John Ruffolo has heard every sort of pitch from hundreds of companies seeking financing – even fielding a phone call from an Italian restaurant looking for funding to sell a line of rice balls.
“This is the real Dragons’ Den,” says the chief executive officer of venture capital fund OMERS Ventures. “We get the pitches from the most amazing stuff to the craziest – we get it all.”
In two-and-a-half-years since it opened its doors in Toronto’s financial district with a $200-million fund to finance early-stage technology companies, OMERS Ventures has become Canada’s go-to choice for small companies seeking funding.
The firm’s clout has helped to boost the scale of venture capital in Canada. Last year, OMERS Ventures participated with partners in two of Canada’s biggest-ever venture capital financings – the record-breaking $165-million (U.S.) venture capital deal to finance Vancouver social media platform HootSuite, and a $100-million (Canadian) financing for e-commerce platform Shopify.
The firm’s initial $200-million fund has been fully invested in 19 deals – all involving Canadian technology firms – and it is now investing in a second round of venture capital financing that will be formally announced soon. Mr. Ruffolo said the second round will give OMERS Ventures the largest active pool of directly invested venture capital money in Canada.
“We invest in about half of 1 per cent of all the pitches we receive, so the issue is filtering the wheat from the chaff,” he explains. “But you want those crazy ideas, because the reality is that those outsized returns – the Facebooks or the Oculus – these are the ones that seemed crazy.”
Companies that have made the cut include Toronto-based Interaxon, which builds tools harnessing the “power of the brain,” including one “that senses brainwaves and lets you do stuff with your mind,” and Hopper, whose trip-planning tool takes ideas such as “spring surfing in California” and provides logistical tips based on a database of travel information.
Mike Woollatt, chief executive officer of Canada’s Venture Capital and Private Equity Association, said there has been a flurry of investment in venture capital financing in Canada in recent years and OMERS has been “going gangbusters” as it quickly becomes one of the biggest players in the action. Investments by Canadian venture capital funds totalled $2-billion last year, up from $1.5-billion in 2012.
Mr. Woollatt said there is still plenty of unmet demand for financing in Canada, and he hopes more investors will develop venture capital pools if OMERS’ experience sparks broader interest in the sector.
“I think they are at the leading edge of recognizing that venture capital is coming through a bit of an emergence here,” Mr. Woollatt said. “They’re starting to see the real returns on the investment.”
The surprise is not that there is a large demand for early-stage financing in Canada, but that the demand is being filled by a Canadian pension plan. OMERS Ventures is a subsidiary of the Ontario Municipal Employees Pension Plan, a $65-billion pool of capital managed on behalf of municipal workers across the province.
OMERS is the first major pension plan to set up an in-house venture capital fund, which typically involves investing smaller sums in young firms looking for minority partners to help them get off the ground. Other pension plans avoid venture capital because of the small scale of the investments, or invest only through funds managed by outside venture capital firms.
Mr. Ruffolo said OMERS used to invest in external funds but grew dissatisfied with the low returns between 2000 and 2008 and the high management fees. Its in-house venture capital arm began active operation in the fall of 2011.
The direct investment approach has not been adopted by other major pension plans who say they need to focus on larger deals that can impact their returns. The Ontario Teachers’ Pension Plan invests in venture capital only through external funds rather than directly through an in-house venture capital division because individual deals are typically so tiny that you “end up writing a lot of small cheques” and it is difficult to pick winning companies at the startup phase, said chief investment officer Neil Petroff.
The firm’s pitch to small companies is that it has the time to be a patient investor. A pension fund does not need to exit an investment and reap its returns in the eight-year time frame typical in the venture capital realm, Mr. Ruffolo says, which means its companies have a chance to grow to a proper scale before facing pressure to sell.
“The actual experience is that some of the best returns have taken far longer than eight years. … That’s too early in the cycle,” Mr. Ruffolo says.
Harley Finkelstein, chief platform officer at Shopify, says young technology firms have many ways to raise money today, but his company chose to do three rounds of venture capital financing from a group of venture capital firms because it wanted long-term partners who could help the founders develop the business.
“For us, we wanted not just growth capital, we wanted expertise,” he says. “We wanted owners and a board of directors that can help us grow our business, and help us with the challenges that we have.”
Mr. Ruffolo says the ideal investment for OMERS Ventures is a company in the technology, media or telecommunications fields that has “passionate” founders who are looking to “solve a problem that has been gnawing at them” and whose products have broad market appeal.
Early stage technology companies need guidance to get established, and many employees at OMERS Ventures are responsible for working with the portfolio companies to help them grow. It is a time-consuming role that requires oversized returns to justify the cost.
“We are expecting a very significant return on our invested capital,” Mr. Ruffolo says. “It really means that the business in question will need to be a scalable business in a large market, which is a subset of all the opportunities you actually see. Not everything has a large market.”
Former Microsoft employee David Crow, director of business development, says part of his role is connecting startup CEOs with each other and ensuring companies in the portfolio can exchange advice.
“If somebody has found something that gives them a unique advantage, we’ll share that,” he says.