When the Business Development Bank of Canada (BDC) reorganized its venture investing regime five years ago, the federal Crown corporation targeted its $150-million information technology fund toward early-stage software startups that had a hard time raising money. Times have changed, and so have BDC's investing priorities as it officially launches its second $150-million IT fund Wednesday.
The first BDC fund was aimed at priming the Canadian startup ecosystem while generating similar financial returns as other private venture capital funds. It earmarked between $500,000 and $5-million for initial investments into seed and Series A financing rounds. At the time, there weren't many early-stage venture capital funds in Canada, and "that's where the need in the market was," managing partner Robert Simon says.
Since then, thanks partly to Ottawa's $400-million venture capital action plan, money has flowed into the sector, bankrolling a bounty of VC firms focused on early-stage investing. As a result, "many startups were funded in the last three years," said Mr. Simon, with BDC playing an active role, backing such Canadian firms as word-of-mouth marketing firm Influitive Corp., online building products wholesaler BuildDirect.com Technologies Inc. and business metrics software firm Klipfolio Inc.
Now the money shortage is more acute at later stages, where some Canadian startups are generating revenues and need fresh financing to help them step on the gas. With relatively few Canadian VC firms set up to finance these Series A and B rounds, the new BDC IT Venture Fund II will target growth-oriented financings, writing initial cheques more in the range of $1-million to $7-million.
The fund has been quietly committing funds for about six months. New recipients include Vancouver online furniture retailer Cymax Stores Inc., which completed a $25-million Series A round last October, and Hopper Inc., a Montreal-based software developer whose travel app predicts the best times to book flights, and was named by Apple as one of the top 10 mobile apps for 2015.
Hopper's founder and chief executive officer Fred Lalonde says he's known BDC's IT venture fund partner Steven Abrams for a few years, but only now with BDC moving into later-stage financing did it make sense for BDC to invest. Mr. Lalonde said it's "tremendously important" for more Canadian venture financiers to provide later-stage capital, as it means fewer domestic startups will need to sell prematurely owing to a lack of growth financing.
"I think BDC and others [including OMERS Ventures, Investissement Québec and the Caisse de dépôt et placement du Québec] starting to do direct investing is a great sign, and when we look back in a few years we'll realize how important that was [to see] serious money being put in at the growth stage," Mr. Lalonde said.
"We want to continue to support Canadian companies here in Canada," Mr. Simon said, adding that often Canadian companies seeking funding at that level from U.S. VC firms are urged to relocate south of the border.
BDC is based in Montreal but management of the IT fund is spread out across offices in Toronto, Vancouver, Ottawa, Montreal and San Francisco, where Mr. Simon, a veteran entrepreneur and U.S.-based venture capitalist, works. BDC's venture portfolio has had several successful exits, including the sale of Radian6, Q1Labs and Layer 7, and its first IT fund has so far returned 20 per cent of its paid-in capital to BDC after five years.