$400M to stimulate VC market to support Canadian scale-ups

The Feds on Monday announced details of a new initiative to diversify the venture capital market as it incents the sector to boost its investments in more Canadian companies. The call for proposals for the $400-million Venture Capital Catalyst Initiative (VCCI) was announced in Toronto December 18 after consultations with stakeholders over the summer.

VCCI is a follow-on from the Venture Capital Action Program (VCAP) launched in 2013, and some in the VC sector recommended it to be renewed (R$, Vol 31, January 18 2017). VCCI was announced in Budget 2017 as part of the government’s  Innovation and Skills Plan.

Like its predecessor, the new fund will be administered by the Business Development Bank of Canada (BDC) and has a 2.25-to-1 leverage requirement to accumulate up to $1.5 billion in capital. The previous program required only $2 in private sector funding for every public dollar.

Speaking at the launch of the availability of the funds, Innovation, Science and Economic Development minister Navdeep Bains stressed the importance of access to capital, along with talent, to the innovation ecosystem.

“Without venture capital and other forms of investments available to small businesses, we wouldn’t have success stories like Shopify (and more) to talk about,” said Bains at the launch, referring to the Ottawa-based e-commerce company that has grown to dominate the global e-commerce market with the help of funds raised funds from venture firms, such as OMERS Ventures, Insight Venture Partners, Bessemer Venture Partners, FirstMark Capital, Georgian Partners and Felicis Ventures. “We need more Shopify’s. We need more companies that scale up and grow here in Canada.”

Bains said the government decided to fund VCCI after examining data showing the VC community raised more funding and invested in bigger deals in recent years.

“In 2016, we saw the most venture capital invested since 2001. $3.2 billion into the Canadian ecosystem was invested through venture capital community, and we are on track this year to exceed that amount,” he said, adding that this year so far, there had been 13 deals with more than $50 million raised against only 10 deals the year before. “This upward trend means Canada’s economy is growing, and the need for funding to fuel growth is essential,” he added.

Neal Hill, VP market development at BDC, said in an interview with RE$EARCH MONEY that VCCI is similar to VCAP in the sense that both use public money to leverage private sector resources. But VCCI’s structure has been modified with new focus areas, including an emphasis on late-stage companies and a stipulation to promote gender, diversity and inclusiveness among startups.

“We’ve done a good job at funding companies in the early stage. But where money starts to get thin is when (companies) … need (from) $20 to $40 million to really scale up fast and go global," said Hill. It is at this stage when companies find it difficult to get financing in Canada, prompting some to look south of the border or overseas for funding. In the process, Canada loses company headquarters along with talent and intellectual property.

Applicants to VCCI will be required to clearly state their strategies to support late-stage companies in the B-round or later stages. Hill said there is still room for startups to be funded under this scheme, however, the emphasis is more on funding late-stage companies.

Like its predecessor, VCCI hopes to attract a wide range of institutional investors, including pension funds, banks, insurance companies, and high-net worth individuals to pool funding to invest in Canadian late-stage firms. Similar to VCAP, the funds will be available through two streams but with a little tweak. Up to $350 million is available for large funds-of-funds and $50 million is for other funding models not covered in the first stream.

VCAP was able to attract four private sector-led funds-of-funds  -- HarbourVest Canada Growth Fund, Teralys Capital Innovation Fund, Kensington Venture Fund and Northleaf Venture Catalyst Fund -- with a total of $1.35 billion under management. These funds can also apply to VCCI, said Hill, but the government is hoping that other funds-of-funds will be attracted to the new program.

The government is also hoping to attract other big investors, such as public-sector pension funds, because they can fund bigger and more deals. Only one large pension fund participated in VCAP -- Canada Pension Plan Investment Board (CPPIB) -- but there were “a couple of smaller” ones that weren’t disclosed, said Hill. And 23% of the funds raised in VCAP were from high-net worth individuals.

VCCI also hopes to attract foreign investors and fund managers from the US, Asia and Europe, said Hill. “This government is very much interested in having foreign capital come in and back our startup companies here,” he said. “We’re hoping that a significant part of the program can be funded by international capital.” VCAP had 5% international money, and Hill said he wants to boost that ratio to 20% in VCCI.

Hill said the second stream of the initiative is “experimental” and open to creative and innovative funding structures, such as impact investing, IP fund investing and “venture-debt funds” where instead of taking equity in firms, investors can lend funds and the loan can be paid back when the startup goes public or gets acquired. “We want that piece (stream) to have a very broad definition, and we want people to be creative and throw us some ideas we’ve never seen before,” Hill added.

The higher leverage ratio -- of 2.25-to-1 -- is a signal to the private market that the government is not going to be in this business forever, said Hill.

Another new focus in the VC program is gender equality and diversity. Bains said at the launch that in line with the Liberals’ focus, proposals should also include details about how the funding will be used “to work towards gender balance and to enhance the diversity of their firms and their investment portfolio.”

Selection committee

The proposals to be awarded the funds will be recommended by a six-person committee that is open for appointment. To be a member of this committee that will make recommendations to the deputy minister of ISED, applicants must have extensive industry experience and knowledge while keeping any conflict of interest in check.

Hill said this is tricky given that the VC community in Canada is small. Potential candidates could be someone who is into private equity but has managed funds, or a retiree.

Interested applicants to the selection committee have until January 15, 2018 to apply.

Bains said getting the private sector involved in the selection of winning proposals is all about public-private sector partnerships and empowering the private sector “to gain a much more meaningful and greater role as we create the conditions for success.”

The deadline for proposals for the $400 million in funding is set for February 23, 2018.

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