Leo Lax (Darren Brown, OBJ).

To put it in Seinfeldian terms, they're real and they're spectacular. Venture capital in the Ottawa area in the first half of 2005 exceeded all expectations as publicly disclosed investments topped $239 million.

That's a tremendous improvement over the first half of 2004, when little more than $80 million in financing occurred.

Leading the way this year is Meriton Networks, which announced a third round of financing worth $64.46 million only one week ago, followed by Zelos Therapeutics, which pulled in $53.68 million, and Tropic Networks, at $41.54 million. All three of those deals occurred in the second quarter.

"There's been a lot of action in the second quarter, and much that hasn't even been announced yet," said Deborah Weinstein, partner at law firm Labarge Weinstein LLP. "It's more robust in this quarter than it has been in prior years, which bodes well for the rest of the year."

One indicator Ms Weinstein likes to see is the diversity of the companies receiving investment. A variety of tech industries doing well is a good defence against another meltdown.

"I don't see any reason for a slowdown. The industry is continuing to build its base all across the board after the bubble burst. Security is big and it's going to get bigger; the semiconductor companies have built themselves a niche and are holding steady; and the telecom companies are healthy and growing. The second half of the year should be positive as well."

And there's more to it than just tossing around bankrolls, she added. Strategic alliances with larger companies are paving the way to the future for many Ottawa startups.

"There hasn't just been investment either, there have been a number of mergers and acquisitions. There have also been strategic partnerships with larger U.S. companies for startups. The worry that customers generally have about startups is that they won't be around in a year, so partnering with these larger companies gives them stability and a solid image. Of course, this can be a minefield, too, so you have to structure things intelligently."

As for those startups, Ms Weinstein issued a warning to investors still sitting on the fence waiting for tangible results before opening their vaults.

"One problem is that it's still harder to get earlier stage financing, which means that there will be fewer companies able to survive later. It sends a mixed message to have fewer seed investments but a lot of Series B and C rounds."

Skypoint Capital CEO Leo Lax was in on the Meriton deal, along with many others. His company has a current portfolio of 23 companies, 17 of which are local. Putting pen to paper on what is so far the largest VC agreement in Canada this year was easier than expected.

"In this case it was fairly easy to pull it together," he admitted. "The team is a very large part of the criteria, and the CEO for Meriton, Mike Pascoe, is fantastic."

Mr. Lax explained that many factors are considered when thinking of investing, one of which is whether the company can succeed on that particular round of financing. Also, companies are divided into three categories.

"In the venture capital world, we see three types of companies. The first one is the company that started pre-bubble – or what we call before nuclear winter. They're now appearing with products and taking off in a solid market. The second kind of company is the one that started post-bubble. They're tech driven and their product is almost ready. The third is just starting to get themselves off the ground. They have an idea and good people, but they're a long way from any kind of sales."

He cites a dramatic increase in the number of customers as evidence of a positive turnaround in the tech sector.

"For these companies, they are entrepreneurs seeing an opportunity in the market because the public have now become major communications buyers. It used to be that only the top business people purchased all the communications devices and the rest of the people had little more than a phone and a TV. Now, the public is diversifying and it has created several opportunities. We now have phones at home, cell phones, BlackBerrys, fax machines, the Internet and more. There are more carriers and more companies selling to those carriers."

He sees a hungry second half of the year with few speed bumps in sight.

"For the rest of the year, I think there will be about 20 or so exit companies searching for financing, and about one-third of them will find the money they need. I think four to eight new companies will also see significant investment."

OCRI president Jeffrey Dale couldn't say enough about the millions being bandied about. As one of the city's most strident boosters of the tech sector, he said the first half was nothing less than "spectacular."

"It's not just the number of deals, which is still strong, but it's the size of them. It's like 2000 and 2001. There are a lot of late-stage deals, but also some very interesting first- and second-stage deals as well."

He added that companies are now taking that money to get products to market and to expand their operations – not just in R&D but in sales and marketing. "They're ready for market and they're using it to ramp up revenue streams."

He agreed with Ms Weinstein that it's still tough for young companies to find financing, but pointed to Third Brigade, which received $6 million, and Liquid Computing, which signed for $18 million, as companies not far out of the gate that succeeded in attracting VC money. For the second half of the year, he predicted more of the same.

"We're now on par with all of last year and well on our way to $300 million to $400 million. I'm not saying that will happen, but we're on our way."

He added that the Ottawa Venture and Technology Summit in late September will further the cause as companies network with venture capitalists and showcase what they can do if given the opportunity.

By Scott Taylor

scott.taylor@transcontinental.ca