$5 billion to end up in the hands of Canadian entrepreneurs, nothing less! (32)
The recent Quebec provincial budget included a range of announcements that represent the most significant set of commitments ever done by any provincial government (or to my knowledge state government) to support entrepreneurship. To help shed some light on the announcement and what it means for Canadian entrepreneurs, I asked my partner at iNovia Capital, Chris Arsenault to write a guest post for MontrealTechWatch - Austin Hill.
Disclosure: I’m on the board of Reseau Capital, Anges Quebec and MontrealStartup some of whom stand to benefit from this issue and I was involved in consultations with the government in the establishment of these programs.
$5 billion to end up in the hands of Canadian entrepreneurs, as a result of Québec’s support of Venture Capital initiatives nothing less!
Now that the dust is starting to settle down around the recent Québec government budget announcements, the high tech community is wondering what concrete actions will come out of what is believed to be the most important “commitments” ever done by any provincial government to date towards fully supporting the build-out of the entrepreneur’s ecosystem.
I feel confident that the recent Quebec initiatives (link to budget) will ignite a flurry of positive impacts that will solidify Quebec’s entrepreneurship foundation, and that we will see numerous successful companies be launched, existing companies be financed which otherwise would not exist or would not be able to further their development because of today’s economic downturn, yet many of these companies will prove to become tomorrow’s industry leaders.
Here are some highlights from the budget:
- $825M for the creation of a privately managed fund-of-funds - to invest in a certain number of VC funds;
- $500M for a privately managed later stage fund – to invest in existing high growth companies;
- $125M for the creation of 3 privately managed seed funds - covering all sectors;
- $60M for existing FIER regional funds – as additional matching capital with private investors;
- And a 10-year provincial tax holiday for new ventures that commercialize research from a Quebec university or research centre.
So, what is so great with the above initiatives? Other than the obvious large amount of dollars that will be flowing towards entrepreneurs old and new?
What is great, is the way all of the above is being delivered! First, it’s important to the that over the last year, Minister Bachand conducted many market and industry assessments, done by qualified individuals and the results were then compared to existing initiatives found elsewhere in the world. Many, if not most of the ecosystem key players (venture capital firms, fund of funds, private equity firms, angels, angels groups, Réseau Capital, CVCA, successful entrepreneurs, incubators, coaching and mentoring service firms, tech transfer offices… and so on) were asked to share their comments and recommend solutions. Finally, and most importantly, the above listed budget highlighted initiatives are being executed in partnership with the private sector and with the financial support of the existing Quebec government affiliated institutions with industry expertise such as the Fond de solidarité FTQ (FsFTQ), the Caisse de depot et de placement du Québec (CDP) and Investissement Québec.
It’s the case for any successful business, it’s ALWAYS about leverage! Successful entrepreneurs know that leveraging others’ contacts, dollars, knowledge, customer relationships and so on, is the only way to create an uncompetitive advantage beyond the obvious and it often proves to be the true marker of success, especially for start-ups.
The above $1.5B doesn’t come from the Québec government alone, only a fraction of it is, the difference of capital is being provided by the FsFTQ, CDP, SGF, Investissement Québec and … by private local and foreign investors that believe and understand our complex ecosystem. Better yet, once the large majority of the above funds get invested into promising new and existing high technology companies, we will witness an even larger financial leverage as these funds will “likely” be matched by other venture capital co-investors and other type of financing. As an example, on average, for every dollar iNovia Capital invest into a company, 7 additional dollars find its way into these same companies either simultaneously or in follow-on financing rounds.
For Fund of funds, the leverage is even more important. By way of logic, an investment or commitment into a VC fund by a Fund of funds only represents a fraction of the size of the fund, as an example of the $112.5M commitments into iNovia Capital’s second Venture Capital fund approximately 40% are commitments from FIER Partenaire, FsFTQ and CDP all together, the difference is made up of individuals and institutions across Canada, from the US and Europe. Furthermore, once the VC funds start investing their capital into promising companies, again, they attract additional funds from co-investors and follow-on investors. Now that’s leverage!
In my opinion, geographical investment limitations will directly impact the “leverage” by reducing the potential amount of capital being attracted into any deal (be it into companies or funds). Building out relationships and networks of co-investors, entrepreneurs and service providers is key to the success and long term viability of any ecosystem. Hopefully, we will see some of the above Quebec initiatives cross some borders, provincially and into what is still today our largest market: the USA.
How fast will all of this be put in place? When will entrepreneurs be able to start knocking at Venture Capital doors and actually know that they have money to invest?
Well, hopefully faster than the time it took the Ontario government, which in the case of their Fund of fund (Ontario Venture Capital Fund) who last week announced its first VC fund commitment, took almost a year before doing deals.
Maybe I’m being overly optimist. But it wouldn’t surprise me if we heard about concrete actions from $825M Fund of fund as well as the identity of the then private manager of the $500M later stage fund by late May, which is when the CVCA holds its annual conference, which this year will be held in Calgary. Why? First, because the Fund of fund must be launched in priority if the Government expect to have timely economic impact (all commitments by a Fund of fund requires further additional commitments by other investors into the selected VC fund manager – that’s a long process alone). Second, the later stage fund has been on the drawing board for over 2 years already, some large Canadian institutions have already announced their intention to commit large amount of funding to such a fund. I even noticed some Tweets on Tweeter, Linkedin and Plaxo about much progress pertaining to the launch of a $500M Canadian later stage fund. Can’t be too many new $500M size funds, one maybe two, so I’m simply adding 1 +1and I get to the conclusion that we should soon hear about how later stage companies will have access to new funds…
What about the $60M of additional commitments to the FIER Regional funds?
Well, these regional FIER funds already exist, already have portfolio companies in need of additional capital and already have deal flow (targeted new investments), so my guest here is that we should see action very soon as well.
And finally, the $125M for three new seed funds. I’m being told that a selection committee is being put in place, that the committee will review proposals by whoever wants to provide the matching funds and has a viable business plan outlining “how” these funds will be put at work. And, that the committee will likely select the three best proposals by year end (could be faster). Existing seed fund managers as well as new entrants can propose their plans. Note that any proposal must at least provide a 1 for 2 in matching dollars. I’m pretty experienced in seed investing and my concerns here are many. Such as, the size of each of these seed funds and their true capability to follow-on in the future financing rounds of their then portfolio companies. Not an easy model. The size also has a direct impact on the level of available management fees a Seed fund manager can get in order to cover for its fees in finding and supporting its portfolio companies.
Another danger is that by seed funding too many start-ups we end up breaking the ecosystem and flooding it with too much noise and too many companies that won’t be able to attract further follow-on financing and won’t succeed. But, as a society, we do need to provide capital to entrepreneurs that have the ability to grasp what needs to be done to launch a successful and fundable company.
So don’t get me wrong, I think we NEED a few more seed funds in Quebec. Seed funds take-on different level of risks than early or later stage VC funds, and they provide a different level of value-add to promising entrepreneurs. But I also believe that no private dollars should be directly financing technology or research! Private funds should only be financing innovation when within the hands of committed, new and recurring, entrepreneurs.
Furthermore, linking these seed funds with existing and new early and later stage funds is critical for the success of the companies receiving seed funding. Through better networking, collaboration and soundboard with later stage funds, Seed funds directly reduce their own risk of choosing the wrong investment opportunities. Seed fund should never look at a deal alone, it can close a deal alone, but it should always be looking into opportunities in conjunction with other investors and partners, in order to initiate relationships early on. Within the High Technology & Venture Capital ecosystem, we find many parties playing critical roles such as: tech transfer offices, seed funds, coaching and incubators, early stage funds, later stage funds, buyout & PE, bankers…(and it’s important not to “wear” too many hats). Failing to feed the ecosystem adequately is a big problem, and I’ve witnessed it many times in the past, either we see players trying to hold multiple roles and do more than what is expected from them and thus, they put themselves into direct conflict of interest with other players; or better yet, some Seed funds worked alone, by fear I guess of not getting the best deal possible and potentially losing out on a huge return and thus, tried to limit the exposure of their deal flow to other parties in order to close the deal by themselves and to then only open up the gate of collaboration once the company is in desperate need of cash!
Angels are key. I like having Angel investors implicated at the seed stage, they provide tremendous value such as industry expertise, contacts and coaching. I hope Angels will find their way into these proposals.
What does the new funding from the Quebec government mean for Montreal & Quebec entrepreneurs & ecosystem? The answer is allot, but most importantly it’s about leverage!
If you are on Twitter come and say hello and share your thought (under 140 characters J). http://twitter.com/chrisarsenault
Chris Arsenault
Managing Partner & COO
iNovia Capital Inc.
P.S. All of this is really good news for entrepreneurs. For more about how this trickle down to start-ups, check out Raymond Luk of Flow Ventures recent blog (link).
Great news, very happy to hear that, sadly coming from the Liberal party but…at least.
Anyway, that is the kind of thing the Quebec Inc and the eQuebec Inc will need to get on track and expand. We got the talent people, we have the creativity that made are reputation (gaming anyone?), lets make business !
Great post. While not too concerned about “flooding the market” with startups (that’s not so bad) one thing I am wondering (and have been told by informed sources might happen) is a consolidation on the existing VC “industry” in Québec.
I am wondering if this meta-fund (fund of fund) will not accelerate an existing trend of consolidation among smaller VCs (and what Canadian VC is not small)? There was a lot of empty funds lately (Brightspark, Ventures West, to name a few) and stalled funds (pretty much all the rest, except a few exceptions like Flow, Inovia and MSU in the seed round, or re-investing in previous deals like some others that shall go under the NDA, mmmmm).
With much less doors to knock on (albeit with more money) should the local startup ecosystem be worried? Maybe, maybe not. Looking forward what will be announced, but expect to wait a bit, since these announcement might play out over a few years (ie. forever in startup time continuum).
Anyhow, I am planning a specific session on this during the pre-event session at the next startupcamp (from 3pm to 6pm, before the offical event at SAT). Curious to hear the collective (and informed) perspectives!
I was also surprised by the announced plans by the Qc government; it was a sharp contrast, compared to last year, and there’s something BIG here.
Entrepreneurs would want to know to when this is available and who would be behind this.
As you mentionned, there are known models in other parts of the world. Y Combinator, Tech Stars (Boulder, Colorado) are models that could and should be happenning here in Montreal.
I do believe we need also a rallying (physical) place for the technology community, much alike the SAT, but more accessible and more oriented towards technology and incubation than the SAT.
MontrealTechWatch (and of course The Gazette and other media such as social networks) play a big role in sustaining this community too.
So great news for the $5 billion, but I remember that money need a solid ecosystem sustaining it … otherwise nobody won’t be aware of anything and every entrepreneur would start from scratch every time
“I do believe we need also a rallying (physical) place for the technology community, much alike the SAT, but more accessible and more oriented towards technology and incubation than the SAT.”
I would like to hear a bit more about that, since I am working with the SAT to create a physical space for the tech/stratup community in the new SAT building, called SAT[incub], still gathering ideas and perspectives on exactly what we can/will do with that space, but it’s definitively part of the new SAT floor plans. In fact, my initial mission is to collect inputs from the communities.
Money is great. But the real question is: Who is this going to be managed by? Unfortunately another much more important problem in Quebec is that some of the money being managed is tightly tied to an institutional mindset (i.e. little to no operational expertise, to speak nothing of actual breadth of field expertise.) Pouring more money into the same ecosystem that’s been around for years is unlikely to yield a different result.
For me the priority, I think, should be to create a rich tissue of entrepreneurs with actual operational expertise. And true operational expertise comes only through one thing: learning iteratively through doing *a lot* of mistakes. I’m not sure what the level of tolerance to going into unchartered territory will truly be here. Especially if those managing the funds haven’t got the go-get’em attitude.
I agree with Karim
What troubles me most is the potential for graft and corruption. The government is putting taxpayer money into the hands of private VC firms, often limited partnerships. Where is the oversight?
Chris mentions leverage, but leverage is not always a good thing (just ask Lehman or AIG). Successful businesses need to be lean and hungry. When you give 7x as much capital as could be raised privately, you risk making them lazy & wasteful. Instead of “3 guys in a garage”, you now have 21 people in an Old Montreal loft producing less. VCs can keep their sick businesses on life support longer instead of making the hard decision early and pulling the plug.
There is plenty of private money in Quebec sitting on the sidelines waiting for good opportunities. If VCs can’t tap into that money, then that is their problem, not ours. Government corporate welfare for VCs is not the best way to achieve our entrepreneurial goals.
Peter, Montreal needs a proper ecosystem of angels, VCs, and solid entrepreneurs to flourish.
The “government corporate welfare” is not for VCs, but rather stimulus to keep the best and the brightest here investing in Quebec.
When I first became an entrepreneur here in 1995, the climate was very different.
Aaron, “stimulus” is just a euphemism for welfare. It is government giving money to startups through VCs. The auto industry is also getting a “stimulus”.
I remember the 80s & 90s as being pretty good for entrepreneurs in Montreal. It was the time of Matrox, Softimage, Discreet Logic, Cirque de Soliel, Future Electronics, and many other homegrown bad-asses.
[...] $5 billion to end up in the hands of Canadian entrepreneurs, nothing less! [...]
Interesting comments. Please take a look at one of the numerous assessments done on the Canadian VC landscape: go to http://post.ly/DQP
And pick up a copy of the French or English .pdf file at the bottom of the post.
For those interested, here is some additional light about how a Fund of Fund and a VC fund works: A Fund of Funds invest substantially all its money (very little goes to administration) into a few selected VC funds (managed by General Partners also referred to as a GP). The investment into a VC fund is done alongside other investors such as individuals, banks, other Fund of Funds, Insurance companies, Pension funds, corporations, endowment funds… The Fund of Funds invest on the same terms and conditions as the other co-investors and expect a strong return on its investment within 10 years (10 years is the standard life of a VC fund). So the Quebec Government initiative mention in the article above to invest in a $825M fund of Fund alongside other investors (FsFTQ, CDPQ and other private institutions) is a great way to help the industry by putting money at work while expecting a very good return on their investment. The main risk here is choosing the right Fund of Funds Management team, as this team will be choosing which VC fund to back.
Selecting the right VC Fund managers is key, as the choices must cover a broad range of industries and investment stages in order for a proper risk management approach. Again, its important to understand that the Fund of Fund ends up only representing a fraction of the size of the VC funds it decides to back, thus, the Fund of Fund is managing its risk by leveraging the knowledge and expertise of other co-investors. As an example in iNovia II, CDP is 1 or 20 investors in our Fund. Yes they are important, but also, note that half our investors are Angel investors or entrepreneurs and the other half are institutions that would only invest if we were at a certain size of a fund! We have investors from Qc, Ont., Alberta, the USA, the UK and Findland! Having the right amount of capital around the table facilitates the fund raising efforts of a VC.
The VC Fund then, is the one selecting companies, new and existing, to invest in. The amounts the VC Fund has to invest per company depends on the investment strategy of each VC Fund as well as on each its appreciation of the risk they are taking when investing into any given company. A VC fund is not a bank, and is not a granting agency. Its only one player in the Food Chain. So let’s not forget that there are ALLOT of great promising companies out there, that SHOULD not be raising VC funding. The VC model is not one that fits most business. And entrepreneurs should understand the opportunities and challenges attached to receiving VC funding.
Take a look at the ecosystem. Réseau Capital is sharing the study on the impact of Venture Capital on the Canadian Economy (en français et en anglais) I posted it on my blog http://post.ly/DQP
So, in a nutshell, this has nothing to do with bailouts nor leveraged financing. When I speak of leverage, I mean the ROLE that one can play to enable a flow of activity (power of attracting: partners, financing, revenues, customers; momentum, support, knowledge, expertise…)! The above is only one of the numerous initiatives from the Quebec government, in supporting Entrepreneurs and the high-tech industry via its participation as a simple but valuable co-investor into a Funds of Fund of Funds managed by the private sector alongside other investors with deep experience and expertise. This is by far more efficient then what we have seen in the past where our Government tried to do good by supporting companies its selected itself within the industry specific knowledge nor networks.
No, their isn’t enough active VC funds in Canada! And yes, one third of our great Companies received US VC funding to date (and its now at its lowest point with the US going through worst times than Canadians)… But guess what, if there wasn’t any Canadian VC Funds doing the early stage deals or even participating in later stage rounds going out and leveraging their contacts & networks within the US VC community, then the US VC’s wouldn’t even know about our great Companies and only a fraction would get noticed and get funding…
VC Funding is one, yet only one, piece of the puzzle and there is a whole ecosystem that needs to be feed intellectually and financially.
Maybe I’m a little optimist and all, yet I do believe many right/good decisions are being taken, yet so much more needs to be done…
Chris, my issue is not with the VC structure, which, as described above and in as far as my understanding goes, resembles pretty much how VCs are typically structured elsewhere in the world. Granted also that not all businesses fit the VC mold, there are other ways to get financed, including bootstrapping one’s own self, angels, etc.
My issue is that for a given geographic region to flourish (check out Paul Graham’s essay on Silicon Valley: http://www.paulgraham.com/siliconvalley.html), it takes a lot of VCs around (money) and a lot of bright people (nerds). The issue in Quebec is that the VC community is *very* small and their expectation on the experience level of the people they fund is relatively high. Hence, a smart person with no experience has basically no chance whatsoever of getting funded. Makes sense for the VCs, makes sense for the institutional investors that pour money into VCs, makes absolutely no sense for this province’s future.
What needs to be done is enlarging the VC community in Quebec by getting more and more qualified GPs/funds. And that’s not going to happen if we only continue investing in those that are “in the know.” In order to create a self-sustaining chain reaction (per Graham’s take) in Quebec, we’re going to need to pour money in a vast amount of bright folks that have ZERO operational expertise. From this group, a few will eventually learn the ropes and an even fewer group will actually generate some success stories. It is the later group of people that is presently an extremely rare breed in Quebec. And until someone decides to bite the bullet and *burn* large sums of money taking chances on otherwise *very high risk* (re experience) individuals, we are unlikely to see any self-sustaining technological ecosystem being born in Quebec. Instead, in a few years, another provincial govt. is going to have to pour more money into the “Quebec tech world.”
You may have information I don’t have. But from what I can see, there is nothing in the present initiative that shows that the political will is there to truly effect a change.
Interesting to see that in this thread, there’s a divide between entrepreneurs, and between experienced entrepreneurs and VCs.
Just imagine how new entrepreneurs or the common Montrealer view VCs.
There needs to be more done in terms of communication and education, of what VCs do (and Chris Arsenault has been doing a great job in doing that lately) and what they don’t. We’d need to get all of guys at StartupDrinks (or an event like StartupCampMontreal or Founders & Funders). I’m thinking about a follow-up post as well
Heri, just so that there’s no misunderstanding: I’m *not* saying it’s the role of existing Qc VCs to take it upon themselves to create a community of entrepreneurs with operational expertise. I’m just saying that providing ammunition to the former without creating the latter is an unsustainable equation. Who and how is an entirely separate topic.
Sylvain: very good to hear that the SAT is working towards building a physical space that will allow the tech community to flourish.
Being an “operationally inexperienced” entrepreneur myself (as Karim puts it), i’d like to see part of those funds be used to subsidize this kind of initiative, and to encourage more incubators and physical spaces to emerge.
As Peter says, the “3 guys in a garage” probably aren’t looking to pitch for an investment that will allow them to rent Old Port offices, whereas they would certainly benefit from cheap office and collaboration spaces where they can find mentors and *maybe* turn into entrepreneurial success stories.
Austin,
I’m all for getting students and universities on board. Mcgill or UdeM for instance have so much potential, and I’ve tried on many opportunities to get them on board for a few projects, but the enthusiasm isn’t there. However, I’ve met many students, and they’ve got what it takes and the energy.
And also agree on the density and intensity. The only time we had it was during Barcamps (which don’t happen anymore in Montreal) or blitzweekend (which is as intense as you can get for these sort of events)
And I iterate my comment earlier about the need for a rallying place for all things tech in Montreal. That would mean a lot for new entrepreneurs. An ecosystem needs also those
We can wish and want as much as we want. But the only way to build a successful business, to build a strong ecosystem, to innovate in an ever-changing environment, is by showing leadership. No one person, nor firm nor government will make any true difference “alone”.
We can’t expect everybody to agree on “how” our ecosystem should be built or driven. But we can agree on the general direction we want to take and we can respect the leadership of the individuals that are paving a way towards solidifying our Entrepreneurship base.
Call to action! If someone doesn’t agree on how things are being done, then that person should show the way, that person should in its own capacity provide leadership, do his/her part, or at the least, support the leadership it believes is right.
I truly look forward to read more about what SHOULD be done, but I sincerely expect to witness more of what WILL be done and to meet up with those who will do their part and show LEADERSHIP.
We are all but little pieces of a very large puzzle.
@Austin, density of intensity is indeed the “right thing” to focus on. Still got one of ZKS’ caps and have fun memories of ZKS’ Ottawa Linux Symposium 2000 party at the ranch with that huge inflatable mushroom (those were the days …) And for sure, this fresh input of money the Qc startup ecosystem is a “good thing.” So too is time a factor. But speaking of time, and taking the past 20 years as a witness, what can we (collectively) do differently so that the next 10 years see the creation of a self-sustaining density of intensity (not a one-off or field-specific, there are quite a few of these) here in Qc that can match that found in the other locations you mention? We can keep pouring money in what was there before or we can try doing something very different.
@Chris, you’re absolutely right: talk is cheap. And by no means is any of what I said meant to criticize the contributions of countless well-intentioned/hard-working individuals such as yourself, Austin, Heri and many others. On the contrary, I’ve got nothing but respect and admiration. But if actionable input on this issue is only going to be reserved to those who can show not just leadership, but results, I’m afraid this debate is going to be limited to only those who presently have access to or influence on the main means of *action* in any startup ecosystem: money. And for better or worse, these are likely to be those same called upon to manage the new money being funneled in. For my part, I won’t claim being able to do more presently in terms of leadership than making sure the company I’m currently steering is a smashing success — and that keeps me pretty busy as it is.
For those still reading on, please feel free to ignore much of my input. All I’ve got to offer in this thread is an opinion and, for what it’s worth, it could be entirely misguided.
[...] recent Quebec government commitments towards venture capital (first posted on Montreal Tech Watch) $5 billion to end up in the hands of Canadian entrepreneurs, nothing less! told me one thing: Yes, people care, people want change, people are showing leadership, support and [...]
[...] $5 Billion to end up in the hands of Canadian Entrepreneurs, Nothing Less by @chrisarsenault [...]
A turning point for VC fund raising in Canada?
Post by Chris Arsenault related to the April 27th announcement of the $700M Teralys Capital Fund of Funds, where the Caisse de dépôt et placement du Québec and the Fonds de solidarité each contributed $250 million and Investissement Québec contributed $200 million to Teralys Capital, all as part of the Fund’s first closing.
http://chrisarsenault.wordpress.com/2009/04/27/a-turning-point-for-vc-fund-raising-in-canada/
[...] period of time between the launch of Teralys and the budget announced by the QC government (see Chris Arsenault’s post). If there were any doubts (see comments) left about potential bureaucracy, then today’s [...]
[...] You can read more about the positive impact of these initiatives in an article ported on the Montreal Tech Watch blog [...]
[...] Arsenault wrote about the unique opportunity for technology startups in a recent post on MontrealTechWatch, when the provincial budget was [...]
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It is remarkable to me how many medium-sized and big corporations still treat working from home as if it is an opportunity to goof off. Then they wonder why they suffer from a brain drain!
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this is not always true because ongoing companies create business plans, project plans, new product plans, and plans for acquiring and integrating other ventures. General Dwight D. Eisenhower once said, “Plans are nothing. Planning is everything.”
Thank you for your help! This was what I needed to know.
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