Venture capital investments in local businesses surged fivefold in the first quarter to the highest level in five years, according to a new report by the Ottawa Centre for Research and Innovation.

Ottawa-based businesses received $42.8 million in the first quarter of 2008, up from the 10-year low of $8 million in the same quarter last year. The number of disclosed deals also rose to five from one.

However, the report noted that all of the VC money went to follow-on or Series-B investments, rather than to fresh startups, with the largest amount of US$28 million going to audio components maker Kleer.

"This remains a tough environment. Yes, the value of investments has increased and yes, there are four more deals than the same time last year, but this is not good news for startups," stated Michelle Scarborough, OCRI's vice-president of investment and commercialization.

"There is no shortage of great early-stage startup companies for investors to support, but without any kind of incentive from the government to encourage high-risk investment to finance at the early stages, Ottawa, and Ontario, are going to continue to miss out."

OCRI pointed to the lack of successful exits for venture-funded companies, resulting in VC funds still being tied up, and "a significant lack of ability to raise new funds in the market overall" as the main reasons for its pessimism about the state of the VC market.

The report said early-stage companies can take heart in the fact that the angel community is still active and willing to invest in startups, and urged the province to set up a formal retail venture capital program to encourage these angel investments and pooled standalone funds or fund-of-funds, which provide seed funding to grow a startup until it has enough traction to attract traditional VC funding.

"There is no quick fix for this situation. We continue to see challenges with slow returns on past investments, inadequate pools of available capital and a declining amount of foreign capital," added OCRI chief executive Jeffrey Dale in a statement.

"Nationwide, with a few exceptions in Quebec and occasionally British Columbia, we continue our steady decline. If it continues, we're running a huge risk of losing our talented entrepreneurs because they will have to go elsewhere to survive."

However, Mr. Dale said the involvement of foreign investors was increasing and helping to bridge the gap in domestic funding, and commended the efforts of the federal government in eliminating the barriers to foreign investment by changing the rules associated with 116 certificates.

Other VC investments in the first quarter were a $6-million investment in VoIPshield Systems, $6 million to Sidense Corp., $1.5 million to Distil Interactive and $500,000 to GridIron Software.