Toronto venture capital firm ScaleUP changes mandate to become climate-technology financier

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An Ontario government-backed venture capital firm that aimed to connect Canada’s corporate giants with promising domestic software startups is transforming into a clean-technology financier.

ScaleUP Ventures was created by former Rogers Communications chief executive officer Nadir Mohamed and former Ryerson University President Sheldon Levy in 2016 as an experiment to foster Canadian innovation. ScaleUP raised $106-million to back enterprise software startups, including $25-million from the provincial Liberal government. Large Canadian corporations invested in its fund and agreed to open doors for business opportunities within their organizations for the startups ScaleUP financed. CEOs of Canadian banks, telecommunications giants and automakers joined its leadership council.

But last month Mr. Mohamed told ScaleUP’s stakeholders during an online conference that “the need we [set] out to address…has largely been met. Another fund doing the same thing would not be appropriate and indeed is not required.”

ScaleUP will now become Climate Innovation Capital (CIC) and try to raise US$500-million for what would be Canada’s largest private-capital fund focused on clean technology. Its pivot comes at a time of renewed investor interest in companies that can not only improve the planet’s health, but also make money.

CIC will focus on backing “climate technology” companies that are devoted to decarbonizing the economy in such areas as electric vehicles, retrofitting buildings and reducing industrial emissions.

Driving the change is general partner Kevin Kimsa. “I have a bigger calling now and … that calling is related to the climate,” the veteran software entrepreneur and investor said. Mr. Kimsa added he was inspired to shift gears and make the planet healthier for his young daughter after the Intergovernmental Panel on Climate change warned in 2018 the world needed “rapid, far-reaching and unprecedented changes” to meet carbon-emissions targets by 2030.

“We have to solve these problems in the next 10 years,” Mr. Kimsa said. “I want to get busy and be part of that, because I can’t not be part of that.”

Mr. Kimsa is venturing into a sector that has disappointed investors. From 2004 to 2012, cleantech venture funds raised US$25-billion, then lost half of that as they discovered the industry faced distinct challenges, including the need for heavy upfront capital expenditures and for companies to work with regulators to create favorable market conditions. A recent report by PricewaterhouseCoopers said “ ‘cleantech’ remains a dirty word” for many investors.

But the appetite for climate-focused ventures is improving, aided by Tesla, Inc.'s success in popularizing electric cars, and the growing acceptance of more environmentally friendly products, including meat substitutes and smart thermostats. Cleantech “is now becoming economically viable and new business models have emerged,” the World Economic Forum said in March.

Venture investments in climate-tech startups hit US$16.1-billion last year, up from US$418-million in 2013, and giant corporations including Amazon, Microsoft, Unilever and Nestlé have devoted US$1-billion or more to fund climate technologies. Governments have collectively committed US$150-billion-plus for climate initiatives to revive their post-COVID-19 economies. The US government under president-elect Joe Biden is expected to join the fight against climate change, which “will usher in an unprecedented boom for environmental, social and governance investment,” Nigel Green, CEO of international financial advisory firm deVere Group, said Monday.

Meanwhile, large companies, notably in the energy sector, have been buying climate-focused startups, providing “exit potential” to investors that didn’t exist before, said Murray McCaig, managing partner with Toronto cleantech financier ArcTern Ventures.

Mr. Kimsa said CIC would provide later-stage venture capital for developing companies with products in market and private equity for more established enterprises. He’s recruited three men to co-lead the fund: long-time partner Paul Atkinson, infrastructure deal maker and ex-OMERS Platform Investments managing director Paul Manias and Nelson Switzer, Nestlé Waters' former chief sustainability officer.

“We’re at a point where demand [for carbon-reducing technologies] so deeply outstrips the level of investment that has been made that the field is quite open for those who know how to invest and understand the demand,” Mr. Switzer said.

Mr. Kimsa said CIC has raised US$20-million from a few individuals so far. He’s now cranking up fundraising efforts and hoping to reach $150-million by mid-2021. Asked if the Ontario Conservative government of Doug Ford, who opposes a carbon tax, would invest, Mr. Kimsa replied: “I’m not anticipating them coming in.”

ScaleUP’s shift leaves questions about whether it met its original objectives. Mr. Kimsa said 14 of the 28 companies financed by ScaleUP struck a combined 28 commercial or merger and acquisition deals with its corporate backers. The portfolio, which generated four-year average returns of 9.2 per cent, in the top half of North American funds, includes appointment-booking software provider Coconut Software Corp., online financier Fundthrough Inc. and video surveillance provider Solink Corp. Existing ScaleUP staff will manage the portfolio until it winds down.

While Mr. Mohamed said in an interview Canadian startups now have an easier time scaling up and big corporations are more open to helping them, Mr. Levy countered: “You can’t say we’ve now got this solved. [ScaleUP had] moderate success and [the model] worked extremely well in selected cases. But I wouldn’t say, ‘Oh my God, we really cracked the code on this.’ ”