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Navigating the Venture Capital Market Amid Upheaval

Venture capital deals are taking a hit in some areas, and booming in others.

Like any other person working in the financial industry, venture capitalists and managers cannot operate with their head down - they must constantly watch the markets to spot new opportunities and risks.

While in some parts of the world, venture capital deals are humming along despite volatility, that is not the case in Canada, consultant Mark Evans writes for the Globe and Mail. He says many Canadian investors have an aversion to risk, particularly to startups without revenue, and unless this problem is addressed and the flow of money is freed up, the business innovation and entrepreneurial spirit may suffer.

He says investors would likely have more confidence in Canadian startups if more companies were purchased. However, that proposition is slightly paradoxical, as it would require some faith for trailblazing investors to make the initial acquisitions.

Evans cites a recent report from Canada's Venture Capital and Private Equity Association (CVCA), which found that venture capital investments in Q2 2011 dropped slightly from previous quarters. VC spending decreased 2 percent from the same time one year earlier, when $335 million was invested across the country between April and June.

Gregory Smith, president of the CVCA and a managing partner at Brookfield Financial, said it was "very concerning" to see the flow of investment take a hit following a time of steady VC investments. "Clearly there is demand coming from young, entrepreneurial businesses … but this demand is not being met by an adequate supply of value-added risk capital," he noted.

As one United Kingdom-based VC trusts professional notes, it's important to avoid operating in a bubble, and investors and fundraisers must make note of the economic activity around them. That said, they should also branch out and take some risks in order to achieve higher returns.

Venture capital managers need to be able to gauge the direction of various markets and juggle the "fragility and volatility in the VCT market," Patrick Reeve, the Albion Ventures managing director, told the Financial Times.

Reeve says that air of uncertainty is also what makes the field exciting and interesting. While those in the VCT market have many challenges, raising money typically isn't difficult, particularly when high tax rates make people more likely to invest and gain tax breaks, he added.