Will the mortgage meltdown hurt or help the VC market?

I’ve received a few calls and emails last week asking how the current financial crisis will affect venture capital both in Canada and the US.According to Rick Nathan, President of the CVCA said there are private equity players who are flush with cash who have barely started dipping into their war chests yet. He estimates major buyout firms have about $10 billion raised privately in 2006 that has not yet been spent.

As for the VC funds, I actually think that this may help Funds raise money. Private Equity typically allocates their capital over various sectors, as one of those sectors falls out of favor, the other sectors can see an up tick. With Tech IPOs doing so well, venture capital may be an area that the larger LPs (those who fund the funders) will allocate more money to.

However, this “good news” will not help overcome the recent Canadian downturn in Venture Capital. According to www.CanadaVC.com (part of Thompson Financial):

Ontario suffered the heaviest losses among the provinces in the 29.7-per-cent decline from the previous quarter in second-quarter national venture capital investment, according to new data from Canada’s Venture Capital & Private Equity Association and Thomson Financial.

Total venture capital investment for the country fell to $426 million for 140 companies in the second quarter, down from $606 million in the first quarter and a decline of 12 per cent from a year earlier.

“While the totals show a reasonable level of investment activity nationwide, they mask a significant shift in our regional markets,” said association president Rick Nathan in a statement. “Venture capital investment has declined dramatically in Ontario, which recorded its weakest quarterly period in recent memory.”

In Ontario, venture capital investment fell by 57.6 per cent between the first and second quarter to $131 million for 34 firms, causing the province to drop to 14th place in terms of investment activity among North America’s regional markets.

So unfortunately, just as I predicated over a year ago, Ontario is feeling the results of our Premier’s flip flop with regard to labour sponsored funds, and Quebec is seeing the positive impact of its LP matching program.

Begs the question, when is Ontario going to finally implement a plan to stop this insanity?

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