Ottawa has unveiled the details of its $400 million program to shore up venture capital supply in Canada, giving particular focus to backing late-stage tech and righting gender imbalances.
The Venture Capital Catalyst Initiative, first announced in March’s federal Budget 2017, was launched today by the Liberal government to channel $1.5 billion of new money into Canada’s innovation ecosystem.
VCCI will do this by leveraging private commitments to VC funds, primarily through market intermediaries. Every $1 VCCI allocates through Business Development Bank of Canada must be matched by $2.25 from private sources, such as corporations, institutional investors and wealthy individuals.
The matching formula, a unique feature of current Canadian public policy in the VC space, is based on one already tested in the market by VCCI’s predecessor, the Venture Capital Action Plan, introduced by the former Conservative government in 2013.
VCAP succeeded in raising $1.35 billion over three years. Of this amount, more than $900 million came from private limited partners, many of them corporate and institutional investors absent from the asset class for a decade or longer.
The result was a renewal of near-stagnant VC fundraising activity in Canada, contributing to robust VC invested in domestic tech startups in recent years. Dollar flows were especially strong this year and in 2016, approaching levels last seen in the dot.com era.
VCCI intends to build on VCAP’s track record, this time by raising more private money. It will do this partly by giving intermediaries, such as funds-of-funds, more scope to secure capital from overseas. Additionally, the scheme will tackle some key market challenges that have attracted attention of late.
They include late-stage opportunities. Despite improved VC supply, there is evidence that Canadian tech companies looking to turn early commercial success into rapid growth are held back by financing barriers. A report issued this year by a TMX-backed working group estimated the size of the late-stage capital gap at $4 billion and climbing.
VCCI will give some preference to VC funds that invest in established companies with strategies for becoming category leaders by hiring talent, enhancing products, and entering new markets at home and abroad.
As if to reinforce this point, VCCI’s launch is being announced at the Toronto headquarters of Hubba, a brand connection platform that closed a Series B round last year and is widely viewed as having significant upside potential.
VCCI will also emphasize diversity goals, among them a greater presence for women in the VC industry and the tech sector.
A 2017 report by MoveTheDial, PwC Canada and MaRS Discovery District highlighted the underrepresentation of women in Canadian tech leadership. To help address this disparity, it emphasized the importance of financing more women-led startups, partly by giving women more of a voice in investment decisions.
VCCI picks up on the theme by giving some preference to VC funds with investment teams and portfolios that reflect gender and diversity considerations.
Neal Hill, BDC’s vice president of market development, told PE Hub Canada that VCCI’s priorities are right for Canada’s VC industry at this point in its evolution.
“VCAP played a critical role in the maturation of the VC industry,” Hill said. “VCCI has the right design to turbo-charge the next phase. It will give us the ability to attract funds and investors that can tap the full range of market resources and ensure that innovative companies transitioning to growth-stage strategies succeed on a grand scale.”
VCCI will be deployed in two streams. Stream 1 will allocate $350 million to fund of funds partnering with Canadian VC funds. These may include vehicles managed by HarbourVest, Kensington Capital Partners, Northleaf Capital Partners and Teralys Capital, which were backed by VCAP.
Stream 2 will allocate $50 million to priorities not covered under Stream 1. These may include specialty funds and initiatives that touch on market gaps, such as investment in underserved regions and sectors, and diversity concerns.
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