The flow of venture capital to Ottawa companies this year continues to lag 2003 levels, recent figures show, but officials say VCs are busy working on deals that will soon come to fruition.

Statistics compiled by the Ottawa Capital Network show a dozen VC deals so far this year, totalling $128.9 million. In the first nine months of last year, 15 deals were catalogued, totalling $183 million.

The venture capital market remains tough, said Ottawa Capital Network manager Rob Woodbridge. During the third quarter ended last week, three deals were announced, totalling $60 million.

"VCs have the money, they're just looking for the right deal," Mr. Woodbridge said.

Venture capitalists found one of their deals in Q3 at Tropic Networks. The photonics company bagged a $41-million investment, the largest of the quarter. It was also the largest deal since the fourth quarter of 2002 and the largest investment in the company since its initial round of $92 million in 2001. Tropic has now banked almost $175 million in venture financing.

Mr. Woodbridge said the Tropic deal was a "rarity", but it offers confidence for the future.

Natural Convergence's $12-million deal in Q3 was the largest in that company's history and boosts its VC funding to $24.3 million.

The tepid pace of VC activity in Q3 should come as no surprise, as the summer months are traditionally the slowest period of the year for venture capitalists, Mr. Woodbridge said. He is optimistic that, when all the figures are in around the middle of this month, the total will be closer to $75 million for Q3.

The fourth quarter is usually the most active, as fund managers rush to invest their cash before year end, he said.

"VCs are busy, busy, busy," said Mr. Woodbridge, who anticipates a strong fourth quarter. Activity by angel investors is also picking up, he added.

Marc Babinski, a corporate finance specialist with the Ottawa office of Borden Ladner Gervais, predicts a steady recovery in the VC market. While Ottawa's telecom sector has been "in the dumps", he said venture capitalists are looking to VoIP as "the next big thing".

"VoIP seems to be a hot sector," he said. That trend is focusing attention on companies such as Natural Convergence and SIPquest, he added. The wireless sector is also attracting interest, he noted.

Tim McGunn at Borden Ladner Gervais is also optimistic. He has worked to establish many labour-sponsored investment funds and with companies pursuing VC funding. He applauds the federal government for its recent move to create a "fund of funds" managed by the Business Development Bank of Canada. He also stressed that VC fund managers are better trained today than they were 10 or 15 years ago, having gone through the ups and downs of the market, and are better able to bring their expertise to bear on young companies.

Mr. McGunn would like to see a life sciences fund created in Ottawa that would take advantage of the crossovers between the biotech sector and IT in everything from medical research to health-care administration.

"We have world-class IT people in Ottawa and I want to put them together with world-class biotech people."

Having such a fund "on the ground" would attract more VC money to the city's fledgling life sciences sector, he said.

The TSX Venture Exchange is in Ottawa this week, actively promoting the idea of an initial public offering as an option for smaller firms looking for a cash infusion. Exchange officials will offer a seminar on this option prior to this week's Venture Capital Fair.

With roots in Western Canada, the Venture Exchange wants to raise its profile in Ontario and Quebec, said president Linda Hohol, adding she will offer "the good, the bad and the ugly" about going public at Wednesday's seminar.

An IPO on the Venture Exchange allows owners to retain greater control over their companies than they would by listing on the TSX, but it also carries responsibilities surrounding financial disclosure and other similar issues, she said. She warned that some entrepreneurs might not be comfortable with being the public face of their company.

"We think Ottawa has some good opportunities for us," said Ms Hohol, noting the city has seen a "retrenching" of private venture capital.

- by Scott Evans