Toronto group proposes series of public-private VC funds to exploit technologies from Ontario institutions

A Toronto organization comprised of members from the financial, academic and consulting communities is weighing in with an Ontario-based commercialization proposal targetting early-stage companies. The $500-million financing and mentoring plan — featuring several industry-specific, public-private venture capital funds — comes from the recently formed Toronto Region Research Alliance (TRRA) committee, tasked to develop the Ontario Next Step Commercialization Program (ONSCP).

Led by John Eckert, managing partner at McLean Watson Capital, the plan calls for the creation of several industry-specific venture funds structured as limited partnerships. It comes with a hefty management price tag. As proposed, $160 million in management fees would be paid out over the 12-year life spans of the funds. When investments begin to return capital, private sector investors would receive preference over public investors and fund managers would receive 20% of all profits once investors have recouped their original investments.

The ONSCP would be private sector led and exploit promising intellectual property from publicly funded Ontario research institutions. It also anticipates a standalone seed fund capitalized at $50 million although 10% of each fund would be dedicated towards proof of principle and pre-seed investments.

Targetted industry sectors include life sciences, information technology, alternative energy and environmental technologies.

Described as an “unprecedented coming together of Ontario’s research, investor and technology communities”, the TRRA says it expects to “catalyze the Ontario technology industry into a new cycle of growth over the next few years”. The larger objective is to create one or more successful technology business clusters by achieving the following goals:

* seed a minimum of 100 new start-ups with sufficient capital to finance full life cycle;

* revitalize the province’s entrepreneurial culture;

* create several successful new firms, led by 3-6 medium-sized companies with revenues above $100 million;

* create thousands of new jobs including hundreds for highly-skilled knowledge workers; and,

* develop stronger links between the financial investment community and provincial scientific research centres.

TAP TRADITIONAL FINANCING SOURCES

The proposal anticipates securing private financing from domestic and foreign institutional investors such as pension funds, corporations and endowments “through the efforts of participating private venture capital firms”. Those funds would then be matched in equal amounts by public funding from federal and provincial sources. Government funding would be triggered when participating VC firms secure at least $50 million per fund, with a per fund maximum of $150 million. Annual cash outlays of government capital are expected to be about $20 million for each level of government.

TRRA acknowledges that, even with the generous financial inducements being proposed, the financial community may be wary of participating in early stage investments due the high levels of risk.

“Institutional investors may continue to reject this asset class — in spite of the incentives built into the Program — in favour of less risky alternatives,” states the proposal. “Venture capital fund managers may also prefer the more familiar, more predictable, and more flexible environment of managing a fully private fund with no early stage investment requirements.”

The TRRA contends that public investment is essential to secure the participation of private investors who typically fear to tread in early stage financing deals. It also says that the size of the funding request will ensure that sufficient patient capital is available for a multitude of investments and follow-on financing. It defends the high management fees associated with the proposed funds as necessary to engage the expertise resident in the VC community.

WESTLINK MODEL FOR SKILLS TRAINING

The TRRA is also proposing that the ONSCP incorporate a training component that marks a dramatic departure from how a traditional venture firm operates. For this, the program is looking to the WestLink Innovation Network’s model of internship, requiring venture capitalists to spend considerable time with researchers, scientists and technology transfer specialists. In turn, each fund would be required to have an intern on staff at any one time.

In addition to WestLink’s internship program, the proposal also cites the Prototype Development Program at the Univ of British Columbia and several programs based at Ontario institutions. It notes that a new internship program is being proposed by WestLink and the Medical and Related Sciences (MaRS) discovery district in Toronto ‘s life sciences corridor, with two program cycles slated to begin this year.

A spokesperson for the ONSCP could not be reached for comment for this article.

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