Toronto venture capitalists are growing increasingly frustrated at the lack of technology startup proposals seeking money, prompting the head of one VC firm to warn that the marketplace is facing a crisis.

Mark Skapinker, managing partner of Brightspark Capital, warned a recent meeting of the Toronto Venture Group that the economy will suffer if there aren't enough ideas for starting early-stage technology companies.

"We could really be in trouble a few years down the road here. If you don't encourage early-stage development then the amount of your mid- to large-sized companies will start to suffer later on," he said in a subsequent interview with Business Edge. "That's going to start to affect your economy. You have to remember that Research in Motion was once a tiny little startup."

Skapinker pointed out a study done by research firm Thompson MacDonald that notes: "Venture capital investment in Ontario has dropped by 50 per cent over the past five years and continues to decline, while investments are on the increase in other provinces."

Mark Skapinker

Consulting firm IDC Canada is more positive about the industry, however.

"Crisis is a very strong word," says managing director Vito Mabrucco. "I think we've been very low on the scale when it comes to driving innovation. Canadians have become too complacent."

Mabrucco says the United States used to be a "hotbed of innovation," but lately those accolades have been going to countries such as India and China.

Statistics from Canada's Venture Capital and Private Equity Association (CVCA) over the past year are mixed. They show a particularly strong second quarter in 2005, with $635 million invested in deals across the country. In the third quarter that dropped to $261 million. Fourth-quarter numbers will be released shortly.

Association president Rick Nathan, who is also managing director at Toronto-based Goodmans Venture Group, says there is no reason to be concerned about the decline. "You have to remember, if there are several big deals closing in one quarter that can cause those spikes. I would say the economy is good right now and everything is moving along well."

Nathan says he hasn't noticed a shortage of proposals, but points out that Skapinker's Brightspark looks at very early-stage technology companies.

Goodmans receives funding proposals from a variety of different industries, including media and entertainment, financial services and telecom.

"I haven't noticed a shortage of tech ideas myself, but if that's what Mark says then that must be the case. He knows the industry extremely well," Nathan says.

Nathan and Skapinker are two of the original three founders of Brightspark.

"If someone doesn't get approved for funding right now it's not because of the market," Nathan adds. "There's plenty of money out there for someone with the right ideas."

Rick Nathan

Skapinker says he's noticed another trend with the proposals he does get - they're becoming more sophisticated. "We used to get bad teams making pitches. Now they're carefully-planned and researched."

He says conditions are vastly different from when he co-founded Delrina Corp. several months before the 1987 stock-market crash. Delrina grew to have annual revenue of more than $150 million before it was purchased in 1995 by Symantec for more than $400 million.

Observers at the time said Symantec, developers of the popular ACT! contact-management software, were particularly interested in Delrina's WinFax application.

Skapinker subsequently founded Balisoft Technologies Inc., a company that specialized in customer-response applications that could answer customers' questions live over the Internet. Balisoft merged with Boston-based Servicesoft Technologies in 1999.

Other former Delrina employees have used their skills to start a number of successful technology companies on their own, adding to the economy even further, Skapinker says.

Skapinker says he has been spending a lot of time in Montreal, which has more beneficial investment tax credits. He noted the Ontario government threatened to end tax credits of up to 15 per cent late last summer for investors in labour sponsored investment funds (LSIF).

There were strong objections from the venture capital sector, however, especially the CVCA. The credits will now be taken down in phases until they reach five per cent in 2010.

Francois Gaouette, a Montreal-based venture capitalist and managing partner with Propulsion Ventures, agrees that there are more tax incentives in Quebec, but says the Toronto market is still strong. His company also invests in technology startups.

"We do deals in Quebec and Ontario, especially cities like Waterloo and Ottawa. There seems to be a mindset that getting funding is too difficult a process. I see a lot of entrepreneurs who are boot-strapping and raising funds on their own instead," Gaouette says.

A bigger problem facing the industry is making sure the companies they do invest in are profitable for investors, he says.

"In order to encourage investment we need to spend more time making sure these companies in our portfolio are profitable."

Last September, Propulsion Ventures received the CVCA's deal-of-the-year award for its work with Montreal-based Airborne Entertainment.

"I agree we do need to encourage innovation though," Gaouette says. "There are never enough good ideas."

At least one Toronto-area entrepreneur, Efren Castillo, director of IT for outsourcing firm Castle Grove Business Consultancy, agrees.

Castle Grove, which just completed its first year in business, received funding from one of its first major clients, but Castillo says there were still lots of challenges.

"There isn't really that much encouragement for startup companies," he says. "Ever since the dot-com years everyone has looked at the entire IT industry and gotten scared.

"They need to be reassured and encouraged somehow to develop ideas."

Castillo says venture capital firms need to do more public education on how to make successful funding pitches. "You need more information on how to send these ideas through the right channels. Gradually the industry will change then and the economy will pick up," he says.

(David Hatton can be reached at hatton@businessedge.ca)