Massive new venture capital fund targets growth-stage tech companies

BDC lead investor

The Business Development Bank of Canada (BDC) is jumpstarting a new venture capital fund that could help to prevent growing firms from leaving the country in search of expansion financing. The $75-million lead investment by BDC led to the creation of Tandem Expansion, a limited partnership that aims to reach $300 million by its first closing in the coming weeks — the largest of its kind in Canadian history.

Tandem co-founder Charles Sirois — legendary telecom executive and venture capitalist — aims to grow the fund to as much as $500 million and make investments of between $10 million and $40 million primarily in companies in the clean tech, information technology and communications technology spaces. New industrial innovations will also be considered, as well as life sciences in conjunction with other Canadian funds with the requisite expertise.

The aim of the fund is to provide critical expansion funding and business expertise to firms seeking to grow and/or tackle global markets. Canadian venture capital has rarely addressed the need for large amounts of growth-stage financing, preferring to allow firms to travel to the US where late-stage funding can be found in abundance. Add to that the virtual collapse of the Canadian VC industry and Tandem's role in growing domestic firms is all the more crucial.

Sirois established Tandem less than a year ago along with Brent Belzberg, a Toronto-based investor, founder and senior managing partner of TorQuest, a private equity firm with more than $700 million under management. Together, they co-chair the fund's investment committee and have assembled a team of four managing partners to handle the fund's operations. Each is a Canadian with significant international experience in various aspects of company financing.

"Growth equity now mainly comes from US funding. Canadian firms have to go south for funds or sell the company way too small," says Sirois, who was appointed chair of CIBC last February. "Right now we have a group of investors that will invest $250 million — that includes BDC's $75 million — and the target is $300 million by the summer. We expect to reach full operation by September … All of the partners at this point are Canadians from different parts of Canada."

Among his many business interests, in 1984 Sirois founded Telesystem Ltd, which has invested more than $1 billion in venture funding in companies at various stages of growth. During the 1990s he headed up high-profile telecommunications companies such as Teleglobe, Microcell, and Telesystem International Wireless.

The federal government provided BDC with a $75-million lead investment in its February 26/08 Budget with the proviso that it be used to "support the creation of a new privately run venture capital fund". Tandem represents a significant shift in BDC's investment strategy, which has historically focused on seed and early-stage opportunities.

"The VC market is going through a bit of a rough patch now. There's an amazing vacuum for late-stage, growth-oriented investment," says BDC president and CEO Jean-Réne Halde. "This is the only fund of this size in this area of VC. It will be a dominant player from day one ... There's never been a late-stage fund in Canada. This is a first for everyone."

The latest data from Thomson Reuters show that VC investments from foreign (mainly US) sources is 2.5 times larger than Canadian investments — $6.7 million per company versus $2.7 million. Of the top seven deals in Q1/09, 77% of funding came from foreign sources. There were just two exits in the quarter, both through a merger or acquisition.

Sirois says the federal funding doesn't come with strings attached in terms of where Tandem invests its money, other than the firms must be Canadian and investments must be of a sufficient size. Tandem has already established offices in Montreal and Toronto and has plans to open a third in western Canada.

Despite the deepening recession and difficult funding environment for tech firms, BDC's Halde says he's confident that a late-stage fund has a good chance of success.

"This is going to be so successful there will be more opportunities to raise funds for late stage. The returns should be good," he says. "A lot of risks have already been taken out. The technology is proven, companies will have some revenues, there will have been due diligence on the management team, technologies and markets. There will be answers for these."

For Sirois, the availability of late-stage funding may be just what's required to develop a new generation of larger tech-based firms and return Canadian VC to health.

"In my own VC, I invested in many companies that had to go south to raise $20 million or $30 million for expansion," he says. "I've seen the returns they have been getting. I hope to get the same sorts of returns with this fund."

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