Canadian corporations are venturing into new territory: financing startups.
In the past two months, a slew of Canadian companies have announced plans to launch their own venture capital arms to back early-stage companies that operate in their sectors, including publicly traded Thomson Reuters Corp. , Spin Master Corp. and Quebecor Inc., and private legal software provider Themis Solutions Inc. (known as Clio). Canadian Imperial Bank of Commerce also earmarked $300-million to invest mostly in venture capital and growth equity funds.
On Thursday, the acquisitive Toronto company said it had created a $200-million venture-capital fund. Constellation said its fund, VMS Ventures, would only invest in companies that have the potential to become standalone entities within Constellation but that don’t rely on other Constellation businesses for sales, marketing or other support.
VMS (which stands for vertical market software) will target companies in which managers and employees own a significant stake, Constellation said in a release. The fund is set to deploy the money over three to five years, but it is not expected to impact the pace at which Constellation makes acquisitions or expand revenue from its existing business, the company stated.
Daan Dijkhuizen, the chief executive officer of Topicus.com Inc., which spun out of Constellation into a separate TSX Venture-listed public company early this year, will be managing partner of the new fund. He will step down as CEO of Topicus.com, but continue to lead one of the operating groups within the company. Topicus.com chairman Robin van Poelje will take over as CEO.
Constellation president Mark Leonard said in the release: “I’ll personally support the fund and Daan as he focuses on leading Constellation’s larger organic growth efforts.”
Until recently, corporations with their own venture capital businesses were relatively rare in Canada. The best-known domestic examples are Telus Corp., Power Corp. of Canada and Intact Financial Corp. “On a global scale, Canada is punching below its weight” compared with other countries where corporations are more active backers of early-stage ventures, BDC Capital partner Thomas Park said in a blog post last year.
Observers say that meant companies leading Canada’s economy weren’t getting the same early look at potential disruptors – both to stake out future challenges and to take advantage of investment opportunities – as their peers in other countries.
But the ranks of venture-funding Canadian companies have grown recently. The Weston family, which controls Loblaw Cos. Ltd., began a dedicated venture-capital arm in 2019. Shopify Inc. has emerged during the pandemic as Canada’s busiest corporate early-stage financier, backing startups that serve its customers. Several financial services companies have become active financiers of startups.
“We’ve seen broadly a significant increase in the amount of corporate venture capital funds in the last year in Canada, more than at any time in the past decade,” Hans Knapp, chairman of the Canadian Venture Capital and Private Equity Association, said in an interview. “This is a realization that smaller, earlier-stage companies tend to be where most of the disruptive innovation happens, and that by ignoring that, [legacy corporations] put themselves at risk.”
Constellation, whose market capitalization of $49-billion lags only Shopify among publicly traded Canadian technology companies, built its business by buying and holding hundreds of “mission-critical” software providers to a vast range of industry niches from spas to public-housing providers to pharmaceutical manufacturers.
Constellation’s companies typically aren’t big or growing fast, if at all, but they are leaders in their markets with unthreatening competition. Constellation is renowned for applying strict financial discipline as a buyer and operator to consistently expand cash flows, profits and returns.
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