The federal government shared hotly anticipated details on how a $1.75-billion CAD commitment would be distributed to the Canadian venture capital industry in Toronto today.
While Canada’s VC investors largely welcomed the announcement, some cautioned that they’d still like to see more financial support for the country’s early-stage startups, while others wondered how much longer they would still have to wait for the new funding to trickle down into the market.
The VC strategy includes two main tenets: $750 million for the Early and Growth Stage Investment Strategy, and $1 billion for the Growth Venture Capital Catalyst Initiative (Growth VCCI), the fourth and largest iteration of the government’s VC program.
“All stages are important, but the added emphasis on growth was what was missing.”
John Ruffolo
Maverix Private Equity
Industry groups had competing ideas for how the $750-million envelope should be allocated. The National Angel Capital Organization (NACO) had wanted funds funnelled to the earliest stages, while the Canadian Venture Capital & Private Equity Association (CVCA) had argued the envelope should be targeted to growth companies at the Series B stage and beyond. The Canadian Startup Capital Association (CSCA) was somewhere in the middle, asking the feds to allocate 10 to 20 percent to pre-seed and seed stages, with the remainder to growth.
In the end, $675 million was earmarked for “later- and growth-stage” gaps—for tech firms scaling at the Series B stage and beyond—and the remaining $75 million was dedicated to pre-seed and seed-stage startups. Later-stage deals often require larger cheque sizes in general to scale, compared to pre-seed and seed deals, most of which fall under $10 million in Canada.
CVCA lauded the announcement, which fell more in line with its asks than with NACO’s. “Today’s announcement gives Canadian managers and investors a substantial new base of federal capital to work with,” CVCA CEO Benjamin Bergen said in a statement.
Despite the smaller allocation toward pre-seed and seed funding, NACO CEO Claudio Rojas called it a “positive development.”
RELATED: Feds reveal breakdown of $750-million VC funding envelope, open Growth VCCI applications
“This adds capacity at the stage that past programs didn’t reach,” Rojas told BetaKit. He added that NACO will continue to share its thoughts with the government on how the pre-seed and seed stream should function. Before any of that envelope can be allocated, the industry is awaiting consultations for the pre-seed and seed investment portion and calls for proposals for that and the growth-stage stream. It’s currently unclear how long this might take.
Maverix Private Equity founder and managing partner John Ruffolo told BetaKit he was very pleased with the fund allocation, calling it “a great shot in the arm for the venture and growth ecosystem of entrepreneurs.”
“All stages are important, but the added emphasis on growth was what was missing,” Ruffolo said in a text message.
At the same time, Nectarios Economakis, a partner at early-stage firm Amiral Ventures, said he was disappointed more was not earmarked for the earliest stages, and questioned how helpful $675 million would be spread across a handful of growth-stage deals.
Michelle McBane
“If we don’t invest early—and we see it on the ground right now—those companies will leave Canada.”
StandUp Ventures
“It feels like a spread-the-peanut-butter strategy” to satisfy multiple camps, Economakis told BetaKit. “The pre-seed and seed is a drop in the bucket in terms of the scale of the problem.”
GreenSky Ventures partner Neil Peet echoed the disappointment at how little was given to early stage, but applauded the overall influx of capital from the government. “I’m not sure how that’s going to move the needle exactly, but the devil is in the details, and I’m optimistic,” Peet told BetaKit at the event.
Michelle McBane, managing director at seed-stage firm StandUp Ventures, told BetaKit that she was happy to see some allocation for the early stage. “If we don’t invest early—and we see it on the ground right now—those companies will leave Canada, and they won’t be there as an opportunity to invest at the later stages,” she said.
It’s a concern reflected by some other investors, who have pointed to a capital crunch as one reason why Canada faces a consistent founder and talent exodus to the US. “The reason a lot of great founders are leaving is because there’s no money,” Economakis said. “We say no to so many good people, because we can’t fund them all.”
However, Council of Canadian Innovators CEO Patrick Searle said in an interview that the growth-stage investments will particularly help in areas that have a longer runway to commercialization and are “critical for our economic security and sovereignty in Canada,” like deep tech, AI, and life sciences.
RELATED: Canadian tech firms are selling to foreign buyers when it’s time to scale, CCI says
In a recent report, CCI had identified a lack of growth financing as a key reason why scaling Canadian companies end up selling too early to foreign buyers. The organization welcomed the federal announcement but argued that the funding would be more likely to succeed if paired with other changes to make Canada a more competitive place to build a company, such as the QSBS-style tax incentive change that CCI is asking for in the upcoming federal budget. “What we also need to see is a focus on a competitive investing environment,” Searle said.
As for the $1-billion Growth VCCI portion, industry minister Mélanie Joly announced that calls for expressions of interest for the program are now open, and guidelines were made available on the government’s website shortly after. Its streams include a core, $700-million VC stream for fund-of-fund managers, $200 million for life sciences firms, and $100 million for emerging managers, who typically invest in early-stage companies.
According to the call for expressions of interest document for the fund-of-funds stream, the selected fund manager will be expected to hold a first close of its fund-of-funds within 18 months of its federal investment. The same timeline applies for selected firms to establish a Canadian presence with “meaningful activities in Canada.”
The biggest priority now, according to Bergen, is timing. The federal call for expressions of interest for the first stream of Growth VCCI will close in January; based on past iterations of the program and the new guidelines, it will likely take at least 12 to 18 months before the capital reaches fund managers and, ultimately, tech startups. This is because funds must apply and be approved for the program, and raise external private capital amid a difficult fundraising environment.
Regarding a potential 18-month estimate, Economakis said the process should be done faster. “Tech is literally changing all of society,” he said. “It’s much more strategic for the country to be active in the sector than to treat it as an equivalent of financial services or natural resources. This is the moment.”
“The next gold stamp of success will be the speed with which government moves forward on the deployment of both—the Growth VCCI, but also on the [$750-million] envelope,” Bergen said.
When asked about concerns over how long Growth VCCI funds might take to reach the ecosystem, Ruffolo was succinct: “Better late than never!”
With files from Josh Scott. Feature image courtesy Benjamin Bergen via LinkedIn.
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