As U.S. venture capital investment in Canada returns to pre-2002 levels, Quebec has been the biggest benefactor.
In the first nine months of 2004, U.S. venture capital firms invested C$88 million ($73 million) in 11 Quebec companies, compared with just C$51 million in all of 2003 and C$49 million in 2002. And the pace accelerated in the third quarter.
It was just a drop in the bucket in the context of U.S. venture investments – which came to $15.5 billion in the first three quarters of 2004 – but with just under C$500 million in disbursements in all of Canada in the third quarter, the increase in Quebec is substantial.
“That shows you that there’s been a re-ignition of U.S. venture capital in Quebec deals that you haven’t seen in two or three years,” says Kirk Falconer of Toronto-based VC tracking firm Macdonald & Associates Ltd. “For U.S. VCs in particular, to have that much of an increase in Quebec is significant.”
Quebec has become a venture capital hotbed for foreign investments since the 20-month-old Liberal government of Premier Jean Charest relaxed a long-standing policy of using public funds to seed Quebec startups.
According to Quebec’s venture capital association, Réseau Capital, U.S. venture funds “were the primary drivers of Quebec activity in the third quarter.” Indeed, foreign investors – mostly American – brought C$55 million to Quebec venture deals in the quarter, or one-third of disbursements, compared with just C$7 million in the third quarter of 2003.
Quebec companies received C$166 million from all sources in the quarter, up 10% from the same period of 2003 and 6% over the C$156 million in the second quarter of 2004. (Fourth-quarter figures have not yet been tabulated.)
Unlike in the U.S., venture capital activity grew in Canada in the third quarter, with C$498 million in disbursements, a 21% increase over the same quarter of 2003 and 31% higher than in the second quarter of 2004.
While startups all across Canada court U.S. investors, New England-based venture capitalists seem particularly enamored with La Belle Province.
Charley Lax, managing general partner of GrandBanks Capital Inc. in Newton Center, Mass., spoke at the Canada-U.S. Venture Capital Conference in Quebec City recently on cross-border investing. “The honest truth is that the geographic proximity makes it worthwhile,” Lax said before flying with dozens of other Boston- and New York-based venture capitalists on Quebec government-sponsored jets to the two-day conference.
Factor in the lower cost of living and the technical and engineering expertise at Quebec’s well-regarded universities, and the province offers an investment haven despite some bureaucratic headaches that complicate foreign investments.
GrandBanks initially invested in Quebec in 2001, in Montreal-based Web-traffic monitor Coradiant Inc. Earlier last year, it led a $13 million Series C round for Colubris Networks Inc., also of Montreal, along with Mid-Atlantic Venture Funds, Prism Venture Partners and the Business Development Bank of Canada.
Lax says that, while there’s a wealth of technical expertise at Quebec information technology companies, many lack the managerial savvy to bring new products to market, and they benefit from partnering with experienced U.S. VCs.
Macdonald & Associates CEO Mary Macdonald, who also attended the Quebec City conference, says the bulk of U.S. venture investment in Canada has traditionally been in Ontario, but the new Quebec government’s initiative is taking hold, primarily in IT.
Though foreign investment is on the rise in Quebec, some worry that the province is not supplying enough private capital. Traditionally, the Quebec government provided about one-third of all venture capital in Quebec, says Réseau Capital president Annie Thabet. And with less than 10% of investments now coming from private, Quebec-based funds, “it has become evident that we needed to accelerate the arrival of new private funds here,” she says.
In Ontario, domestic private funds make up 23% of investments, compared with the U.S., where domestic private funds make 70% of investments.
But that could begin to change. Provincially owned savings bank Caisse de Dépôt et Placement du Québec has committed some C$200 million over two years to invest in Quebec-based private funds, and the labor-sponsored Solidarity Fund QFL has said it is similarly committed to the new private-funding plan. “So we’re getting there,” Thabet says. “We need the Quebec players to be focusing on solving the structural problems that we have.”
Meanwhile, Réseau Capital is working hard to woo U.S. VCs to Quebec.
“I think it’s a matter of seeing more successes come out of Canada and Quebec specifically,” says Ken Gordon, a partner with law firm Testa, Hurwitz & Thibeault LLP, the conference organizer. “The bottom line for the venture capitalists is that they’ve had some successes in Quebec, and as dealflow gets more competitive in the United States and people start to see successful Canadian companies, whether it be [Research in Motion Ltd.] or Cognos [Inc.] or some of the other big companies, people start to realize that, hey, it’s not that far away.”
Alain Proulx, director of economic affairs for the Québec Government Office in Boston, points out that Quebec is home to 50% of the Canadian IT and biotechnology sectors, and Montreal now ranks as a top biotech center. By all accounts, high-tech is pulling ahead of biotech as the key sector for U.S. venture capital firms in Quebec. In the last quarter alone, Oz Communications Inc. and Airborne Entertainment Inc., both of Montreal, attracted just over $64 million in venture financing, primarily from U.S. firms. And VC watchers expect high-tech will be the key to plugging the funding gap left by the change in Quebec government policy.
“There’s a changing of the landscape in Quebec,” Macdonald & Associates’ Falconer says. “The feeling is that if we can move towards more of a private venture partnership model, then you’re going to increase the rate of capital coming from a range of different sources in the rest of Canada and the U.S.”
