Vancouver-based Yaletown Partners in April unveiled a new fund earmarked for emerging-growth technology companies in Canada.
Yaletown Emerging Growth Fund, targeted to raise $135 million in committed capital, is intended to build on Yaletown’s 14-year history with innovative companies whose potential for high growth is too often limited by underfunding.
PE Hub Canada sat down with General Partners Brad Johns and Salil Munjal to talk about the fund and its goals. We also took the opportunity to discuss the latest financing of Bit Stew Systems, a data-integration platform for the industrial Internet.
Q: In Yaletown’s view, how big is the funding gap faced by emerging-growth companies?
BJ: Our experience and research tell us that Canadian technology companies have access to roughly half of the capital supply available to their American counterparts. That’s despite the fact that entrepreneurial demand for risk financing in Canada is healthy and even outpaces demand south of the border.
The capital gap is largest for mid-stage companies, or revenue-stage companies that have shown some initial commercial success. They have often been reduced to boot-strapping their growth. The result is slower velocity and delayed exits, typically at lower valuations, relative to their competitors.
SM: Without adequate funding, technology companies don’t stand much of a chance of becoming market leaders. Instead of being a consolidator in their verticals, they end up as one of the consolidated. Canada does not have enough anchor tenants that can help breed innovative ecosystems at the local level.
Q: How does Yaletown Emerging Growth Fund plan to tackle the problem?
BJ: The fund’s overarching theme is emerging growth. It will undertake financings of about a dozen mid-stage companies across Canada. Fund investments will be $2 million to $4 million initially, with capital reserved for follow-ons for a total of $6 million to $12 million. We expect portfolio exits will range at $50 million to $250 million, with an upside optionality.
SM: The fund will also have a unique sector theme. It will invest in companies whose technology products or services help industrial and enterprise customers improve sustainability, productivity and competitiveness. Yaletown describes these sectors as intelligent industry and intelligent enterprise.
There are some terrific opportunities in these sectors. But we’ve found their financing challenges are exacerbated compared to consumer-facing technology companies.
BJ: We want to ensure the best of these companies have the resources to accelerate scale, gain more customers and market share, and shorten the time to exit. For them, opportunity will no longer be left on the table because there wasn’t the capital. The fund will be a catalyst for putting great mid-stage companies on the radar screen and attracting more investors to the space.
Q: What has been the market reaction to the fund’s launch?
BJ: Yaletown Emerging Growth Fund is resonating in the market and among limited partners. We believe our strategy is understood because the challenges posed by underfunding are well-known in Canada.
The fund will be marketed to both new and repeat LPs. These will include large institutional investors, as well as angels and other high-net-worth investors. The latter group will include founders of past portfolio companies, many of whom are likely to bring deal opportunities with them.
We’re feeling confident about raising the fund’s $135 million target. We expect to close on an initial $70 million in capital committed by October.
Q: Bit Stew, backed by Yaletown since 2013, announced an initial close of its Series C financing. How will it use the money?
SM: Bit Stew began its commercial life developing software that helped utilities process and manage data generated by end devices and sensors. The company has since attracted growing appreciation for the analytical capabilities of its technology, which we believe can push the boundaries of the industrial Internet.
The initial close, which is backed by GE Ventures, Yaletown, BDC Capital and Kensington Venture Partners, among others, will fuel this goal and introduce Bit Stew to new verticals, such as agriculture, manufacturing and oil and gas. The final close will bring on more strategic and financial investors.
Q: Bit Stew raised a $20.6 million Series B last May. What has it achieved in the interim?
SM: Bit Stew has been a rocket ship since it closed the Series B round. It experienced record growth in 2015, with revenue increasing 171 percent year over year. It also broadened its geographic reach, which included establishing a European beachhead.
Bit Stew’s strategy to diversify its applications took it into the aviation sector last year. GE is using the company’s platform to analyze terabytes of data generated by aircraft engines to inform how to improve aircraft fleet performance and safety. We expect further rollouts across GE’s customer base.
Photo of Yaletown banners in Vancouver, British Columbia, courtesy of Yaletown Partners/All Canada Photos/Kurt Werby