A number of Ottawa companies could be celebrating Christmas by counting some newly invested cash.

With Ottawa Capital Network's disclosed venture capital figures for the first nine months of 2004 down almost $25 million compared to the first three quarters of last year, the city could use a few last-minute deals to boost the year-end total.

"We know of a number of deals that will be closed in Q4 but won't be announced until January or February," said Rob Woodbridge, manager of the Ottawa Capital Network.

"There is activity out there, but we just haven't seen anything percolate out into deals yet. Aside from the fact that there are fewer financings this year, the VCs that usually come in late, like the labour-sponsored funds, have paced themselves well throughout the year, which is why we saw second- and third-quarter numbers so high."

TenXc Wireless Inc. added a kick to the dying days of December by unveiling a venture capital round last week worth US$13.9 million by VenGrowth Capital Partners and U.S. firm JK&B Capital and including new investments from Venture Coaches/Skypoint Capital and BDC.

Mr. Woodbridge expects $45 million to $50 million more to be invested in the final quarter, bringing the tally to about $220 million for the past 12 months. A number of deals closed in December probably won't be announced until next year, but will be included in 2004 figures.

Investment in Ottawa companies totaled $258.61 million in 2003. To put the figures further into perspective, investors poured close to $300 million into Ottawa companies in both the first and fourth quarters of 2002.

"We won't release any numbers for Q4 2004 until the second or third week of January. This is typical because things don't usually come to pass until late December or early January for announcements," Mr. Woodbridge said. "But that big push that we always expect might not happen this year."

There's no doubt it was a tough year to be a startup looking for cash. As a result, entrepreneurs have become experts at stretching limited resources while being frugal with money they solicit from investors.

Most have devised plans to take their business where it needs to go with a substantially smaller amount of money, said Axis Capital partner Greg McElheran.

"We are a seed investor and, primarily, we are the first money in or money in with angels. We are seeing a lot of companies coming to the table with business plans at a much later stage than we saw three years ago for companies looking for first-time funding," he said.

"And few are coming with the notion of building a big end-to-end system. What we are seeing is people building subsets, components and a particular set of functionality or application that fits into a bigger unit."

Axis focused most of its 2004 investments in software and wireless applications, he said.

While the number of deals in 2004 may surpass the total from last year, the dollar amounts of individual investments are down. Apart from two large financings for Tropic Networks and S2io, the 13 other deals were for less than $15 million. There were seven announcements last year of more than $15 million.

"There are still a lot of companies looking for capital and many in Ottawa that are worthy of capital, but what we've seen is that the amounts are lower and nobody is capitalizing a company like they did a few years ago," Mr. Woodbridge said.

"It's a very different time and companies are seeing how far they can go with a couple of million rather than $10 (million). Smarter money, so to speak, is being put in."

Also, in many cases all the cash doesn't get deposited until the company reaches stated milestones, which often include attracting customers. That mentality is reflected by the size of the deals in 2004. The smaller deals have also changed the start-up landscape, which now stresses fundamentals and hitting targets.

"Instead of doling out $10 million or $20 million in the first round, they'll give you $2 million series A round and say, 'Here's $1 million, do these 10 things and you'll get the rest'," Mr. Woodbridge said.

"It's a more realistic way of doing business and the money isn't just being thrown around."

Nevertheless, the technology sector continued to diversify in Ottawa, with financing stretching across many areas, such as life sciences, microelectronics, photonics, software and wireless. Unlike previous years, many companies getting cash were not core telecom plays, although a large percentage exploited telecom skill sets to find innovative solutions to everyday problems.

Mr. McElheran used the example of one of his company's investments, Netistix Technologies, which developed fleet monitoring software based on wireless networking.

"They have a telecom aspect in the sense that they are transmitting the information, but they've built a ... management platform and a wi-fi-enabled box to extract data from cars to be used to provide information for fleet managers," he said.

"So, they are taking their ability to build networked technology with the kinds of standards, quality and reliability you need in a telecom play, but to do something different."

While Netistix got its cash, most early stage companies were left out in the cold as VCs watched to see who survived and, more importantly, who flourished without cash infusions. That's because a large percentage of the deals in 2004 were follow-on financings as investors meted out cash to companies they've already supported.

A number of debt financing deals, which do not make the Ottawa Capital Network list, indicate that companies have begun to look for alternative sources of cash so they don't have to give up equity, Mr. Woodbridge said.

"Only the strong will survive and only the strong should survive; many are going through their growing and suffering year," he said. "It's an interesting time and I think what happens in the next year will be a telltale sign of what's going to happen in the Ottawa VC community."

One positive thing on the financing level was the formation of the Ottawa Angel Alliance, which promises to help companies at the earliest stage find financing and survive the critical first few months to make it through to the VC stage.

While there are new angels coming on to the scene, Mr. McElheran said a number of early stage investors who had gone quiet for a few years had also returned to the market.

"These are people who may have been successful selling companies during the boom who are starting to get involved and work with entrepreneurs as mentors and putting some capital at play," he said.

"As a seed investor, we think it's a terrific thing because any trend that leads to more early stage capital being available for start-up companies to get running is a good thing. Companies are finding ways to bootstrap and take themselves farther along their business plan before looking for money from fund investors, partly because they are getting support from the angels."

Local VCs may not have been as active in Ottawa as in previous years, but they were investing in companies outside the region. After exploring outside opportunities in 2004, Mr. Woodbridge feels investors will begin to look inward in 2005.

There continues to be speculation that Celtic House is close to closing a new investment fund, which will be available sometime in the new year.

And, having local tech guru Terry Matthews come on-board at Natural Convergence as an investor and ambassador remains a highpoint for the tech community. Mr. Matthews hasn't invested time into a startup publicly for a number of years, except for Wales-based Newport Networks, which he took public earlier this year.

But perhaps the surprise of the year was the $44.11-million deal by Tropic, especially since it came about 18 months after the company received a $30-million infusion in the first quarter of 2003. Tropic has received about $175 million in investment so far.

"That's a huge round in a really brutal time to raise money and the players they have in there really came out of left field," Mr. Woodbridge said.

"There's also a great story coming out of DNA Genotek and the beautiful thing about them is that they needed such a small amount to get their product out to market. We will see great news coming out of those guys soon."

VC WINS SO FAR IN 2004 (in millions)

BelAir Networks $2.64 Wireless

Metconnex $10.60 Microelectronics

SipQuest $2 Software

Adherex Technologies Inc. $4 Life Sciences

Seaway Networks $11.01 Microelectronics

ObjectWorld Inc. $1 Software

S2io Technologies $20.48 Hardware

IceFyre $13.11 Microelectronics

Mobile Knowledge $4 Wireless

Tropic Networks $44.11 Photonics

Natural Convergence $12 Software

Zelos Therapeutics Inc. $7 Life Sciences

Spotwave Wireless Inc. $7 Wireless

Taral Networks $13.06 Photonics

DNA Genotek $1.40 Life Sciences

TenXc Wireless Inc. $17.12 Wireless

By Jeff Pappone

special to the Ottawa Business Journal