Canadian VCs bolstered by Wellington’s new fund

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After years of neglect, Canada's venture-capital industry is finally feeling the love. But that doesn't mean the community now has all the money it needs.

Following the financial crisis, the country's VC industry faced a massive dearth of funding. Too many investors got burned when financial markets collapsed and that put them on the sidelines for far too long. The drought lasted for years and by 2012, many people were so concerned that they argued in favour of government intervention, worried that the next wave of great Canadian communities wouldn't get the early-stage financial support they desperately need.

Eventually, Ottawa stepped in and promised to back four new venture-capital funds. Since then, the Canadian tech sector has also caught fire, fuelled by investors' cyclical rotation out of commodities and into non-resource sectors. Combined, the two trends have put a big spotlight on the venture capital community.

With so much attention, which has led to such deals as the initial public offering of tech darling Shopify Inc., it may seem as though there is too much money piling in too quickly. The raw numbers tell a different story.

Last year, $48-billion in venture-capital money was invested in startups in the United States. While Canada is never expected to come close to that figure because we are a much smaller country with one-10th the population, we're still punching below our weight after making the necessary adjustments.

"Even if you cut the $48-billion in half, we are not following the 1-to-10 rule," said Mark McQueen, who runs Wellington Financial LP. Canada saw $1.9-billion in venture capital invested within its borders last year, according to the Canadian Venture Capital and Private Equity Association.

Given the need for more startup support, Wellington's new $300-million fund is a welcome addition to the venture-capital community. Backed by pension plans, the fund adds fresh ammo that can be deployed in startups.

Unlike many venture-capital funds, which look for equity in return for their investments, Wellington's offers debt financing to its portfolio companies – the latest is its fifth. Wellington looks to offer $2-million to $40-million of growth capital per company, and its previous fund, for which it fundraised in 2012, has invested in 28 different companies.

By now, Wellington's business is well known in Canada, but it wasn't always so. When the company raised its first fund, meeting with more than 30 potential investors, the vast majority decided not to commit any capital. But a solid track record, coupled with the unique investment method – debt, not equity – has won investors over.

Historically, pension funds have been required to put a significant portion of their investable assets in debt securities. In a world where government bonds often pay less than 2-per-cent annual interest, venture capital-style debt securities are very intriguing.

Wellington's new fund comes on the heels of other encouraging fundraising campaigns. In April, Georgian Partners raised $200-million for its second growth fund.