CVCA, Sunday, January 31st, 1999.

While specialization has been a growing trend in the US venture industry over the past decade, it is a more recent phenomenon in the Canadian market. However, there is little doubt that management teams are increasingly focusing on specific segments of the market, particularly as defined by specific sectors and business within these sectors. In so doing, they hope to better position themselves to add value to their investees, thereby differentiating themselves from their competitors to develop proprietary deal flow.

Management groups with a sector specific focus are managing a growing share of the industry's capital, and this specialization is reflected in the growing concentration of disbursements in the information technology and life sciences sectors. Virtually all of the venture funds that invest in these markets have hired in or developed in-house expertise in these sectors. For example, J.L. Albright Venture Partners, BCE Capital Inc., Castlehill Ventures, Fulcrum Partners, McLean Watson Capital, Skypoint Capital, XDL Capital, TechnoCap and Telsoft all focus exclusively on the IT sector. Within that broad sector focus, XDL concentrates on internet-related deals, Telsoft and McLean Watson on software deals, Skypoint on telecom and datacom, and Fulcrum on very early stage companies that still need some serious handholding. The growing skill base within these funds is evidenced in the sharp increase in investment activity in the IT sector over the past five years.

Similarly in the life science arena, Canadian Medical Discoveries Fund, MDS Capital Corp., BioCapital, and Genechem invest in nothing but biotech and other medical/health related opportunities. They all have PhD level scientists on staff and must invest in their own knowledge base on an ongoing basis.

With this specialization has come a dramatic increase in the amount of capital being invested in this sector. In 1998, if the first nine months activity is annualized, a total of 165 firms will have been financed in the life sciences sector with $367 million. This compares with the $51 million invested in 40 life science firms five years earlier.

This trend towards specialization is bound to continue and, in fact, is likely to become even more refined going forward. Even those funds that choose to build a balanced portfolio at the macro level will increasingly need real sector experts to gain access to any of these deals. This should be good news for those supplying the capital to the venture funds and to the investee companies availing themselves of it. More knowledge and experience should mean a greater ability to add value-which should be good for all concerned.