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BDC shakes up venture capital strategy, with plans to spin out two tech funds as independents

Two Business Development Bank of Canada venture capitalists are setting out with their own independent fund backed by tens of millions of dollars from U.S. fund giant Fidelity Investments, the first step in a significant shift by the federal agency in how it finances Canada’s growing technology sector.

Peter Misek and Andrew Lugsdin, partners with BDC Capital’s Information Technology Venture Fund in Toronto and Vancouver, respectively, will lead newly formed Framework Venture Partners, which will start with a $100-million fund seeded primarily by Fidelity’s private equity group Devonshire Investors and its alternative investment arm Eight Roads, along with backing from the BDC. The parties agreed on a term sheet earlier this year, and the deal is expected to be finalized this month.

It’s part of a staged restructuring for BDC’s venture capital division, the largest funder of Canada’s tech startup sector. It invests about $200-million a year in companies and venture funds, reflecting the fact the industry is in more robust shape than when the government agency set up its venture financing strategy seven years ago. With foreign funds and tech giants now flooding into Canada and focusing on hot areas such as artificial intelligence (AI) and drug development, BDC is making changes to stay consistent with its past practice of funding tech ventures and sectors that struggle to attract capital in Canada, including agriculture and clean technology.

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BDC is planning a similar spin-out for its healthcare venture fund in the coming months to create a second offshoot independent VC firm that will invest in Canadian life sciences firms, BDC president Michael Denham said. The agency isn’t sharing further details at this time.

Framework plans to finance Canadian firms that sell AI-enabled subscription software to enterprise clients and tech startups looking to modernize financial services. Framework will aim to lead financings by growing “scale-ups,” targeting an average investment of $8-million per deal and participating in syndicated transactions of up to $50-million. Mr. Misek and Mr. Lugsdin will continue to co-manage $125-million worth of BDC’s direct investments in IT startups, including prosperous up-and-comers Wattpad Corp., TouchBistro Inc., Elastic Path Software Inc. and Trulioo Information Services Inc.

When Ottawa set its last venture investing strategy in 2011, Canada’s tech scene was reeling from the demise of Nortel Networks and the compounding challenges at BlackBerry. The country’s venture capitalists pressed Ottawa for help after Canadian institutional investors largely abandoned the asset class after years of poor returns.

BDC set up three VC funds at the time specializing in IT, life sciences and clean technology that were instructed to follow the same investing discipline as private sector funds. The hope was that they would attract venture capitalists and institutional investors to back Canadian startups.

“BDC invested when no one else did and shouldered the burden when no one else would,” said Mr. Misek, a former Wall Street equity analyst who joined BDC in 2015. “There would be no capital in the Canadian VC ecosystem were it not for BDC over the last 10 years.”

That experiment has largely succeeded, as BDC made several successful early bets and helped fund successful entrepreneur-led VC firms. Across Canada, a new class of Canadian software companies including Shopify Inc., PointClickCare Technologies Inc. and Hootsuite Media Inc. became globally successful, while breakthroughs in artificial intelligence turned Montreal, Toronto and Edmonton into AI research hotspots. The Canadian early-stage healthcare market experienced a similar resurgence as drug developers including Zymeworks Inc. and Clementia Pharmaceuticals Inc. attracted significant funding. Canadian institutional investors, starting with OMERS Ventures earlier this decade, began to move back into venture. Canadian financial institutions and other corporations, including OpenText, have also committed funds to early-stage ventures in recent years, alongside foreign venture funds.

Overall, venture capitalists invested $3.5-billion in Canadian firms last year, double the level from five years earlier, according to the Canadian Venture Capital and Private Equity Association.

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As a result of the two planned fund spin-outs, BDC will collapse its IT and life sciences funds into one large fund that backs a range of technology firms and funds that promote innovation in such priority sectors for the government as agriculture and ocean industries, Mr. Denham said. BDC is also managing a $200-million Women-in-Technology Fund to back female-led companies that have had difficulty attracting funding as a result of well-documented systemic bias against female tech CEOs. A third fund that invests in clean technology firms will continue to operate as is.

“It’s an evolved strategy,” Mr. Denham said. “But we’ll continue to focus on … investing in innovative companies and taking the steps to keep the ecosystem healthy.” He added BDC will continue to commit about $200-million to venture capital, half through direct investments into startups and the balance into venture funds. The agency is also managing distribution of $400-million to VC firms through a government program aimed at drawing additional private funds into the sector.

“It’s a great time to be building companies in Canada,” said Vancouver-based Mr. Lugsdin, who joined BDC in 2001 and cut his teeth as a venture capitalist during the tough ensuing decade, emerging as one of Canada’s most respected early-stage tech investors. “That’s the message we took to Fidelity.”

Fidelity is expected to anchor future Framework funds if the partners deliver on performance targets, following a model it has established in other markets. “They don’t go into markets with a view to only one-and-done, [but] with a long-term view,” Mr. Misek said.

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