Feds boost BDC venture capital to help offset retreat of private sector funds

The federal government has made its largest single injection of funds into the Business Development Bank of Canada's (BDC) venture capital (VC) operations with $350 million over three years. The size and focus of the government's intervention reflects the serious decline in VC financing from the private sector as firms become increasingly desperate for growth financing to fund technology development and marketing.

The financing is designed to address two objectives: $90 million to contribute to private sector led VC funds and $260 million in follow-on funding for BDC-portfolio companies, other promising tech-based companies and some early- and seed-stage opportunities. The larger amount is particularly relevant in the current VC environment, which has seen firms retreat from all but the least risky of investments.

"The market really is in big difficulty … This will allow us to have a pace of $100 million a year to inject into technology-based companies," says Jacques Simoneau, BDC's executive VP investments. "There's been a real drop in VC in the past year combined with the financial crisis. We want to be an early-stage investor but we can't be insensitive to the other companies that need money. We will invest from seed through to exit."

BDC funding will be made in syndication and could ultimately result in investments in 70 to 100 companies. Simoneau says that with the recent creation of several provincial funds of funds, combined with private investment, a significant amount of new money is poised to flow to a wide range of tech-based companies. No particular tech sectors are being targeted although Simoneau says investments will likely match BDC's current mix of investments — 25% life sciences, 29% information technology and telecom, 32% in funds of funds and 14% in energy, environment, electronics and materials.

"They need to be companies developing technologies, but all types," he says. "We're looking for good companies, good technology and good management. It's always a challenge to get good people but we hope these companies will have management with international expertise so they can be global from day one."

The surge in demand for growth and late-stage VC funding is inextricably tied to the lack of exit opportunities for VC. Initial public offerings (IPOs) — once the exit method of choice during the tech boom of the 1990s — have all but disappeared while merger and acquisition activity is also in steep decline.

"The most common thing now is to keep them (portfolio companies) for a while," says Simoneau. "We've sold a few … but we don't see them (exits) enough. Funds have to stay in for longer."

The $90-million portion of BDC's new VC funding is designed to contribute to the creation of new VC funds, most likely using existing managers. The government funding is expected to leverage hundreds of millions in private sector investment

Simoneau says it was the need for follow-on VC funding that prompted BDC to approach Industry Canada, which contributed $75 million in the 2008 Budget. That led to the creation of the Tandem Expansion Fund which could grow to as much as $500 million (R$, June 2/09).

"There was a clear gap in the market for that kind of money and expertise so we proposed that to the government to full that specific gap."

Prior to the current investment, the largest amount provided for BDC's VC activities was made in 2004. That money was directed towards seed- and early-stage companies to focus commercial applications on key enabling technologies and build on existing initiatives for commercializing activities performed in universities and other research institutions. That investment was made at a time when private sector VC was demonstrating increased risk intolerance and Simoneau says the situation is even worse now.

"We will still do seed and early-stage but we now do less," he says. "Before we did more because we had to keep less for further investment."

A 2007 report on BDC's role in the VC industry concluded that the bank's investment mix was properly focused but recommended steps to boost performance and effectiveness (R$, May 20/08).

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