Deloitte LLP is joining Corporate Canada’s swelling ranks of startup financiers, just as valuations of tech companies swoon amid a public markets sell-off.
The Canadian professional services giant said Tuesday it has launched a $150-million venture capital fund to back early-stage Canadian companies, after a slew of domestic corporations that did the same last fall, including Thomson Reuters Corp. TRI-T, Constellation Software Inc. CSU-T, Spin Master Corp. TOY-T and Quebecor Inc. QBR-A-T Canadian Imperial Bank of Commerce CM-T also earmarked $300-million to invest mostly in venture capital and growth equity funds.
Talia Abramowitz, managing partner of Deloitte Ventures, said in an interview her group would invest two-thirds of the money, which comes from the partnership’s balance sheet, in sectors Deloitte “is uniquely positioned to assess and also accelerate.” Those include cybersecurity, financial services, health, consumer products and government risk compliance. The balance will be invested with other funds.
Deloitte will invest between $2-million and $10-million for every company in enterprises with at least $1-million in annual revenue and “validated product-market fit,” she said. It will limit ownership to 10 per cent of any one startup. “If you look at our firm and clients, we’re getting disrupted by technology,” Ms. Abramowitz said. “We look at ventures as a way to build organizational resilience and a hedge against the eroding parts of our business,” such as advising companies on complying with customer data standards.
But the recent arrival of Deloitte and other Canadian corporates to venture investment begs the question whether they are late to the game, as the spectre of rising interest rates squeezes valuations of tech stocks. That could weigh on valuations of privately funded tech companies as well, as it has during previous corrections, Tomasz Tunguz, managing director of Redpoint Ventures in San Francisco, wrote in a blog post last week.
“Diversity of VCs is a net positive for the innovation ecosystem so a pool of capital from a cross-vertically positioned [venture capitalist] should be a welcome addition,” Hans Knapp, chairman of the Canadian Venture Capital and Private Equity Association, told The Globe and Mail. “However, increased formation of corporate venture capital funds in past market cycles has been, in hindsight, correlated with periods that were late in the venture capital valuation cycle. So either it’s different this time or history will repeat itself.”
For years Corporate Canada had a reputation for underinvesting in innovation and startups, particularly after Canadian institutions largely retreated from the space following the 2008-09 recession. Availability of privately funded domestic innovation capital was so scarce a decade ago that the federal government launched a $400-million program to stimulate investment into the space. That program and follow-ons have helped stimulate investment in Canadian tech startups; in 2021, Canadian companies raised a record $16-billion in venture capital, according to preliminary data from Refinitiv.
Until recently, corporations with their own venture capital arms were relatively rare in Canada, and the country lagged other countries where corporations were more active backers of young ventures. The best known examples were Telus Corp. T-T, Power Corp. of Canada POW-T and Intact Financial Corp IFC-T. Their ranks had expanded recently as the billionaire Weston family started a dedicated venture capital arm in 2019 and Shopify Inc SHOP-T. began funding startups during the pandemic.
In addition to the late-cycle flood of new corporate venture arms, some commentators have raised concerns of a potential repeat of past mistakes by such funds, including muddled governance and investment objectives and a lack of disciplined funding choices by sponsors.
Ms. Abramowitz said she was aware “there are a lot of hazards” and said she had consulted Harvard Business School economist Josh Lerner, a leading thinker on the topic, to ensure Deloitte avoids the standard pitfalls. She said Deloitte wouldn’t make decisions that were purely strategically motivated or give it access to innovators, but rather those that were primarily driven by investment return goals. “We plan to generate returns” that rank among the leading venture funds, she said.
She said investment decisions will be made by a three-person investment committee composed of chief client officer Marc Perron, chief business and financial officer Iseo Pasquali and chief strategy and innovation officer Tim Christmann based on suggestions from professional venture capitalists Deloitte has yet to hire, as well as an advisory committee.
Asked whether the timing was right for another corporate venture fund, Ms. Abramowitz said: “I feel the timing is actually really good. People have said it will slow down quite a bit and that we’re at a peak. If that does happen we’re in a great place. … We have an opportunity to buy on a down.”
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