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Ottawa's tech VC push bears fruit as $300-million Kensington fund closes

A federal government program to stimulate venture capital in Canada has hit its initial goal by spurring private investors to commit $900-million to fund technology startups.

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A federal government program to stimulate venture capital in Canada has hit its initial goal by spurring private investors to commit $900-million to fund technology startups. Now, the VC industry is calling on the new Liberal government to keep the spigots open to ensure domestic funding for startups doesn't dry up.

"The program works," said Mike Woollatt, chief executive officer of the Canada Venture Capital and Private Equity Association. "There's never been a better time to fund innovation and growth. Our pitch to the government in the next year will be: Now is the time, it doesn't cost taxpayers anything, it creates jobs, increases tax [revenues] but also generates a financial return for government."

The Conservative government in 2013 pledged $400-million through its venture capital action program (VCAP) to stimulate the domestic VC industry to invest more in tech startups.

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Most of that came with strings attached: The government earmarked $350-million to invest in four new tech-focused "funds of funds" managed by the private sector, which had to raise $2 from private investors for every dollar from government (Ontario and Quebec also committed millions). Then-federal finance minister Jim Flaherty's "pitch was, 'Yes, it's $400-million, but we're going to get a billion out of it [from private investors] and try to make sure the ecosystem will be self-sustaining,'" said cabinet colleague Lisa Raitt, now opposition finance critic.

Last July, one of the four VCAP funds, managed by Toronto's Northleaf Capital Partners, became the first to hit its goal, raising $300-million, with funds coming from banks, the Canada Pension Plan Investment Board, OpenText Corp., Sun Life Financial Inc. and wealthy families, alongside the government's outlay. In November, a VCAP fund managed by Montreal's Teralys Capital reached its $375-million target, drawing from financial institutions, pension funds, corporations and entrepreneurs. "Venture capital is back," Teralys partner Jacques Bernier said. "Ten years ago, there were almost no private dollars in this asset class. Governments had to step in to maintain an ecosystem. Now we're giving the [private] financing resources Canadian entrepreneurs never had."

Now, Kensington Capital Partners has become the third manager to close its VCAP fund, surpassing its $300-million target. "There's no question that being part of the VCAP was an important factor in our ability to raise the money," said Rick Nathan, managing director of Kensington, a private equity and VC firm in Toronto.

Of the $306-million Kensington raised, just more than $200-million came from private investors, including banks, Torstar Corp. and about 300 private clients of wealth management firm Richardson GMP. "This fund aligns well with what Richardson GMP is trying to do," said James Price, director of capital markets products. "To me, it suggests high-net-worth investors in particular are looking for alternatives" to stocks and bonds.

Meanwhile, industry sources say the fourth fund, managed by Boston's HarbourVest Partners, LLC, is set to close its $375-million fund this month.

These four have in turn funded about 20 other Canadian VC firms that invest directly in startups. "I think we're very close to being able to declare that all the major objectives of the program have been achieved, with one major outstanding piece – capital flowing to Canadian companies" said Neal Hill, a vice-president with Business Development Bank of Canada, which administers the VCAP program. "That's a 10-year process and it's only just begun."

Kensington's Mr. Nathan added: "We have lots of risk capital in Canada, but we've historically put it into things like gold mines and oil wells. One of the goals of the program was to bring some of that risk capital into technology. For us … that goal has been significantly achieved. Many of the investors in our fund have not previously invested in venture capital. If we are successful and they have a good experience, they'll … be receptive to continuing to invest in the sector in the years ahead."

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Mr. Nathan called on the government to continue the VCAP program with fresh financing, "or you will essentially miss out on the main benefit of building a sustainable venture capital sector," he said. "You can't do this in one shot."

Mr. Hill said he has had initial conversations with the government but that it has other priorities at the moment. "We expect to hear more from them later this year," he said. "We've indicated we feel it's a very valuable program."

Minister of Small Business and Tourism Bardish Chagger said in an e-mailed statement that the government is "monitoring the performance" of the VCAP and other venture investments by BDC, adding the government "will continue to invest in high potential Canadian companies in the coming years...It is important to note that a critical element of the Government of Canada's Innovation Agenda going forward will be the financial investments needed for ideas to thrive and for entrepreneurs to succeed."

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About the Author

Sean Silcoff joined The Globe and Mail in January, 2012, following an 18-year-career in journalism and communications. He previously worked as a columnist and Montreal correspondent for the National Post and as a staff writer at Canadian Business Magazine, where he was project co-ordinator of the magazine's inaugural Rich 100 list. More

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