In the News...

While entrepreneurs may scramble harder for money in the new year, it could mean bargains for financiers.
by WENDY STUECK

The easy money isn't easy any more.

The market turbulence that has swiped billions from the stock market value of technology companies is also having an effect on venture capitalists and the companies in which they invest.

For 2001, both investors and entrepreneurs expect lower valuations for funded companies, longer time frames for firms to go public or be acquired, and a generally more sober environment.

"The investors are still there, but they are looking for a shorter and clearer path to profitability," says John Eckert, president of the Canadian Venture Capital Association.

"You're going to see [investors] being much more conscious of the quality of the management team, of the business model, of the size of market."

Mr. Eckert says the shift in the Canadian scene won't be as pronounced as it will be in the United States, where venture capitalists poured millions into business-to-consumer dot-com startups, a sector now beset by layoffs and bankruptcies.

And although the downturn means entrepreneurs will likely have to scramble harder for money, and do more with less of it, it could spell some attractive bargains for financiers who didn't blow their budget in the past 12 months.

"The committed, smart investors will see this [downturn] as a buying opportunity," says Mr. Eckert, who is also a managing partner with Toronto venture firm McLean Watson Capital. "We think we're going to see some spectacular opportunities."

While consumer-oriented dot-coms have fallen out of favour, he adds, there is growing demand for high-bandwidth equipment and services.

"It's important to understand that in the technology sector, the core drivers [of investor interest] are still in place."

Robin Louis, president of Vancouver-based venture fund Ventures West, also expects investors to be more cautious in 2001.

"I think we are going to see a slowdown -- we have been in an overheated environment. There was a lot of money thrown at companies that probably shouldn't have been funded."

Ventures West is in a good position to pick up some bargains. The firm had a landmark year in 2000, raising $235-million for its latest fund, and investing $100-million in 14 new companies.

Ventures West has also strengthened its ties to U.S. venture capital firms and institutional investors, a step that many Canadian firms are taking to make sure they are not shut out of big-ticket financings and to provide portfolio companies with a better network of customers, potential employees and other investors.

U.S.-based venture capital firms are increasingly taking an interest in Canadian technology companies.

In December, for example, Ottawa-based Catena Networks Inc. landed $60-million (U.S.) in its third round of financing from a group of investors led by New York-based Goldman Sachs and Berkeley International Capital Corp. of San Francisco.

Mr. Louis expects that trend to continue.

"Ottawa in particular is really on [the U.S. firms'] radar."

The Canadian venture capital scene, which grew rapidly in the nineties, is still a fraction of the size of its U.S. counterpart, where $1-billion funds compete to back the hottest companies.

But Canadian firms closed more deals and invested more money in the first nine months of 2000 than in all of 1999, according to figures from Toronto-based Macdonald & Associates Ltd., which tracks the venture capital sector.

There were $3.4-billion (Canadian) worth of equity financings completed by the end of September, up from $2.7-billion in 1999.

Follow-on financings -- second or third rounds of investment geared at getting companies to the point where they have a commercial product or can go public -- accounted for about two-thirds of the activity.

Brent Holliday of Vancouver-based Greenstone Venture Partners says if there's a pinch, it will likely be felt most in the startup, or seed, stage.

The increased focus on profitability means venture capital firms may steer away from companies that are at the very beginning of their development.

To make matters worse, so-called angels -- typically, technology entrepreneurs who have made millions in their own ventures and want to back other startups -- may have their own holdings tied up in the stock market. They may be less inclined to back startups when their own net worth, at least on paper, is being shredded.

Such belt-tightening on the angel scene, which Mr. Holliday says is already evident in Seattle, makes it tougher for startups to get to the stage where they can put together a solid plan for a conventional venture capital firm.

"It has an impact on entrepreneurs today, and it has an impact on us tomorrow," Mr. Holliday says.

Vernon Lobo, managing director for Toronto-based Mosaic Venture Partners, says he expects good investing opportunities in 2001.

"We're excited about next year -- all our portfolio companies are quite well-funded, most have a year or more of cash."

That means Mosaic can look for new companies in fields such as optical networking equipment, an area that saw a flurry of activity in 2000 but that is expected to stay hot for at least part of the coming year.

In general, venture capital firms said they expect to see a continued focus on technology, more interest by U.S. outfits and sizable investment rounds, even in early stages, as companies try to grow rapidly and grab market share before competitors find their feet.