It has sent the United States some of its best comedic actors and hockey players. Now Canada is sending cold, hard cash to its neighbor to the south--and its timing couldn't be better.

U.S.-based venture capital firms have pretty much turned off the tap for new deals, cutting back the amount they invested in the first three quarters of 2001 by a startling 73 percent, compared to the same period of 2000. By contrast, Canadian venture firms invested a mere 14 percent less over the same time period (see "Yukon Do It," facing page).

What's more, the amount of that money Canadian VCs are investing in the United States has more than doubled. About 20 percent of total investments went to foreign companies in 2001, up from just 8 percent in 1999; most of those dollars went to U.S.-based technology companies, according to Macdonald & Associates, a Toronto firm that tracks the Canadian venture business.

One of the beneficiaries of this increased interest is Air2Web, which makes a platform for wireless application development. For nearly six months, the Atlanta-based company had been looking for $20 million in a third round before its placement agent, Merrill Lynch, brought CDP Sofinov, a VC firm in Montreal, to the table. "I wouldn't have gone out to look at Canadian VCs to start with--it's not like heading to Boston or Silicon Valley," says Sanjoy Malik, CEO of Air2Web. But after his experience with CDP, Mr. Malik says Canada will be among the top places he visits, should he raise another round.

The steady pace of investment by Canadian VCs is partly a result of their healthy portfolios. They didn't overinvest in dot-coms, for one thing. Also, because they have smaller funds, they have traditionally been more cautious about the deals they do and the amount they invest, says Mary Macdonald, president of Macdonald & Associates. Another factor: since there was less capital available, Canadian startups have had to maintain low burn rates, and that put them in a better position than their peers in the United States when the economy faltered, she says.

Because of their success, Canadian VC firms have attracted growing amounts of capital from their limited partners. In the past three years, the firms have more than doubled the amount of money they have under management, to $12.7 billion.

Just like their counterparts in the United States, Canadian venture firms want to see experienced management teams, actual sales, and profitability within 12 to 18 months. The difference is that companies meeting those criteria have better odds of raising a first round of capital in Canada. Canadian firms invested a stunning 58 percent of their dollars in early-stage technology deals in the first nine months of last year. By contrast, U.S. VCs are avoiding brand-new deals, choosing follow-on investments instead (see "Venture Capital," October 1).

Because valuations of private U.S. technology companies are down sharply, Canadian VCs can afford to be selective. Just a year ago, the average U.S.-based technology company sought a pre-money valuation of $150 million, but now the average is about $25 million, says Denis Dionne, president of CDP Sofinov, which has $1.1 billion under management. Besides Air2Web, the firm's recent U.S. investments include Avalon Pharmaceuticals, Glimmerglass Networks, SS8 Networks, and the security and surveillance company VistaScape Technology.

Canadian VCs invest in just about every technology segment, including communications and networking equipment, semiconductors, software, and even Internet-related enterprises. Biotech is of particular interest, since it's a thriving industry in Canada. Acorda Therapeutics, a New York-based company that makes drugs and therapies for central nervous system disorders, has raised about $9 million of its $65 million from MDS Capital and the Royal Bank of Canada. "Canadian VCs have really grown up in the past five years, and their knowledge of venture capital investing is now on a par with that of U.S.-based VCs," says Ron Cohen, Acorda's founder and CEO. As word spreads about Canada's burgeoning venture capital scene, expect to see more U.S. entrepreneurs take off to the Great White North.