CVCA chief executive Kim Furlong, seen here in 2022, said that while Canadian pension plans, corporations and other institutions are 'missing in action' in financing early-stage companies 'it’s a great sign that this class of investors is getting more comfortable with venture capital.'Shay Conroy/The Globe and Mail
As the federal government presses pension funds to invest more at home, wealthy Canadians and family offices are increasingly backing domestic startups and venture capital firms that finance them.
The Canadian Venture Capital and Private Equity Association (CVCA) says high-net-worth individuals and family office participation in federal government-backed venture capital investment programs has more than doubled, from 29.3 per cent in the first program a decade ago to 60 per cent of the third, announced in the 2021 budget, according to data from the program’s fund managers.
CVCA chief executive Kim Furlong said that while Canadian pension plans, corporations and other institutions are “missing in action” in financing early-stage companies “it’s a great sign that this class of investors is getting more comfortable with venture capital.”
Some of Canada’s most successful tech entrepreneurs have reinvested in startups, including BlueCat co-founder Michael Hyatt, PlentyOfFish.com founder Markus Frind and Globalive Capital chairman Anthony Lacavera, while established families including the Westons, Slaights and Goodmans of Montreal have backed innovative upstarts.
Under the latest version of the federal program, Ottawa provides $1 for every $3 raised by four “fund-of-funds” firms from private investors up to a cap. After delays, the government signed agreements with the firms in 2023 enabling them to raise their funds, which back both VC firms that invest in startups and some of the companies directly.
Three of the fund-of-fund managers have hit their targets, enabling them to secure their full allotment of federal dollars. On Thursday, Northleaf Capital Partners and Kensington Capital Partners announced they had reached their fundraising limits of $370-million and $290-million respectively to receive their federal money for their latest VC funds. Teralys Capital managing partner Jacques Bernier said his firm had raised $470-million of its $570-million goal. Montreal-based Teralys secured a one-quarter share from Ottawa for its first $370-million and is halfway through raising $200-million more, to which the Quebec government will contribute 25 per cent.
A fourth manager, HarbourVest Partners, reached $200-million of its $370-million goal in December and is expected to close on its target.
“Ultimately it is good news for Canadian start-ups that the four funds-of-funds have been able to raise over $1.1-billion so far, and proves that our investments in innovation are working,” said Nadine Ramadan, a spokeswoman for federal Small Business Minister Rechie Valdez.
The four firms have been seeded for the past decade by Conservative and Liberal governments to invest in Canada’s innovation economy, but this time “it has been the most challenging fundraising we’ve been through,” Northleaf managing director Ian Carew said.
Several Canadian banks and other institutions do invest in VC: Canadian companies including Thomson Reuters TRI-T , Deloitte Canada, Constellation Software CSU-T and Canadian Tire CTC-A-T have also launched VC units although the country’s corporate class lags other nations in financing startups. Ontario Municipal Employees Retirement System has a venture capital unit, BC Investment Management Corp. is developing an investment program in the space, and Northleaf since 2006 has managed venture capital for Canada Pension Plan Investment Board, which has allocated $50-million to its latest fund. Teralys has drawn backing from Caisse de dépôt et placement du Quebec and other local institutions.
But aside from the federal and CPP money, Northleaf raised less than 30 per cent of the balance in its new fund from institutions, including Bank of Montreal, and the rest from individuals. Kensington draws much of its investment from wealth management firms on behalf of clients. “It’s disappointing there aren’t more institutional investors in venture,” Kensington senior managing director Rick Nathan said.
A key issue for many investors is a lack of cash returns – known as distributions to paid in capital, or DPI – which has been a widespread complaint since the tech downturn began in 2021. Few Canadian venture capital or funds-of-funds firms have returned all their investors’ cash. Only a handful, including Inovia Capital, Version One Ventures and Brightspark Ventures, have generated DPI well above cash received from investors on certain funds.
“The most common feedback venture capital general partners are getting while fundraising is, ‘Where are the realizations? I need to see that before I commit to the next fund,’” said Mr. Carew. “If we can prove out those DPI numbers, we take another obstacle off the table” for institutions who have stayed away from VC.
The Harper government launched the Venture Capital Action Plan in 2012 to help a sector devastated by the 2008-09 financial crisis after years of poor returns and after many institutional investors had retreated from the sector. The program distributed $340-million to the four funds-of-funds as an investment that was expected to yield returns for taxpayers. The funds had to raise $2 from investors for every $1 from Ottawa, which they did. The timing was good: Canada’s tech sector rebounded and a new group of VCs posted increasingly better returns.
Despite the momentum, the CVCA argued one shot of federal money wasn’t enough to sustain the sector. The Liberal government in 2017 renewed the program and renamed it Venture Capital Catalyst Initiative, requiring winning funds of funds of the $400-million program to raise $2.50 for every $1 from Ottawa. The government followed in 2021 with another sequel, committing $350-million to the same managers and requiring them to raise $3 per $1 from Ottawa. In April, the government announced another $200-million boost to VCCI to invest in underserved communities and outside big cities.
Asked how much longer the government should support the risk-capital sector, Mr. Carew replied: “This is an elegant public policy program where the government leverages its capital to go into a really important set of sectors that will drive the future of the Canadian economy, and makes money at the end of the day. Why wouldn’t you keep doing that. I don’t know how many more we need but we’re not at that point yet.”