A new early-stage fund led by OMERS Ventures is raising cautious optimism that Canada's venture capital ecosystem is slowly moving to a new level of maturity, with increasing levels of investment in the first half of 2015 and greater participation by typically risk-averse institutional investors.

A case in point is OMERS' $260-million Fund II, described by OMERS as "one of the largest long-term private capital pools active in Canada's venture sector". Led by one of Canada's largest pension funds, with participation by the Canadian BMO Financial Group and San Jose CA-based Cisco Investments, it follows the successful $210-million OMERS Fund I which launched in 2011 (R$, October 31/11).

Fund II will focus on North American opportunities in three of today's hottest tech sectors:

• fintech (financial technologies and technology-enabled financially services);

• ad tech (technical or software solutions and services used to deliver, display, target and control online ads); and,

• the Internet of Things (the network of physical objects or "things" embedded with electronics, software, sensors, and connectivity to enable objects to exchange data).

"With the first fund, OMERS was dipping its toe in the venture market. Our experience was that there's a ton of opportunities in this country and many tech companies have never raised venture capital before," says OMERS Venture managing director Damien Steel. "With this fund, Cisco has technological expertise that provides partnering opportunities for our portfolio companies and BMO is well known as a global leader in the adoption of technology."

Steel says the fund represents "the next evolution in Canadian venture funding", which has lagged behind the US industry both in scope and the diversity of players.

"Since the financial crisis, more US venture funds are investing in Canada than ever before … In Canada especially, people always pay notice when outsiders come into this country and support initiatives," says Steel. "OMERS doesn't need capital but they (the fund partners) bring services and expertise in their own verticals."

OMERS Ventures is a subsidiary of OMERS which has $72 billion in net assets and describes itself as an institutional angel investor and later-stage investor that takes an active role in the management of firms in its portfolio.

New capital pool Building on Fund I

Several investments made through OMERS Fund I are on the verge of high-profile success. It has participated in venture funding (and exits) for Hootsuite, Desire2Learn and Vision Critical, all of which Steel says have become leaders in their field. In fact, OMERS remains an investor in all of its portfolio companies supported under Fund I.

OMERS Fund I investments are clearly having an impact on the tech sector. In 2014, OMERS participated in three of the year's largest VC deals and was the third most active, participating in nine deals worth $310.5 million

"There's been significant progress and I used this to sell the merits of Fund II," says Steel. "It proved there was opportunity and we could position the fund to partner with those companies. Venture is part of a broader investment strategy and a diversified portfolio is always the best strategy. This new fund is a part of that."

FinTech

FinTech is one of the fund's three areas of focus and Steel says Canada is especially well situated to take a leadership position. He points to Canada's banks as a central reason, noting that they are willing to try new technologies from the back end of their operations to enhance surging technological innovations in retail banking, financial literacy and education and crypto currencies like bitcoin.

"Financial technology is forging incredible gains worldwide, both in terms of enabling new capabilities and disrupting existing service models, and it is exciting that a growing number of the most important developments being made in this sector are taking place right here at home." — OMERS Ventures

The main criteria for investment is exceptional returns based on sound business fundamentals. He rejects the comparison of the three hot areas targeted by the fund to companies that characterized the tech bubble and flamed out at the beginning of the new millennium.

"If you look at the companies of today, they all have strong fundamentals. These are real companies unlike many companies during the tech bubble," says Steel. "The participation of BMO and Cisco speaks volumes."

Despite the positive experience of OMERS Fund I, there has not been a rush by other institutional investors to jump on the VC bandwagon. Mike Woollatt, CEO of the Canadian Venture Capital & Private Equity Association (CVCA) says it's too early to say whether more such firms will enter the frey.

Mini tech boom

"I see more interest in VC but it (institutional investment) is not a trend yet. One or two is not a trend. OMERS is leading the way and others are watching pretty closely but we need to see a few more players, especially on the pension side because the vast majority don't participate," says Woollatt. "There are a ton of Canadian opportunities out there and lots of people are chasing them. There's a mini tech boom in Canada right now."

In line with OMERS' investment strategy, nearly two thirds of VC investment in Canada in 2014 was in the broad information and communications technology (ICT) sector — a percentage that increased slightly in the first half in 2015, with $939 million in disbursements.(see chart)

Maintain momentum

Woollatt says OMERS Ventures is unusual in that they are actively committed to early-stage VC investment, despite the fact that VC accounts for a tiny fraction of funding. He says the interest of other institutional investors is limited — the relatively small amounts involved require time and staff to manage.

That's beginning to change as the highly profitable exists of firms like HootSuite and Desire2Learn attract widespread attention. Investors are increasingly convinced that FinTech investments could lead to similar returns.

"There's a lot of revenue and quick growth (and) the strength of the banking sector is important," says Woollatt, adding that the high profile of the most promising ICT firms will inevitably result in more institutional engagement. He also notes that public programs like the $400-million Venture Capital Action plan has helped by indicating that the federal government is willing to derisk early-stage investment.

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