,000)
3. Angel InvestorRound ($500,000to $2 million)
4. “A Round”:Retail VentureCapital Funds($2 million to $5 million)
5. “B Round”:Private VentureCapital Funds($5 million to$10 million)
6. “C Round”:Usually co-investmentwith U.S. partners($10 million to $25 million)
4. “A Round”: Retail Venture Capital Funds($2 million to $5 million)
• Retail Venture Capital Funds (RVCF) are similar to mutual funds but generally invest in high-risk smaller businesses and are open to investment by the general public. Investors in RVCFs are eligible for fairly generous tax credits that are not available to mutual fund investors.
– Health of this capital source in Canada: POOR – Investments in LSIFs qualify for a federal RVCF tax credit. Seven provinces (Nova Scotia, New Brunswick, Quebec, Ontario, Manitoba, Saskatchewan and British Columbia) also support the industry by offering an additional tax credit of 15 percent credit, bringing the total benefit to 30 percent of their RVCF investment. However Ontario’s plans to phase out the RVCF tax credit by 2011 puts the health of this critical stage of venture capital investment in jeopardy (particularly in Ontario) as poor returns on investment have made it difficult for such funds to attract new sources of investment capital from the public.
1. Start Up Phase2. Friends and Family Round (Up to $500,000)
3. Angel InvestorRound ($500,000to $2 million)
4. “A Round”:Retail VentureCapital Funds($2 million to $5 million)
5. “B Round”:Private VentureCapital Funds($5 million to$10 million)
6. “C Round”:Usually co-investmentwith U.S. partners($10 million to $25 million)
5. “B Round”: Private Venture Capital Funds($5 million to $10 million)
• Private venture capital funds invest in companies that have demonstrated a continued track record of success. These funds are generally structured as limited partnerships and investors are typically large tax exempt entities (i.e. pension funds) or large financial institutions (i.e. banks or insurance companies).
– Health of this capital source in Canada: POOR – This sector has suffered as a result of the technology bubble and is still trying to rebuild. Poor returns have made it very difficult for such funds to attract new sources of investment capital from limited partners.
1. Start Up Phase2. Friends and Family Round (Up to $500,000)
3. Angel InvestorRound ($500,000to $2 million)
4. “A Round”:Retail VentureCapital Funds($2 million to $5 million)
5. “B Round”:Private VentureCapital Funds($5 million to$10 million)
6. “C Round”:Usually co-investmentwith U.S. partners($10 million to $25 million)
6. “C Round”: Usually co-investment with U.S. partners($10 million to $25 million)
• Once a company has proven itself to a venture capital firm in Canada, the next step is to attract new rounds of investment from a syndicate of partners that often includes U.S. venture capital firms. This level of investment would usually see a Canadian venture capital firm act as lead investor by coordinating funding deals and representing the group’s members.
– Health of this capital source in Canada: POOR The Canadian industry is often unable to lead international co-investment initiatives because there are neither enough syndicates or funds in Canada. As a result U.S. companies, often become the lead syndicate, which can result in Canadian companies moving to the U.S. to be closer to their source of funding.
1. Start Up Phase2. Friends and Family Round (Up to $500,000)
3. Angel InvestorRound ($500,000to $2 million)
4. “A Round”:Retail VentureCapital Funds($2 million to $5 million)
5. “B Round”:Private VentureCapital Funds($5 million to$10 million)
6. “C Round”:Usually co-investmentwith U.S. partners($10 million to $25 million)
• An initial public offering (IPO) is the first sale of stock to the public by a private company. IPOs are only possible after a company has proven itself through several successive rounds of funding, and is seen as having long-term potential. To reach this phase, a company must have had several successful rounds of financing.
– Health of this capital source in Canada: FAIR TO GOOD – Several Canadian technology companies have achieved some success in 2007, but if systemic problems are not fixed in earlier stages of VC funding in Canada, companies won’t have the financial backing to make it to this stage in the future.
1. Start Up Phase2. Friends and Family Round (Up to $500,000)
3. Angel InvestorRound ($500,000to $2 million)
4. “A Round”:Retail VentureCapital Funds($2 million to $5 million)
5. “B Round”:Private VentureCapital Funds($5 million to$10 million)
6. “C Round”:Usually co-investmentwith U.S. partners($10 million to $25 million)
• This is the real problem; foreign venture capital could fill some of the gap BUT strong domestic venture capital is critical
• Need to look at the entire financing ecosystem
• Address issues at each stage of the ecosystem
• The ultimate problem!
– Canadian entrepreneurs receive much less capital funding than their U.S. competitors (3X less)
– Canadian companies that don’t have access to capital are unlikely to evolve into globally competitive enterprises
– While the best Canadian entrepreneurs continue to raise funds, the financing process increasingly encourages emerging new businesses to leave Canada.
North american context: Ontario, Québec and BC finish in 5th, 13th and 20th place overallQ3 2007 VC disbursements ranking by province and state (CAD$ MM)
$83
$100
$130
$141
$202
$246
$409
$1,022
$3,423
$206
$116
$69
$362
$210
$77
$74
$128
$90
$288
$128
British Columbia
D. of Columbia
Minnesota
Utah
North Carolina
Florida
New J ersey
Quebec
Kentucky
Georgia
Illinois
Pennsylvania
Colorado
Maryland
Washington
Ontario
New York
Texas
Massachusetts
California
US data as per the MoneyTree™ Report by PWC/NVCA based on data by Thomson Financial
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