$205M Ontario Venture Capital Fund

Funding for emerging Ontario companies dropped from $1.5 billion in 2000 to $236 million in 2007. The number of Series A rounds has reached a 12 year low. Clearly there is a problem, one with long term implications. And so the Ontario Government has stepped up to the plate, investing $90M into a fund of funds in partnership with OMERS Capital Partners, RBC Capital Partners, Manulife Financial, Business Development Bank of Canada, and TD Bank Financial Group for a total commitment of $205M.

This fund of funds will be managed by TD Capital Private Equity Investors who will in turn spread the $205M across Ontario venture capital and private equity groups who will be responsible for making direct investments.

A minimum of 80% of the funds will be invested into Ontario companies. 75% of funds will be allocated to venture funds who invest in emerging companies, the remainder being set aside for private equity funds who invest in mid-market companies. It is anticipated that the fund will be invested over four years starting this year. All this translates to approximately $123M to be invested in emerging Ontario startups.

“The decline in Ontario venture capital has coincided with greatly lowered investment by institutions such as pension funds and insurance companies. In 2000, institutional investors represented 21 per cent of venture financings. This has dropped to one per cent or less in the period from 2005 to 2007.”

It is rumored that the capital co-invested by the other limited partners is secured by the Government of Ontario’s $90M. If this is true, what the Ontario Venture Capital Fund is really addressing is the unwillingness of Canadian institutional investors to continue supporting Ontario’s venture capital funds. It seems dismal returns have soured LPs on the asset class or perhaps the venture funds they had previously invested in.

In the last three months two funds have closed rounds almost as large or larger than the OVCF. In March iNovia closed on a $107M fund and in May JLA closed on a $150M fund. Unfortunately, the $123M is likely to be spread across the same old funds. No one ever got fired for making the safe bet. The question is, what does an additional $20M in five preexisting funds do for Ontario? I would hazard to guess that the best possible result of the OVCF would be the creation of 1-2 new venture capital funds based in Ontario.

Ever the optimist, I suggest we focus on the bright side, three good things might come of the OVCF:

1. Institutional investors rediscover Ontario’s venture funds and pleased with returns from the OVCF decide to increase the amount of capital they commit for investment in early stage growth companies.

2. $123M is invested over the next four years across 15-30 Ontario startups. Some of who might not have been able to raise money otherwise. More money = More startups.

3. A new crop of venture investors emerge, with greater skill, luck, or just plain old good timing and reinvigorate the ecosystem, going on to raise new funds to provide all the growth capital Ontario startups need.

Ultimately the onus is on Ontario’s entrepreneurs to build companies that can scale. Money is everywhere. 59 per cent of foreign venture capital invested in Canada is invested in Ontario. Ontario’s venture funds are only as good as the companies they invest in. So get back to work! There is $123M more now available to fund your startup.

  • http://www.jonasbrandon.com Jonas Brandon

    Mark McQueen over at Wellington Financial has some thoughts on this worth reading: http://www.wellingtonfund.com/blog/2008/06/11/mri-fund-rumors-come-true/

  • http://www.jonasbrandon.com Jonas Brandon

    Mark McQueen over at Wellington Financial has some thoughts on this worth reading: http://www.wellingtonfund.com/blog/2008/06/11/mri-fund-rumors-come-true/

  • Startup

    Clearly another example of the “old way” of doing things – similar to the labour sponsored fund model where tax dollars support VCs.

    “Ugly returns. Dead funds. Funds reinventing themselves…. http://tinyurl.com/5zlcxs

    How about giving the money directly to Angel investors, those who have built companies, those that are putting their own money in, those with feet on the street experience.

    If Ontario is interested in investing in the future, invest in those that have built Ontario, the Angels.

  • Startup

    Clearly another example of the “old way” of doing things – similar to the labour sponsored fund model where tax dollars support VCs.

    “Ugly returns. Dead funds. Funds reinventing themselves…. http://tinyurl.com/5zlcxs

    How about giving the money directly to Angel investors, those who have built companies, those that are putting their own money in, those with feet on the street experience.

    If Ontario is interested in investing in the future, invest in those that have built Ontario, the Angels.

  • http://www.socialcapitalvalueadd.com Michael Cayley

    I am not a doctor, but I play one on T.V.

    That sort of covers my depth of analysis here. I am not an expert on how to make the VC ecosystem better, but about three months ago I had lunch with someone who is and we talked about the Ontario government’s approach.

    Jonas’ points and Mark McQueen’s post both do a good job at covering the shortcomings of this plan. I.e., reinvesting in the same players and not zeroing in on domestic seed/venture funding.

    I do not think that there is a shortage of entrepeneurial talent and energy. As some have pointed out, government regulation/programs/tax breaks are actually pretty good in Ontario. And while it is nice to see the Ontario government stepping in to address the VC crisis in this province, few authentic capitalists would argue that it is government’s job to be a venture captial market maker. Just get out of the way.

    And if you are going prime the pump with some cash, try to stimulate some competition and establish high value links to global VC markets instead of reinforcing the tightly bound social network that can sometimes stifle innovation (as I recently wrote about in the MESH, unMESH post over at http://www.socialcapitalvalueadd.com).

    Here’s what I remember from that lunch. The nachos were good. Israel seemed to have come up with the model worth emulating and Peru has emulated it with some success.

    In those cases, the government basically provided enough funds to convince top tier US venture firms to open a local office (with the Americans contributing some matching funds). Typically a VC partner with a winning record opened the office. The startups received the value add of that experience, the experience of successful partners in the US and most importantly, a bridge into the US market for follow on rounds and marketing.

    These foreign VC offices also eventually spun off talented VC partners into stand alone local firms and encouraged globally successful nationals to repatriate.

    The effect was the development of a layer of global class venture capital partners and returns on investment that obliged institutional investors to open the flow of cash to the asset class. Ah-ha!

    It is tough to message this kind strategy politically though. Who is going to lobby for and sing the praises for this kind of approach?

    Cash starved entrepeneurs who are too busy trying to get their idea off the ground? The TD Bank who just got a juicey management contract as a reward for basically sitting on the venture capital sidelines for years? The local VC firms who are the only game in town? Hmm … maybe this is a job for David Crow??

    ONTARIO GOVERNMENT FUNDS U.S. VC FIRM TO COMPETE LOCALLY … not a very catch Globe & Mail headline if you are the Premier but probably the best job creation strategy possible.

    (wow … that is my first “comment grows into post” experience … catch it all again fresh and new at http://www.socialcapitalvalueadd.com)

  • http://www.socialcapitalvalueadd.com Michael Cayley

    I am not a doctor, but I play one on T.V.

    That sort of covers my depth of analysis here. I am not an expert on how to make the VC ecosystem better, but about three months ago I had lunch with someone who is and we talked about the Ontario government’s approach.

    Jonas’ points and Mark McQueen’s post both do a good job at covering the shortcomings of this plan. I.e., reinvesting in the same players and not zeroing in on domestic seed/venture funding.

    I do not think that there is a shortage of entrepeneurial talent and energy. As some have pointed out, government regulation/programs/tax breaks are actually pretty good in Ontario. And while it is nice to see the Ontario government stepping in to address the VC crisis in this province, few authentic capitalists would argue that it is government’s job to be a venture captial market maker. Just get out of the way.

    And if you are going prime the pump with some cash, try to stimulate some competition and establish high value links to global VC markets instead of reinforcing the tightly bound social network that can sometimes stifle innovation (as I recently wrote about in the MESH, unMESH post over at http://www.socialcapitalvalueadd.com).

    Here’s what I remember from that lunch. The nachos were good. Israel seemed to have come up with the model worth emulating and Peru has emulated it with some success.

    In those cases, the government basically provided enough funds to convince top tier US venture firms to open a local office (with the Americans contributing some matching funds). Typically a VC partner with a winning record opened the office. The startups received the value add of that experience, the experience of successful partners in the US and most importantly, a bridge into the US market for follow on rounds and marketing.

    These foreign VC offices also eventually spun off talented VC partners into stand alone local firms and encouraged globally successful nationals to repatriate.

    The effect was the development of a layer of global class venture capital partners and returns on investment that obliged institutional investors to open the flow of cash to the asset class. Ah-ha!

    It is tough to message this kind strategy politically though. Who is going to lobby for and sing the praises for this kind of approach?

    Cash starved entrepeneurs who are too busy trying to get their idea off the ground? The TD Bank who just got a juicey management contract as a reward for basically sitting on the venture capital sidelines for years? The local VC firms who are the only game in town? Hmm … maybe this is a job for David Crow??

    ONTARIO GOVERNMENT FUNDS U.S. VC FIRM TO COMPETE LOCALLY … not a very catch Globe & Mail headline if you are the Premier but probably the best job creation strategy possible.

    (wow … that is my first “comment grows into post” experience … catch it all again fresh and new at http://www.socialcapitalvalueadd.com)

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