Best candidates receive convertible notes

Five health-focused commercialization networks have created a national accelerator and joined forces with the Business Development Bank of Canada (BDC) to help create or grow start-up firms with promising discoveries. The Accel-Rx Health Sciences Accelerator will provide validated and investment-ready health technologies to BDC Venture Capital which will select three to four annually to receive $500,000 in convertible notes.

The concept for Accel-Rx was driven by CDRD Ventures Inc (CVI), the commercialization arm of the Centre for Drug Research and Development (CDRD) — one of five Centres of Excellence for Commercialization and Research (CECR) backing the accelerator (see chart). For the time being, Accel-RX will be supported within CVI which will act as its management team. Accel-Rx has applied to the CECR program — one of several managed by the Networks of Centres of Excellence — and is among the 11 short-listed applicants in the current competition. An announcement of the winners is expected this summer.

A win would provide Accel-Rx with sufficient operating funds to expand its suite of support services including business planning, investment strategies, access to consultants and technology validation/development utilizing the infrastructure and expertise of the five founding CECR partners.

For BDC, Accel-Rx is the latest accelerator it has agreed to support with financing services. BDC's accelerator program was launched two years ago and currently consists of six information technology (IT) accelerators (see chart) with Accel-Rx the first national health science-focused accelerator in its portfolio. The convertible notes are like a debenture that can be repaid or converted into equity, giving firms time to further develop a product or concept.

"It joins six accelerators we already support. We're always looking for new models and teams and we wanted to expand into new sectors such as health," says Jérôme Nycz, executive VP at BDC in charge of BDC Capital, the bank's venture arm. "Accel-RX has lots of resources … and companies that go through their program will be investment ready. The health sector needs significant infrastructure and the regulatory regime is quite complex."

Builds on CAIP support

Accel-Rx follows CDRD's recent success in the competition for the Canada Accelerator and Incubator Program (CAIP) — administered by the Industrial Research Assistance Program — which is providing $90 million to 15 accelerators across the country (R$, June 26/14). CAIP will assist CDRD/CVI in enhancing its pipeline of commercializable discoveries and strengthen its national reach. Accel-RX will allow CDRD to help establish companies around those discoveries and enhance their value to potential investors.

Each participating CECR can nominate a company for Accel-Rx which is assessed by an independent investment committee for evaluation. The committee will make recommendations to BDC, which will then decide which companies will receive a convertible note.

"We want to create fundable companies. Our pipeline must be interesting to other investors. Success comes down to funding the best companies," says Natalie Dakers, CVI's president and CEO and centre director for Accel-Rx. "In the last year, Rafi (Hofstein, MaRS Innovation's president and CEO) and I have been pulling it together and BDC is investing in the concept. They've done it in other sectors but health is much more challenging with heavy infrastructure needs and long lead times."

Target the best accelerator candidates

Accel-RX plans to get early feedback on companies in the accelerator program in order to target the best follow-on funding source or combination of sources, building up a specialized investment community. Dakers says convertible notes are a particularly valueable financing mechanism for nascent firms because companies don't have to decide valuation upfront and can leverage financing from other sources. Once converted, the notes become an equity investment for Accel-Rx and BDC.

"In addition to CDRD, other CECRs will bring their commercialization expertise and invest in the technologies that come to Accel-Rx," says Dakers. "Companies establish preferred relationships with the CECRs which gives them access to their infrastructure to develop their technologies. We'd like to keep the companies virtual for as long as possible and cross fertilize between the CECRs even more than we do now."

Part of VC renewal attempt

Accel-RX arrives at a time of renewal for Canada's beleaguered VC industry, which has been plagued by poor returns and (until recently) stagnant fundraising compared to its US counterpart.

"With Accel-RX, companies can stay a long period of time and the amount of the convertible notes we provide ($500,000) are considerably greater than the $150,000 notes we provide to the IT accelerators," says Nycz. "If we support three or four companies annually over five years, that's 20 excellent new companies. We hope they will attract an equal or greater investment than the notes."

Accel-RX targets the persistent gap between seed and series ‘A' venture financing. Nycz says companies can double down and apply for a second note if development takes more time than anticipated before VC becomes a viable option.

"We're quite bullish on the investment environment. There's an awareness that if we want to compete as a country, we have to collaborate better. The feds have recognized this and encouraged it," says Dakers. "Success will come from partnerships ... People are looking at what we and other CECRs are doing and investment is coming back into the country that wouldn't have otherwise."

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