$5 billion to end up in the hands of Canadian entrepreneurs, nothing less!


First Posted in Montreal TechWatch MARCH 31ST, 2009 

Follow Montreal Tech Watch: http://twitter.com/mtw

The recent Quebec provincial budget included a range of announcements that represent the most significant set of commitments ever done by any provincial government (or to my knowledge state government) to support entrepreneurship.   To help shed some light on the announcement and what it means for Canadian entrepreneurs, I asked my partner at iNovia CapitalChris Arsenault to write a guest post for MontrealTechWatch – Austin Hill.

Disclosure: I’m on the board of Reseau CapitalAnges Quebec andMontrealStartup some of whom stand to benefit from this issue and I was involved in consultations with the government in the establishment of these programs.

$5 billion to end up in the hands of Canadian entrepreneurs, as a result of Québec’s support of Venture Capital initiatives nothing less!

by Chris Arsenault

Now that the dust is starting to settle down around the recent Québec government budget announcements, the high tech community is wondering what concrete actions will come out of what is believed to be the most important “commitments” ever done by any provincial government to date towards fully supporting the build-out of the entrepreneur’s ecosystem.

I feel confident that the recent Quebec initiatives (link to budget) will ignite a flurry of positive impacts that will solidify Quebec’s entrepreneurship foundation, and that we will see numerous successful companies be launched, existing companies be financed which otherwise would not exist or would not be able to further their development because of today’s economic downturn, yet many of these companies will prove to become tomorrow’s industry leaders.

Here are some highlights from the budget:

  • $825M  for the creation of a privately managed fund-of-funds – to invest in a certain number of VC funds;
  • $500M for a privately managed later stage fund – to invest in existing high growth companies;
  • $125M for the creation of 3 privately managed seed funds – covering all sectors;
  • $60M for existing FIER regional funds – as additional matching capital with private investors;
  • And a 10-year provincial tax holiday for new ventures that commercialize research from a Quebec university or research centre.

So, what is so great with the above initiatives? Other than the obvious large amount of dollars that will be  flowing towards entrepreneurs old and new?

What is great, is the way all of the above is being delivered! First, it’s important to the that over the last year, Minister Bachand conducted many market and industry assessments, done by qualified individuals and the results were then compared to existing initiatives found elsewhere in the world. Many, if not most of the ecosystem key players (venture capital firms, fund of funds, private equity firms, angels, angels groups, Réseau Capital, CVCA, successful entrepreneurs, incubators, coaching and mentoring service firms, tech transfer offices… and so on) were asked to share their comments and recommend solutions. Finally, and most importantly, the above listed budget highlighted initiatives are being executed in partnership with the private sector and with the financial support of the existing Quebec government affiliated institutions with industry expertise such as the Fond de solidarité FTQ (FsFTQ), the Caisse de depot et de placement du Québec (CDP) and Investissement Québec.

It’s the case for any successful business, it’s ALWAYS about leverage! Successful entrepreneurs know that leveraging others’ contacts, dollars, knowledge, customer relationships and so on, is the only way to create an uncompetitive advantage beyond the obvious and it often proves to be the true marker of success, especially for start-ups.

The above $1.5B doesn’t come from the Québec government alone, only a fraction of it is, the difference of capital is being provided by the FsFTQ, CDP, SGF, Investissement Québec and … by private local and foreign investors that believe and understand our complex ecosystem. Better yet, once the large majority of the above funds get invested into promising new and existing high technology companies, we will witness an even larger financial leverage as these funds will “likely” be matched by other venture capital co-investors and other type of financing. As an example, on average, for every dollar iNovia Capital invest into a company, 7 additional dollars find its way into these same companies either simultaneously or in follow-on financing rounds.

For Fund of funds, the leverage is even more important. By way of logic, an investment or commitment into a VC fund by a Fund of funds only represents a fraction of the size of the fund, as an example of the $112.5M commitments into  iNovia Capital’s second Venture Capital fund approximately 40% are commitments from FIER Partenaire, FsFTQ and CDP all together, the difference is made up of individuals and institutions across Canada, from the US and Europe. Furthermore, once the VC funds start investing their capital into promising companies, again, they attract additional funds from co-investors and follow-on investors. Now that’s leverage!

In my opinion, geographical investment limitations will directly impact the “leverage” by reducing the potential amount of capital being attracted into any deal (be it into companies or funds). Building out relationships and networks of co-investors, entrepreneurs and service providers is key to the success and long term viability of any ecosystem. Hopefully, we will see some of the above Quebec initiatives cross some borders, provincially and into what is still today our largest market: the USA.

How fast will all of this be put in place? When will entrepreneurs be able to start knocking at Venture Capital doors and actually know that they have money to invest?

Well, hopefully faster than the time it took the Ontario government, which in the case of their Fund of fund (Ontario Venture Capital Fund) who last week announced its first VC fund commitment, took almost a year before doing deals.

Maybe I’m being overly optimist. But it wouldn’t surprise me if we heard about concrete actions from $825M Fund of fund as well as the identity of the then private manager of the $500M later stage fund by late May, which is when the CVCA holds its annual conference, which this year will be held in Calgary. Why? First, because the Fund of fund must be launched in priority if the Government expect to have timely economic impact (all commitments by a Fund of fund requires further additional commitments by other investors into the selected VC fund manager – that’s a long process alone). Second, the later stage fund has been on the drawing board for over 2 years already, some large Canadian institutions have already announced their intention to commit large amount of funding to such a fund. I even noticed some Tweets on Tweeter, Linkedin and Plaxo about much progress pertaining to the launch of a $500M Canadian later stage fund. Can’t be too many new $500M size funds, one maybe two, so I’m simply adding 1 +1and I get to the conclusion that we should soon hear about how later stage companies will have access to new funds…

What about the $60M of additional commitments to the FIER Regional funds?

Well, these regional FIER funds already exist, already have portfolio companies in need of additional capital and already have deal flow (targeted new investments), so my guest here is that we should see action very soon as well.

And finally, the $125M for three new seed funds. I’m being told that a selection committee is being put in place, that the committee will review proposals by whoever wants to provide the matching funds and has a viable business plan outlining “how” these funds will be put at work. And, that the committee will likely select the three best proposals by year end (could be faster). Existing seed fund managers as well as new entrants can propose their plans. Note that any proposal must at least provide a 1 for 2 in matching dollars. I’m pretty experienced in seed investing and my concerns here are many. Such as, the size of each of these seed funds and their true capability to follow-on in the future financing rounds of their then portfolio companies. Not an easy model. The size also has a direct impact on the level of available management fees a Seed fund manager can get in order to cover for its fees in finding and supporting its portfolio companies.

Another danger is that by seed funding too many start-ups we end up breaking the ecosystem and flooding it with too much noise and too many companies that won’t be able to attract further follow-on financing and won’t succeed. But, as a society, we do need to provide capital to entrepreneurs that have the ability to grasp what needs to be done to launch a successful and fundable company.

So don’t get me wrong, I think we NEED a few more seed funds in Quebec. Seed funds take-on different level of risks than early or later stage VC funds, and they provide a different level of value-add to promising entrepreneurs. But I also believe that no private dollars should be directly financing technology or research! Private funds should only be financing innovation when within the hands of committed, new and recurring, entrepreneurs.

Furthermore, linking these seed funds with existing and new early and later stage funds is critical for the success of the companies receiving seed funding. Through better networking, collaboration and soundboard with later stage funds, Seed funds directly reduce their own risk of choosing the wrong investment opportunities. Seed fund should never look at a deal alone, it can close a deal alone, but it should always be looking into opportunities in conjunction with other investors and partners, in order to initiate relationships early on. Within the High Technology & Venture Capital ecosystem, we find many parties playing critical roles such as: tech transfer offices, seed funds, coaching and incubators, early stage funds, later stage funds, buyout & PE, bankers…(and it’s important not to “wear” too many hats). Failing to feed the ecosystem adequately is a big problem, and I’ve witnessed it many times in the past, either we see players trying to hold multiple roles and do more than what is expected from them and thus, they put themselves into direct conflict of interest with other players; or better yet, some Seed funds worked alone, by fear I guess of not getting the best deal possible and potentially losing out on a huge return and thus, tried to limit the exposure of their deal flow to other parties in order to close the deal by themselves and to then only open up the gate of collaboration once the company is in desperate need of cash!

Angels are key. I like having Angel investors implicated at the seed stage, they provide tremendous value such as industry expertise, contacts and coaching. I hope Angels will find their way into these proposals.

What does the new funding from the Quebec government mean for Montreal & Quebec entrepreneurs & ecosystem?  The answer is allot, but most importantly it’s about leverage!

If you are on Twitter come and say hello and share your thought (under 140 characters J)  http://twitter.com/chrisarsenault

Chris Arsenault
Managing Partner & COO
iNovia Capital Inc.

P.S. All of this is really good news for entrepreneurs. For more about how this trickle down to start-ups, check out Raymond Luk of Flow Ventures recent blog (link).


8 Responses to “$5 billion to end up in the hands of Canadian entrepreneurs, nothing less!”

  1. 1 Chris

    Please take a look at one of the numerous assessments done on the Canadian VC landscape: go to http://post.ly/DQP and pick up a copy of the French or English .pdf file at the bottom of the post.

    For those interested, here is some additional light about how a Fund of Fund and a VC fund works: A Fund of Funds invest substantially all its money (very little goes to administration) into a few selected VC funds (managed by General Partners also referred to as a GP). The investment into a VC fund is done alongside other investors such as individuals, banks, other Fund of Funds, Insurance companies, Pension funds, corporations, endowment funds… The Fund of Funds invest on the same terms and conditions as the other co-investors and expect a strong return on its investment within 10 years (10 years is the standard life of a VC fund). So the Quebec Government initiative mention in the article above to invest in a $825M fund of Fund alongside other investors (FsFTQ, CDPQ and other private institutions) is a great way to help the industry by putting money at work while expecting a very good return on their investment.

    The main risk here is choosing the right Fund of Funds Management team, as this team will be choosing which VC fund to back. Selecting the right VC Fund managers is key, as the choices must cover a broad range of industries and investment stages in order for a proper risk management approach. Again, its important to understand that the Fund of Fund ends up only representing a fraction of the size of the VC funds it decides to back, thus, the Fund of Fund is managing its risk by leveraging the knowledge and expertise of other co-investors. As an example in iNovia II, CDP is 1 or 20 investors in our Fund. Yes they are important, but also, note that half our investors are Angel investors or entrepreneurs and the other half are institutions that would only invest if we were at a certain size of a fund! We have investors from Qc, Ont., Alberta, the USA, the UK and Findland! Having the right amount of capital around the table facilitates the fund raising efforts of a VC.

    The VC Fund then, is the one selecting companies, new and existing, to invest in. The amounts the VC Fund has to invest per company depends on the investment strategy of each VC Fund as well as on each its appreciation of the risk they are taking when investing into any given company. A VC fund is not a bank, and is not a granting agency. Its only one player in the Food Chain. So let’s not forget that there are ALLOT of great promising companies out there, that SHOULD not be raising VC funding. The VC model is not one that fits most business. And entrepreneurs should understand the opportunities and challenges attached to receiving VC funding.

    Take a look at the ecosystem. Réseau Capital is sharing the study on the impact of Venture Capital on the Canadian Economy (en français et en anglais) I posted it on my blog http://post.ly/DQP

    So, in a nutshell, this has nothing to do with bailouts nor leveraged financing. When I speak of leverage, I mean the ROLE that one can play to enable a flow of activity (power of attracting: partners, financing, revenues, customers; momentum, support, knowledge, expertise…)! The above is only one of the numerous initiatives from the Quebec government, in supporting Entrepreneurs and the high-tech industry via its participation as a simple but valuable co-investor into a Funds of Fund of Funds managed by the private sector alongside other investors with deep experience and expertise. This is by far more efficient then what we have seen in the past where our Government tried to do good by supporting companies its selected itself within the industry specific knowledge nor networks.

    No, there isn’t enough active VC funds in Canada! And yes, one third of our great Companies received US VC funding to date (and its now at its lowest point with the US going through worst times than Canadians)… But guess what, if there wasn’t any Canadian VC Funds doing the early stage deals or even participating in later stage rounds going out and leveraging their contacts & networks within the US VC community, then the US VC’s wouldn’t even know about our great Companies and only a fraction would get noticed and get funding… VC Funding is one, yet only one, piece of the puzzle and there is a whole ecosystem that needs to be feed intellectually and financially.

    Maybe I’m a little optimist and all, yet I do believe many right/good decisions are being taken, yet so much more needs to be done…

  2. Great Blog chris!

  1. 1 CVCA - Capital Rants » Blog Archive » Teralys a $700M Fund of Funds: A turning point for VC fund raising in Canada?
  2. 2 A turning point for VC fund raising in Canada? | iNovia Capital
  3. 3 The revitalization of the Canadian Venture Capital sector | iNovia Capital
  4. 4 La revitalisation du secteur canadien du capital de risque | iNovia Capital
  5. 5 The revitalization of the Canadian Venture Capital sector | iNovia Capital
  6. 6 More on the $1.35B initiatives from Quebec for the Venture Capital industry | iNovia Capital

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