In the News...

Lynne Olver

VANCOUVER - Canadian venture capitalists are starting 2003 with a more optimistic outlook than their U.S. counterparts, according to a Deloitte & Touche LLP quarterly survey conducted in December.

The survey found that 47% of Canadian respondents believe the Canadian economic climate will improve this year. Compared to the third quarter, more of them expect to see higher exit valuations for companies they own, and more of them expect portfolio valuations to rise in the next six months.

The survey was sent to 800 people in Canadian venture capital firms and 11% responded.

The consulting firm says the findings contrast with a similar survey it did in the U.S., which found U.S. venture capitalists don't share the Canadians' positive view.

But there's been some volatility in recent Canadian survey results, with respondents feeling positive one quarter and cautious the next.

Michael Badham, a partner in Deloitte & Touche's corporate finance group in Toronto, said that's typical at the top or bottom of a cycle, and he thinks the industry is bumping along at the bottom of one.

"We had a fair degree of pessimism in Q4 2001, and a lot of that bore out - last year was one of the lowest years of merger & acquisition and private equity transactions since 1992," Badham said.

Tech Spending Key To Higher Activity

As 2002 evolved, Deloitte's Canadian VC surveys tracked some fairly high confidence numbers in the first half, but there was a drop-off in the third quarter. Confidence seems to be picking up again. "I think that people were unrealistically optimistic at the beginning of 2002, they thought 'we'll get over this, we'll move forward,' " Badham said. Whether they're being overly optimistic again this year "is a really good question," he added.

Survey respondents said the most important factor in the recovery of venture investment levels is an increase in technology spending. Just over half of respondents said this was more critical than the recovery of public equity markets, an opinion flip-flop from the previous quarter.

Badham said the key issue "for your portfolio companies, the ones you actually own and the ones you're looking at, is, do they have customers?"

Future spending on information technology and telecom products and services is the subject of much debate.

Brent Holliday, partner at Greenstone Venture Partners Ltd. in Vancouver, said last week that his outlook for 2003 can be summed up in four words: "Less bad is good." Greenstone invests in early-stage technology companies, and Holliday said if North American technology and telecom spending is flat this year, "I'd be doing handsprings," but he added that many experts anticipate further declines in capital spending.

There is no "new, new thing" that would make companies replace existing personal computers or systems, Holliday said.

Still, in the broader Canadian venture capital market, Badham said everyone is working hard to make deals happen.

Just over half of Canadian VCs surveyed by Deloitte & Touche expect to completely invest their current funds in less than two years, signalling an increase in investment activity for the upcoming year. And 21% anticipate spending more time raising funds, up from 8% in the third-quarter survey.

The venture fund-raising environment is better in Canada than in the U.S. as institutional investors are increasingly involved, Badham said. "Because the public markets aren't expected to have stellar performance over the next few years, the big pension funds are all looking at alternative investment classes, and private equity and venture capital is important to them," he said. "They all want to put a little bit more money into that."