Caisse buries ghosts of tech bets past to become lead startup financier

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With its heavy dot-com bubble losses in the distant past, the Caisse de dépôt et placement du Québec is emerging as one of the leading financiers of Canada's technology sector renaissance.

As venture capital pours into the sector – Canada is on track for one of its strongest years ever for VC financing – the pension giant has become one of only a handful of Canadian institutions, along with OMERS and Georgian Capital Partners, writing big cheques to finance fast-growing startups looking for "late-stage" capital investments to fund their expansion.

The Caisse, with $248-billion in assets under management at the end of 2015, has been one of the lead investors in three of the seven largest Canadian tech venture capital deals of the past two years. Those transactions included an $80-million financing for retail merchant software provider Lightspeed POS Inc. in September, 2015,; a $100-million (U.S.) deal for drug developer DalCor Pharmaceuticals Inc. last April; and this month's $82-million funding for Hopper Inc., maker of a popular airfare prediction app. All three companies are based in Montreal

It's part of a recent effort by the money manager, which invests on behalf of Quebec public pension and insurance funds, to put its heft behind promising local startups to further its dual mandate of seeking financial returns and supporting the Quebec economy.

"It was obvious to [us] … that we're sitting on a pot of gold," said Thomas Birch, the senior director of funds with the Caisse's private equity group. "We have some beautiful technology companies in Quebec. Now is the time to start investing in them."

Dax Dasilva, the founder and CEO of Lightspeed, said the Caisse's move into funding startups in a big way is "really significant" for the local tech sector. Choosing a patient, deep-pocketed local investor to lead the last funding round means Lightspeed has a better chance of staying independent and becoming "a tech anchor in Montreal," he said.

The Caisse was a big player in the tech sector during the dot-com bubble, making giant bets under then-boss Jean-Claude Scraire that turned into big losers. Those included backing fibre-optic network builder 360networks Inc. and doubling down on Nortel Networks Corp. stock as it cratered in 2001. The Caisse's Nortel losses hit $2-billion and contributed to overall negative investment returns in 2001 and 2002.

What's different this time is that the Caisse's approach to the technology sector is more measured. With a focus on earlier-stage companies, it can write smaller cheques that can have an outsized impact.

"We have about $25-billion in private placements and billions of dollars invested in [established] companies like CGI [Group Inc., the Montreal-based IT services giant]," said Christian Dubé, the executive vice-president in charge of the Caisse's dual-mandate investment strategy. Startups "are the CGIs of the next five to 10 years, so for us to put this sort of amount is significant to them but it's not risky for us in the big scheme."

The Caisse has backed 17 venture capital and small private equity funds that target technology, not just in Quebec but all of Canada and the United States. Mr. Birch said the Caisse views the 600 firms in those portfolios (about 400 of which are Quebec-based) as a startup "farm team" that it monitors regularly. "We've identified the top 50 and we'll invest in the top 10," he said. It's notable that in the three recent deals, the Caisse followed sophisticated American venture capital firms that had previously invested.

In doing so, Caisse officials cite the organization's long-standing support of what eventually became some of Quebec's most successful global firms, including CGI and convenience store giant Alimentation Couche-Tard Inc.

Current Caisse boss Michael Sabia said in a recent interview that the Quebec economy "must create new enterprises, new innovative companies," adding the pension fund is "in the process of making investments in these companies to fuel their growth and encourage them to expand outside Quebec."