The venture capital model has hardly evolved since the 13th century when Marco Polo first convinced a group of wealthy Venetians to underwrite his travels to Asia in exchange for a share of the riches he might discover. Today, a fund manager supports and cultivates an entrepreneur's good idea by providing financing in exchange for a share in their business – with the hope for a return on their efforts. But after years of stalled performance, that model is due for a shakeup BDC Capital is among a small number of institutions leading the effort to modernize the model. We refer to this new approach as catalyst partner financing. It's essentially a hybrid of an incubator and a traditional venture capital fund.
Catalytic partnering is a far more involved approach than traditional venture capital financing. It requires specialized expertise, patience and flexibility. But it helps address a notable gap that exists between the angel investing phase and venture capital financing. It's that gap that many entrepreneurs find hard to bridge.
Here's how it works. We work with entrepreneurs who have good ideas – usually those with a proven track record of success. But we work on ideas that are at their earliest stage of development and well before they would traditionally attract venture capital investment. We then assemble a team that is high-performing, specialized and comprehensive. We provide them with business management capacity, with financing expertise, with product development and, yes, with funding. They get everything they require to transform an idea into a thriving enterprise. Working as partners, we nurture the idea and we fund it.
A handful of characteristics typically define catalyst partner financing. First, the investor becomes involved early in the process, sometimes before the idea is hardly even formed. It's for this reason that it's sometimes thought of as institutionalizing angel investing. The investor becomes a partner to help encourage the innovative process, to mold the team's thinking and to help the entrepreneur realize their potential.
Second, it involves nurturing a host of supports for the entrepreneur, not just funding. Catalytic partners will enlist a whole network of investors and professionals offering a variety of insights, counsel, professional development and market access to foster success.
Finally, because it often occurs before an idea is even mature, it's a partnership built around the entrepreneur. At BDC Capital we're basing our involvement on the entrepreneur with whom we're working – their creativity and determination, their track record at generating value and their ability to draw impressive people and teams to their cause. Venture capital is, at the end of the day, a people business.
A concrete example of this approach is TandemLaunch – an early-stage company creation platform that BDC Capital has invested in and that focuses on fostering innovators spun-off from university-sector labs. One of the first companies launched by TandemLaunch is Mirametrix, an award-winning startup that uses cutting-edge technology that allows people to interact with computers and TVs using only their eyes as a remote control. The team needed financing, but also assistance with product development, sector networking and more. TandemLaunch helped them refine their offering, develop a winning approach and access major industry players such as Microsoft and Sony, and more than 250 other clients including Stanford, Harvard and McGill universities.
Catalyst partner financing is still a new approach but already it is generating promising results. Traditionally, the success rate from early-stage accelerators is only two to three per cent. By contrast, 50 per cent of those in the catalytic partnering model raise subsequent funding, a rate that is unheard of in Canada's venture capital sector.
For those wondering whether their idea might be a good candidate for catalytic investing, ask yourself three questions.
First, does your idea include a principal with a track record of innovation success? Given the need for patience and hands-on involvement, investors will require such a person.
Second, are you trapped in that space between angel investor interest and venture capital backing? If so, catalytic partners might be exactly what you need.
Third, do you have the ability to rise above the noise? Is your idea innovative enough and dramatic enough to attract the involvement of a team of experienced investors and entrepreneurs? Because that's what your partners are seeking.
Catalytic investing will never be a substitute for traditional venture capital. But as an innovation to the model, and as a means of providing tried, tested and true sector expertise, it can unlock the value of many outstanding ideas and businesses that would otherwise go unrealized.
Dominique Bélanger is vice-president of strategic investments and partnerships at BDC Capital (@BDC_Capital).