PricewaterhouseCoopers, NVCA, Thomson Financial Money Tree and the Dow Jones Ernst & Young’s VentureSource reported that the amount of venture capital (VC) invested in the U.S. during 2007 increased to US$29.5B and the amount of VC raised by U.S. VC funds increased to $34.7B in 2007. This represents the strongest year in VC investing since 2000 and the largest amount raised by VCs since 2001. The good times are back! Let the good times roll!

Meanwhile, although full-year data is not yet compiled, based upon three quarters of data (see Q3 2007 VC Industry Overview from Thomson Financial), the amount of money raised by Canadian VC firms declined in 2007 from 2006, and the amounts invested in Canadian companies by Canadian VCs was essentially flat during 2007 relative to 2006, and not rebounding like in the U.S.

So, what can Canada learn from U.S. VCs?

I recently attended a conference hosted by Harvard Business School to which their VC industry graduates were invited to gather for a day of panel discussions and the overwhelming theme was “globalization.” Many large U.S. VC funds are investing in Europe, India and China. A lot of the capital currently being raised by U.S. VCs is going to other countries, including Canada which ranks fourth amongst foreign countries. During the first three quarters of 2007, 41% of the VC investment in Canada came from U.S. VCs. A friend of mine raised $6M in startup financing from a Boston-based VC and didn’t consider any Canadian VCs.

The evolving strategy for U.S. VC funds is either to be large and global, or small and local. But if you’re small and local, VCs have to have contacts and access to global VCs for raising capital, establishing distribution relationships and making customer contacts. A second key observation was that funds with specialized sector “practice groups” with a mix of both financial partners and those who have operating experience are outperforming “generalist” funds with partners with primarily financial or consulting experience.

If Canadian VC funds want to ride the wave and raise additional capital, they would be well advised to consider the implications of these trends, as the best entrepreneurs in Canada will increasingly have direct access to U.S. VCs.

Peter Tolnai

Peter Tolnai is a special advisor to MaRS on the formation of capital pools and works with the MaRS Venture Group on attracting investment capital to MaRS-sponsored businesses. See more…