BDC's VC division restructures, launches targeted funds to assist industry turnaround

The Business Development Bank of Canada (BDC) has completed a review of the venture capital (VC) industry and is restructuring its VC division as part of a new strategy to revive the flagging investment sector and position it for long-term stability. The study determined that the low level of available capital is a symptom of the industry's current predicament and not the cause, due a system that is effectively broken and largely devoid of the institutional investments it attracted prior to 2000.

After a decade of losses and dwindling fundraising and investment, the Canadian VC industry is trying new approaches for stimulating investment, creating larger funds and improving the selection and mentorship of promising high-tech firms. That entails identifying and tackling gaps in the VC infrastructure that range from a shortage of serial entrepreneurs and skilled management to over-investment in early-stage firms without adequate follow-on capital.

To help affect a turnaround in the industry, BDC has developed four strategic initiatives, the most important of which are plans to create and invest in three internal general partnerships (GPs). The GPs will target key areas — life sciences, information technology and telecom and energy and clean tech — with the intention of spinning them off once they begin to raise private capital. An existing fourth internal GP (GO Capital) will continue to focus on seed investments in Quebec.

"We found that BDC had the right sector focus — life sciences, IT/telecom and energy and clean tech. We also have a diversified group for those that don't fit into the three sectors," says Jerome Nycz, BDC's senior VP strategy and corporate development. "We also have a strategic initiatives group working with incubators, universities, angels and research labs. We did this ad hoc before but now it's structured and institutionalized."

BDC will also help to establish several larger "at-scale" funds, including funds-of-funds such as Quebec's Teralys, the Ontario Venture Capital Fund and British Columbia's Renaissance Fund. With more experienced management and private sector guidance, these funds should lead to improved performance in the long term and attract institutional investors like pension funds back into the VC asset class. Prior to 2000, institutional investors accounted for more than one third of all VC investments.

"Institutional is a long-term imperative. The only way (to bring them back) is to show profitability and demonstrate that the asset class is able to make money. The key is backing successful technology companies."

Approximately 40% of its investment portfolio is comprised of intellectual property emanating from universities and research labs. BDC's strategic initiatives group is positioned to reach out to these start-ups and make them more efficient, grooming them for further investment. "We need to provide financing to help them develop their products, test them and go to market. It takes a lot of money and networking," says Nycz.

A recent example of successful, long-term investing is the sale of Fredericton NB-based Radian6 to Salesforce.com, San Francisco, for US$276 million in cash and $50 million in stock.

Formed in 2007, Radian6 has developed world-leading social networking monitoring software for use in cloud computing. BDC invested in the firm over several rounds before the successful exit.

BDC's VC review also notes that targeting successful funds and continuing to invest in them is preferable to devoting capital to sub scale or labour-sponsored funds.

"The historically inefficient allocation of capital to lower-performing funds has been truly damaging to the industry and must be reversed," states the report. "The next generation of investments into new structures such as Teralys in Quebec, is taking a more sophisticated approach to capital allocation and should have a significant long term positive impact."

While no one is under the illusion that the VC sector will spring back to profitability soon, the report says there are promising signs, including an upswing in mergers and acquisitions activity.

"In the past, we only gave companies enough for six months to a year. VC needs to be there for round after round," says Nycz.

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