A decade after the federal government agreed to bail out Canada’s venture capital industry, the sector’s now-healthy chief lobbyist promises that his days of demanding big cash injections from Ottawa are over.
“I’ve made a commitment not to go back and ask for another general fund” to fund venture capital firms, said Kim Furlong, CEO of the Canadian Venture Capital and Private Equity Association. , in an interview. “It’s not a crutch the industry should rely on. I think this is the last time we will see a major fund-to-fund initiative from the federal government.
On Wednesday, the government opens the application process for its $450 million Venture Capital Catalyst Initiative (VCCI), announced in Budget 2021. The money is split into three tranches: the largest is $350 million dollars for “funds of funds” (FOFs) to invest in venture capital funds which, in turn, invest in companies.
The government hopes to move the FOF money quickly: applications are due June 2 and decisions are expected in the fall. Small Business Minister Mary Ng said the government plans to distribute the FOF money “as quickly as possible” by the end of the year.
The CVCA has lobbied hard for the FOF program in 2020, warning that Canada’s innovation sector would be “seriously weakened” without it. The industry continued to raise record levels of funding globally, with giant funds leveraging vast sums without the need for government aid programs. Ms Furlong acknowledged that federal finance officials are “always wondering, ‘Is this political agenda distorting what the private market should be doing on its own? “”
The VCCI program promised last year is the second sequel to the $390 million venture capital action plan (VCAP) originally promised by the Conservative government in 2012. This program was a response to the 2008 financial crisis -2009, which devastated the national venture capital industry. after years of poor performance. Many institutional donors have withdrawn from the sector.
VCAP distributed $340 million to four FOFs – Northleaf Venture Catalyst Fund, Teralys Capital Innovation Fund, Kensington Venture Fund and HarbourVest Canada Growth Fund – and $50 million directly to four venture capital firms. The governments of Ontario and Quebec have contributed an additional $113 million to the FOFs.
The federal government money – an investment that is expected to yield returns – came with strings attached: the four FOFs had to raise $2 from private investors for every $1 from Ottawa, which ‘they did.
The timing was right as Canada’s tech sector rebounded in step with global trends and a new group of venture capitalists outperformed their predecessors. A government report revealed that as of December 31, 2019, all VCAP FOF wallets were in the money, on paper.
The domestic tech industry and seed funding sector flourished as venture capitalists generated strong returns and raised increasingly large funds, and funding for start-up companies soared.
Last year, venture capital financing in Canada reached an all-time high. Large backers who had been left on the sidelines have started to turn to venture capital again, angel investors and family offices have broadened their support for the space, and a slew of Canadian corporations have launched their own ventures. internal venture capital.
Despite the momentum, the CVCA argued that a single hit of federal money was not enough to make the sector fully self-sufficient. (Other government agencies, including the Business Development Bank of Canada and Export Development Canada, also invest in venture capital.)
The Liberal government therefore renewed and renamed the program in 2017, committing $400 million to VCCI. The government has made some changes, including asking candidates to commit to improving the gender imbalance in the tech sector. You had to earn FOF to raise $2.25 for every $1 in Ottawa. This time the government chose five FOFs, but the only newcomer, Hamilton Lane Advisors LLC, pulled out.
Then the CVCA said it needed one more program, despite the sector’s apparent health. “In venture capital, a decade is what your minimum horizon should be and we’re asking the government to stay the course for a decade,” Ms Furlong said.
In addition to Ottawa’s $350 million for funds-of-funds, the government is also committing $50 million for up to seven funds that invest directly in life sciences startups, and $50 million for five to 10 “inclusive growth” funds that support entrepreneurs from underserved groups, including women and non-binary people, Indigenous peoples, people of color, and people who identify as LGBTQ2+ or live with disabilities.
Ian Carew, Managing Director of Northleaf, which has raised two $300m funds through VCAP and VCCI, said: “We have more maturity in the ecosystem, but many funds still can’t. raise substantial capital without this type of support.
Teralys Managing Partner Jacques Bernier said: “We knew it would take three cycles to have a sustainable ecosystem.
He and his FOF peers have been eagerly awaiting the latest VCCI, which now requires winners to raise $3 for every $1 from Ottawa. The program was delayed by last fall’s election and their last VCCI funds have dried up in recent months.
They also fear that fundraising will become more difficult given the growing turmoil in the technology sector and the global economy. Without the new VCCI, “there is a good chance that fundraising from the entire ecosystem will be problematic over the next five years,” Bernier said.
Mr. Carew argued that, from a public policy perspective, VCAP and VCCI have been very effective. “On the other hand, we are preparing” for their demise, he said. “We are all working towards the same goal, defending our track record and raising capital. We are gearing up that hopefully, with our fourth fund of funds focused on Canada, we will have a balance sheet that holds up and that investors will support.
Your time is valuable. Receive the Top Business Headlines newsletter in your inbox morning or evening. register today.