Canadian second-quarter venture capital investment jumped 34 percent in comparison to the start of the year, but the boost is offset by the big picture.Total venture investment, at $496 million,is down 25 percent when compared with last year’s total second-quarter investments of $663 million.

The figures come in a report released Tuesday by the Canada Venture Capital and Private Equity Association, in partnership with Thomson Financial. Only 129 companies received investment funding in the year’s second quarter, with an average investment of $3.8 million, compared with 211 companies averaging $3.1 million.

“We have not enough capital in the market as a whole,” said Rick Nathan, CVCA president and managing director of Kensington Capital Partners. “So what we need to learn how to do, better than what we have in the past, is to put bigger bets on our better prospects and give them the firepower they need to compete.”

In that context, investments in alternative energy became the second quarter’s powder keg.Eighteen companies received $87 million in second-quarter funding, capturing 18 percent of the entire Canadian venture marketplace and a growth of 6 percent when compared with the entirety of last year.

The U.S. Match-Up

Although the overall second-quarter investment average of $3.8 million is Canada’s highest over the past five years, it still pales in comparison to the U.S. market, which reached an average of $8.9 million in average venture investment during the first half of the year. Thank Silicon Valley and Boston investments for that; the two regions easily top the worldwide venture capital scene.

CanadaBoston

But Canadian venture capital isn’t on a cruise course for competition with the big boys.Rather, secondary U.S. venture capital markets—like Washington or Texas—are better estimators for the strength of Canada’s top regions, and better regions to stack up against.“Ontario and Quebec should be in the top five of North America,” Mr. Nathan said. “That would be a good target, and we should be able to get there.”

WashingtonCanadaOntarioNorth America

Ontario led Canada’s provinces in venture capital dollars, with its companies receiving $210 million in 2006 second-quarter funding.Nevertheless, the amount is down 37 percent from last year’s second quarter when the region saw $334 million worth of investments.Consequently, Ontario fell to ninth place in the total North American venture capital market, with Quebec joining it shortly after at twelfth.

“What we’ve seen recently in the last few quarters, including quarter two, is that the Ontario market has been kind of stagnant,” Mr. Nathan said. “It hasn’t really fallen.It’s fallen a bit, but it hasn’t grown.”

The Not-So-Great White North

The trend matches the general forecast for Canada’s venture capital development—flat.U.S. involvement in the Canadian venture marketplace is nevertheless higher than in years past, with an average of 40 to 50 venture capital firms engaged in Canadian deals at any given time.And foreign involvement is up to 37 percent, as compared to last year’s 25 percent.

And foreign involvement is up to 37 percent, as compared to last year’s 25 percent.

Still, the market is waiting for Canada’s chief venture-attracting sectors to start churning, including software, media, and telecom.That’s not to say the Canadian venture capital market is on its way to oblivion, said Mr. Nathan.Nor is there even a deep concern over venture involvement.

Canada

“Companies are getting funded, deals are being done, people are making money,” he added.“But there’s just this real lack of drive from the investment community to get more capital at work in the venture space.”

Contact the writer:DMurphy@RedHerring.com