The global venture capital (VC) market has been in turmoil since 2008’s financial crisis. When capital markets seized up, investment activity dropped significantly and only recently has shown meaningful signs of recovery. Fundraising is challenging as limited partners have reduced or eliminated their commitments to VC. Many knowledgeable observers believe that the global venture capital market is undergoing a fundamental structural change involving a major consolidation in the number of funds and an increase in focus on investments in Asia and other emerging markets.
In Canada, the VC market was in big trouble before the financial crisis and was devastated by 2008’s events. VC investment had been dropping for a number of years prior to the economic downturn; the market had never fully recovered from the technology bust in 2001, funds had difficulty attracting institutional investment, retail investment through labour sponsored funds was being phased out in many provinces, including Ontario, and returns to investors were tepid at best. By 2008, investment had fallen to levels not seen in 15 years.
Against this backdrop, venture capital market activity has shown improvement over the past 12 months. The U.S. market has stabilized, with biotechnology a major focus of investment activity. According to Mark Hessen, President of the National Venture Capital Association, “the established software and life sciences sectors continue to benefit from a steady commitment of venture capital dollars being put to work within meaningful pockets of innovation” (emphasis added) (National Venture Capital Association, October 15, 2010 press release).
The Canadian market has recently exhibited a slight, but nonetheless positive, increase in activity. In the third quarter of 2010, investment increased 20% compared to the same period in 2009 although it remains well below levels in years prior to 2008. (All financial and statistical data is derived from the CVCA – Canada’s Venture Capital and Private Equity Association and Thomson Reuters).
Investment in biotechnology and other life sciences companies also increased slightly in Q3 and represent about 25% of all Canadian venture capital funding. However, the amount of VC financing in the Canadian life sciences sector falls woefully short of the industry’s requirements. To maintain a sustainable industry, it is estimated the Canadian life sciences sector requires a minimum of between $1 billion to $1.5 billion in annual funding. In 2009, VC investment was approximately $215 million. Other sources of funding, including government programs, angel investors and the public markets, do not come close to filling the gap, and while the market has improved slightly in 2010, it hardly begins to bridge the existing financial chasm.
As a result, industry participants have begun to explore bold initiatives which could increase the amount of capital invested in life sciences companies before it is too late. Possible solutions, such as enhanced tax credits for qualified investments, enhancements to the Scientific Research and Experimental Development tax credit program, capital gains tax exemptions for investments in life sciences companies and a flow-through share program for the industry, require careful analysis and consideration. The industry is too important to Canada’s economic future and the country has invested too much time and money developing a global leadership position in its research capabilities, to squander our potential and advantages by failing to provide optimum conditions for the commercialization of these essential products and technologies.
For a copy of the CVCA’s press release on venture capital investment in Q3 2010, please go to www.cvca.ca/news.