Economic meltdown in U.S. poses difficulties for digital start-ups

The current economic crisis in the U.S. is expected to further batter Canada’s weak venture capital (VC) market, spelling long-lasting difficulties for start-ups in the digital media industry. Financing for digital media companies has been a tough slog since the industry began taking shape in the early ‘90s. Between 2002 and 2007, VC investment in the early-stage Canadian companies dropped 42%, a trend that is continuing in 2008, according to Canada’s Venture Capital and Private Equity Association. As well, gone are many of the labour-sponsored venture capital funds and federal government programs that supported digital media. The economic crisis in the U.S. is further exasperating the situation, as risk-averse venture capitalists pass over start-ups in favour of more established and proven companies, says Matthew Williams, CTO and founder of Ipeak Networks, an Ottawa-based company that specializes in solutions that enhance Internet-based applications. “There are only a couple of venture capital firms that have money and they are very nervous about giving it out right now,” says Williams, at the recently held Ottawa Venture and Technology Summit. The amount of available VC in Canada is also shrinking, despite a strong domestic economy over the past several years. According to Thompson Financial, VC disbursements in Canada have declined considerably since 2001, from $40 billion seven years ago to less than $20 billion in 2007 and plummeting even further this year, to an abysmal $12 billion. The amount of VC funds raised has also dropped in the last seven years. In 2001, this amount totalled almost $60 billion, followed by a steep drop the following year. The figure peaked in 2005 and 2006, but dropped to about $32 billion this year. And don’t expect the situation to improve over the coming years, warns Williams. Current VC investments will run their course, and with no new funds being created, he predicts a gap in funding over the next coming years. He expects VC firms will become even more cautious, delaying funding for major investments, and supporting only the most promising start-ups with sound business plans and viable products. “You have to have more milestones, more validation, more customers saying its great technology, more awards to get to the point where you are seriously considered as investible,” says Williams. One reason VC firms are hesitant to invest in digital start-ups is because of the fear that competitors will replicate the technology. But the crisis in the U.S. has made venture capital firms even more careful, says Bernie Li, principle with iNovia Capital, a firm that manages early-venture funds. “The amount of capital that entrepreneurs can access to build their companies is retracting, likely from the debt side of the industry and from the private equity side,” he says. This means young companies in the digital media industry will have difficulties raising capital. The valuation of these companies will go down and these depressed cost appraisals mean limited acquisitions.

Economic meltdown in U.S. poses difficulties for digital start-ups

Broadcast | October 16, 2008

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