Case study, Ottawa.

In Canada, entrepreneurs are feeling the pinch of tightening credit markets and it’s starting to erode one of their most important life lines venture funding.

VCs — who get much of their working capital from pensions and institutional investors (who are themselves bleeding to death as international securities topple) — are starting to take steps to mitigate risk. Unfortunately for some new startups, the two most common new tactics are syndication and concentration.

Instead of taking on the entire risk of a particular venture, VCs are sharing the risk with other institutional investors (syndication). Deals are being shared and the number of hands going into a particular deal is increasing. While this isn’t necessarily a bad thing, the more cooks you have in the kitchen vying for the apron the harder it’s going to be to get anything done as an entrepreneur. Dilution of control will make it harder for entrepreneurs, who already struggle to hold onto the reins of their companies, to keep their heads above water.

Next, many Venture Capital firms are reducing the number of deals they are doing. It’s smarter and less risky to concentrate capital into a few companies in hopes that one of them will make it, than to scoop a few grains of fertilize on the entire field of startups knowing that most of it will go to waste.

The net result of these changes will be increased competition in an industry that is already fueled by intense competitive forces.

What are the venture capitalists recommending? Spend less money and make the money you do spend go further. I’d take this one more step and say that VCs are looking for and more to get their hands into either very early stage ventures (which are extremely cheap to finance) or into established businesses with proven track records.

If you are a business still trying to make it over the hump, you have to be extra careful about how you spend the dollars you already have because as we continue to drag our way out of these unfortunate economic times — it’s going to be harder and harder to replace them.

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