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Summary:

After a long period of decline, there are signs that Canada’s VC market may be heating up: a new $20 million fund to invest in early-stage companies has launched, and three new funds will be financed with a total of C$100 million from the Quebec government.

The venture capital business hasn’t exactly been setting the house on fire in Canada in recent years. The number of successful exits has been tiny, and some funds have all but dried up or stopped making new investments. According to a recent survey released by the Canadian Venture Capital & Private Equity Association, investment levels in 2009 were the lowest they’ve been in over a decade. That said, there have been some encouraging signs that money is starting to flow — or may soon begin to flow — into smaller-stage companies: A new $20 million investment fund called Mantella Venture Partners launched this week, and the Quebec government also announced that it’s selected three seed-capital venture funds to receive a total of C$100 million ($96.82 million) in provincial funding.

Mantella Venture Partners is a collaboration between Mantella Corp. — a family-owned real estate development firm based in Toronto — and Basecamp Labs, a technology fund run by Robin Axon and Duncan Hill. Both Axon and Hill were formerly at Vancouver-based Ventures West, and left to set up Basecamp Labs, which they describe as an “accelerator” for early-stage companies. The fund provides financing for startups, but also gets involved in hands-on support, including business development, marketing and team development. Hill says that he feels that the “more passive investment model that is common in Silicon Valley” works there because the Valley has a strong ecosystem of repeat entrepreneurs, but that a more hands-on approach works better in a market like Toronto, where most startups are run by first-timers.

Hill says that Mantella Venture Partners is looking to fund 10-15 companies, and will provide initial rounds of between C$100,000 and C$500,000 with an option to join additional rounds or top up those amounts. Among other opportunities, Mantella says it is interested in startups that are emerging from the technology community that has formed around BlackBerry developer Research in Motion, which is based in Waterloo, Ontario. Basecamp’s current portfolio companies include Chango, which is developing a web-based advertising platform, and a mobile entertainment platform called PushLife (founded by a former RIM employee).

Despite the downturn in Canadian investment over the past few years, “innovation is still thriving,” Hill said in a statement. “With the venture market in such a state of flux, the timing could not be better for the launch of a new fund that is focused on both early-stage investing and providing the hands-on support entrepreneurs need.” Before he joined Ventures West as entrepreneur-in-residence, Hill was the founder and chief technology officer of Think Dynamics, a data center automation software company that was bought by IBM in May 2003. Axon worked at MD Robotics (formerly Spar Aerospace) and the Canadian Space Agency, where he helped prepare the Canadarm2 for installation onto the International Space Station.

The Quebec venture funds that are going to receive government financing include FounderFuel Ventures (which is focused on the information and communications technologies industry), AmorChem (focused on life sciences) and Cycle-C3E Capital (which will focus on green technologies). Quebec has agreed to provide a total of $100 million to the three funds through several provincial agencies, including $50 million from Investissement Québec, $33 million from the Solidarity Fund QFL and $17 million from a fund called FIER Partners. Each of the three new funds must also find a minimum of $8.25 million from the private sector in order to receive the government funding.

FounderFuel Ventures was created by the team behind a Montreal-based venture fund called Montreal Start-up, a group that includes entrepreneur and angel investor Austin Hill, the founder of Zero Knowledge Systems, now known as Radialpoint.

Related content from GigaOM Pro (sub req’d):

What The VC Industry Upheaval Means For Startups

Post and thumbnail photos courtesy of Flickr users Tico and rogiro.

  1. agreed mathew & startups aren’t bad either, witness our recent investment in vancouver based hootsuite :)

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    1. Thanks, Mike — good to know :-)

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  2. Hey Mathew,

    As someone who talks to startups and entrepreneurs in Toronto on a daily basis I can tell you that the #1 question I hear is “how do I find funding?” It’s a real challenge for local startups to get in front of VCs, and even harder to find Angels. But I’ve been encouraged by some of the investments and exits I’ve seen lately – CanPages buying GigPark is just one example. Funds like Mantella and the money earmarked by the Quebec government show me that the climate for startups might get a bit warmer in 2010.

    Erin

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  3. Outside of Quebec, it’s still very sad. Robin & Duncan will be happy to have $20M when others can’t raise anything, but it’s a small fund and nowhere near what companies need. Still, startups in the Waterloo area have been doing a great job of raising money. Unfortunately, most of it never gets disclosed.

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  4. [...] Venture Capital Market Warming Up in Canada – GigaOM You can leave a response, or trackback from your own site. Printed from: [...]

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  5. As someone who works with startups on both sides of the border (and ocean as well occasionally), the problem I see with VCs in Canada is not temporary but deeply structural: Canada has never had a thriving VC sector, and the reason for it is that most levels of governments simply don’t get it, launching on-off actions that don’t scale rather than working on setting up the right regulatory environment in place. We need tax credits for angels and VCs instead of co-investment funds, an extension of SR&ED to commercialization (see it as marketing R&D) activities, and the repel of section 116 which keeps US investors from looking north. At least the latter does seem to get some attention now: http://www.wellingtonfund.com/blog/2010/03/03/feds-to-tackle-section-116-in-budget/

    As for a more hands-on model of investment as advocated by Hill & Axon, I’m all for it but again it doesn’t scale well, and in my experience VCs are not the best equipped to get involved in operations beyond high-level advice – so they need to work with others who do that for a living (hint). The belief that first time entrepreneurs need more hand-holding is true, but it doesn’t necessarily mean that this hand-holding should come from the investors themselves. And again the legal framework needs to evolve to build a better ecosystem. For example, consultants in Canada today, unlike employees, can’t even get paid in stock options without an immediate tax consequence… That’s a problem that lead people like me to focus further on business south of the border.

    We are in the prehistory of

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  7. Matthew:

    These are tentative steps at best. A $20 million fund is an annual management fee for many US based funds. What is more worrisome (and you will hear much more about this in the coming weeks), is the lack of money raised by retail focused tax credit funds (also known as Labour-sponsored funds). I have spoken to fund managers who have used terms like “the worst” or “awful” to describe their fund raising efforts that finished March 1st. Love or hate ‘em, the retail funds are a significant chunk of investment in Canada, and they appear to be lacking any dry powder.

    Chrysalix and Yaletown are Western funds with new money and iNovia has plenty left to invest in Alberta and points west, but other than that things are pretty grim out here.

    I would be interested in how the Eastern retail funds have done.

    Brent

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    1. Thanks, Brent — yes, others have mentioned the same concern about retail funds. I wonder if we are going to see a major shakeout occurring.

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  8. @Greg Boutin

    While I’m not sure I agree with all of your points I definitely agree that investors (alone) are not able to provide all the depth and scale of input that early stage companies and their founders need.

    FounderFuel Ventures will be putting significant time into developing a supply of “talent” with whom the founders of it’s companies can collaborate !

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  9. @John Stokes

    Hi John,

    Yes I wouldn’t expect you to be against government co-funds, since as the article says you benefited from it.

    I’m happy you agree on the need for better hands-on entrepreneurial support from specialized providers (and here I’ll have to add: not government-sponsored hubs with no performance management or public reporting… they’re hurting lots of start-ups out there and should stick to forum-like activities), I’m sure we can build on that. Although I’m also biased since it’s my job to provide such services ;)

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    1. @GregBoutin
      In response to your point about ‘hands on’ investing ‘not being able to scale’. This is exactly the kind of thinking that has put venture capital in the position it’s in today – trouble. Venture Capital investing and company building in general is not intended to be a factory-line production system. It is a slow and deliberate process of painstakingly building companies – one at at time. Take a read through the history of venture capital in the US and look at how small the funds were in the 60s and 70s (even time adjusted) and look at how few companies the successful funds were invested in at a time. Georges Doriot was no slouch. Our belief, as John Stokes rightly points out, is that by taking our time and supporting a few companies well, with our passion, our ecosystem of support and yes, our fund, we can build some fantastic companies and exits over the next few years and possibly even decades.

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      1. @Robin Axon
        A quote, from Paul Graham: “We’re mass-producing the start-up.” http://www.inc.com/magazine/20090601/the-start-up-guru-y-combinators-paul-graham.html

        Is Paul Graham’s version of hands-on the same as yours? If so, he personally has less than a day per month to devote to each of his startup…

        This is not your granddad industrial economy anymore, we have entered the age of the innovation economy. Unless you support dropping start-up investing all together as an asset class for institutional investors, and telling limited partners that their money should go instead to later-stage investments… capturing some of that money for start-up investing require organizations that are rapidly able to deploy large amounts of capital.

        If former VCs don’t play that role anymore because they are individually involved in helping operate a much small number of companies like you propose, then I can guarantee you that some other professional finance manager role will be created to make the investment pool decisions that those VCs used to make. And you will become more of a consultant to them.

        They certainly may let you directly handle a small pool of money to spend on supporting your handful of startups, but don’t fool yourself into thinking you’re creating a new VC model all together, and that you can scale the investment you manage beyond a few millions while devoting more than a few hours per week to each startup in your portfolio (I think you’ll agree that’s the minimum required to qualify for the “hands-on” label).

        That is, unless you enroll other professionals to do the operational support role you were initially planning to do yourself. Or change your definition of “hands-on” to mean a few relevant introductions and some business model advice, incidentally the same contribution as traditional VCs.

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