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A decade after the federal government agreed to bail out Canada’s venture capital industry, the chief lobbyist for the now healthy sector promises its days of asking for big cash injections from Ottawa are over.

“I’ve committed that I will not go back and ask for another general fund” to bankroll VC firms, Kim Furlong, chief executive officer of the Canadian Venture Capital and Private Equity Association, said in an interview. “This is not a crutch the industry should rely on. I think this is the last time we’ll see a major fund-to-fund initiative from the federal government.”

On Wednesday the government opens the application process for its $450-million Venture Capital Catalyst Initiative (VCCI), announced in the 2021 budget. The money is split in three chunks: The biggest is $350-million for “funds-of-funds” (FOFs) to invest in venture capital funds that in turn invest in companies.

The government hopes to get the FOF money moving fast: Applications are due June 23 with decisions expected by the fall. Small Business Minister Mary Ng said the government plans to distribute the FOF money “as quickly as we can” by year’s end.

The CVCA lobbied heavily for the FOF program in 2020, warning Canada’s innovation sector would be “severely weakened” without it. The industry continued to raise record levels of funding globally, with giant funds tapping vast sums without the need for government assistance programs. Ms. Furlong acknowledged officials in the federal Finance Department “always question, ‘Is this policy program distorting what the private market should be doing on its own?’”

The VCCI program promised last year is the second sequel to the $390-million Venture Capital Action Plan (VCAP) originally pledged by the Conservative government in 2012. That program was a response to the 2008-09 financial crisis, which devastated the domestic VC sector after years of poor returns. Many institutional funders retreated from the sector.

VCAP distributed $340-million to four FOFs – Northleaf Venture Catalyst Fund, Teralys Capital Innovation Fund, Kensington Venture Fund and HarbourVest Canada Growth Fund – and $50-million directly to four VC firms. The Ontario and Quebec governments provided another $113-million to the FOFs.

The federal cash – an investment expected to yield returns – came with conditions: The four FOFs had to raise $2 from private investors for every $1 from Ottawa, which they did.

The timing was good as Canada’s technology sector rebounded in step with global trends and a new group of venture capitalists posted better returns than their predecessors. A government report found that by Dec. 31, 2019, the total VCAP FOF portfolios were in the money, on paper.

The domestic technology industry and early-stage financing sector flourished, as venture capitalists generated solid returns and raised larger and larger funds, and financing for early stage companies soared.

Last year, venture capital funding in Canada hit an all-time record. Large funders that had remained on the sidelines started moving back into venture capital, angel investors and family offices expanded support for the space, and a slew of Canadian corporations launched their own in-house venture capital firms.

Despite the momentum, the CVCA argued one shot of federal money wasn’t enough to get the sector fully self-sustaining. (Other government agencies, notably Business Development Bank of Canada and Export Development Canada, also invest in venture capital.)

So the Liberal government renewed and renamed the program in 2017, committing $400-million to VCCI. The government made some tweaks, including asking applicants to commit to improving the tech sector’s gender imbalance. It required winning FOFs to raise $2.50 for every $1 from Ottawa. This time the government picked five FOFs, but the lone newcomer, Hamilton Lane Advisors LLC, pulled out.

Then the CVCA said it needed one more program, despite the sector’s apparent health. “In venture capital, a decade is what your horizon should be at a minimum and we’re asking the government to stay the course for a decade,” Ms. Furlong said.

In addition to Ottawa’s $350-million for the funds-of-funds, the government also is committing $50-million for up to seven funds that invest directly in life sciences startups, and $50-million for five to 10 “inclusive growth” funds that back entrepreneurs from underserved groups, including women and non-binary individuals, Indigenous peoples, people of colour, and those who identify as LGBTQ2+ or live with disabilities.

Ian Carew, managing director with Northleaf, which has raised two $300-million funds under VCAP and VCCI, said, “We’ve got greater maturity in the ecosystem, but still a lot of the funds can’t raise substantial pools of capital without this type of support.”

Teralys managing partner Jacques Bernier said, “We knew it would take three cycles to have an ecosystem that would be sustainable.”

He and his FOF peers have been keenly waiting for the latest VCCI, which requires winners to now raise $3 for every $1 from Ottawa. The program was delayed by last fall’s election, and their last VCCI funds dried up in recent months.

They are also concerned that fundraising could become tougher given the mounting turbulence in the tech sector and the global economy. Without the new VCCI, “odds are fairly high that fundraising of the whole ecosystem would be problematic over the next five years,” Mr. Bernier said.

Mr. Carew argued that, from a public-policy perspective, VCAP and VCCI have been very effective. “On the flip side, we’re girding ourselves” for their demise, he said. “We’re all working toward the same goal, to stand up on our track record and raise capital. We are preparing ourselves that hopefully by our fourth fund of funds focused on Canada that we’ve got a track record that stands up and that investors will support.”

Editor’s note: An earlier version of this story stated the deadline date for applications for the $350-million funds-of-funds stream in the VCCI date as June 2. This was based on a document sent to the Globe and Mail this week by the government. A spokeswoman for Small Business Minister Mary Ng said the date in the document was a typo and that the correct date is June 23. The story has been corrected to reflect the accurate date.

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