Activity in Canada’s venture capital market continued to fall in the first quarter of 2009, consistent with the slowdown that was apparent throughout 2008, according to the industry’s statistical report released Tuesday by the CVCA-Canada’s Venture Capital & Private Equity Association and research partner Thomson Reuters.

Across the country, a total of $275 million was invested, down 25% from the $367 million invested during the same period one year ago. In fact, first quarter 2009 activity was in dollar terms the lowest reported on a quarterly basis in close to six years when it was $255 million in the second quarter of 2003.

In addition, the number of domestic firms securing venture funding was also reduced. Between January and March, companies financed totaled 102, which is also one-quarter fewer than the 136 companies financed the year before.

First-quarter trends also showed a sustained emphasis of smaller venture capital deal sizes. The average amount invested per firm was $2.7 million, or the same average recorded in the year-earlier period. The spread in Canada-U.S. financings thereby continued to track results in 2008 with domestic firms capturing only 40% of venture capital dollars going to firms south of the border.

“We are at a crisis point in Canada’s venture industry. At several levels, the data conclusively demonstrates that there is a venture capital financing ‘gap’ in Canada,” says Gregory Smith, President of the CVCA. “and this means Canada’s ability to drive innovation will weaken and we will see the overall economy suffer. Time is critical and we must act now.”

“After all, the impact of venture-backed companies on the Canadian economy is significant,” says Smith, “they generate jobs, contribute to the GDP and, according to a recent research report that was commissioned by the CVCA with the financial participation of the federal government and several provincial governments, they grow five times faster than the overall economy”.

The CVCA says the crisis point in venture capital investment in Canada can ultimately be traced to the fundraising challenges facing the venture capital industry. Fundraising activity reported in the Canadian market was especially weak in the first three months of 2009. New commitments of capital going to domestic venture capital funds totaled a mere $149 million, which is 74.4% lower than the $418 million committed during the same period in 2008. These numbers are in stark contrast to the situation in the U.S. where a total of $U.S. 4.3 billion was raised in the first quarter, 39% below the $U.S. 7.1 billion raised in the year-earlier period.

“This fundraising gap with the U.S. must be addressed if Canada is to compete in the knowledge-based economy of the future,” says Smith.

The CVCA has proposed a commercialization support program to help address these venture industry trends and to increase the availability of venture capital for high-growth small businesses.

The CVCA’s comprehensive program calls for the government of Canada and provincial governments to establish and grow fund of funds structures, make improvements to the SR&ED tax credit program, improve the incentives for corporations to invest in venture capital funds, and actively promote investment in Canadian venture capital funds as part of the offset agreements that are negotiated with major government contractors.

“Growing the supply of venture capital to support the growth of new and emerging companies will require all stakeholders to work together to build a solid foundation,” says Smith “we need to work with governments to ensure all potential sources of venture capital dollars are available for Canadian companies, from institutional investors to retail and angle investors, from domestic investors to foreign investors.”