Canada’s VCCI Venture Capital Program: A New Catalyst for Investors
Canada’s emerging technology sector is a pillar of our future growth and prosperity. A successful tech industry creates innovation to enhance our lives and grow our economy, including through financial returns to investors and the creation of high paying jobs. Everyone recognizes this great potential, leading us into a global competition for the highly educated and mobile talent that can bring these benefits to our communities.
The key to attracting and developing a growing technology sector is Venture Capital: the fuel to keep this engine moving forward.
What Has Been Going on So Far?
In 2014, the Government of Canada launched the Venture Capital Action Plan (VCAP) to stimulate investment in Canada’s emerging technology sector. Kensington was proud to have been selected as one of the firms to manage a VCAP fund, and has raised and invested approximately $300 million in the intervening years. VCAP was widely viewed as a success for Canada’s tech sector, although the work is not finished: more remains to be done to solidify these gains in our market.
Following the success of VCAP, the Government has launched a new program to attract more investors into our Venture Capital market. The new Venture Capital Catalyst Initiative (VCCI) is backing the creation of new private sector funds-of-funds with a lead investment from the Business Development Bank of Canada. Private investors will invest $2.50 for every dollar invested by the Government, to leverage the impact of taxpayer funds. The program is expected to inject over a billion dollars into the Canadian market to be deployed into new emerging tech companies. The Government conducted a competitive selection process and, once again, Kensington is very proud to have been chosen as a VCCI fund manager.
For investors, the appeal of venture capital is the possibility of out-sized gains in brand new companies that can change the world. Typically, most of these gains occur while the companies are still private and not available on any stock exchange. Most investors find it very difficult to get in early when the real money is made.
At these stages, investments in individual companies can be very risky and difficult to identify and evaluate, and many opportunities that appear to be very promising can crash and fail. Venture Capital is the classic “high risk, high reward” play: it is essential to have experienced hands and a diversified portfolio.
The VCCI fund-of-funds is a unique opportunity for investors to balance the risk/reward equation in their favour. In a diversified fund-of-funds, investors will own a slice of more than 150 different companies spanning different subsectors, investment stages and geographic regions. Further, the 30% investment from the Government of Canada is subordinate to private sector investors, acting as a cushion against potential losses. As a result, the overall risk to investors in a VCCI fund is substantially reduced.
The Canadian Venture Capital Landscape
The past few years have seen tremendous growth in the Canadian tech sector, with new company formation, total investment dollars and job creation all rising steadily. The CVCA — Canada’s Venture Capital and Private Equity Association, reports that almost $1 billion was invested in 166 companies across Canada during Q2 2018, representing the third time in the past 18 months that quarterly investment pacing has reached this level.
We see strong anecdotal evidence supporting this continuing growth cycle beyond the hard financial numbers:
- Amazon has identified Toronto as a short-listed candidate for its new second headquarters;
- Silicon Valley Bank has announced the opening of a Canadian bank to support its growing activity in Canada;
- Google’s Sidewalk Labs has chosen Toronto for the development of its “smart city” project.
At Kensington, we see continued growth ahead as several new technologies move from exploration and research to commercial deployment.
The most important driver of the current global technology cycle is artificial intelligence/machine learning, as software developers become more adept at creating applications that can derive useful insights from massive data sets, with the ability to get better results as these algorithms learn over time.
Canada is a market leader in AI/ML, with leading global research centres at Toronto’s Vector Institute, Montreal’s Element AI and Google’s DeepMind project at the University of Alberta. We see AI/ML as a foundational new technology with lots of open field opportunities ahead. Additional sub-sectors such as industrial automation, cybersecurity, fintech, transportation, IoT and digital media continue to spawn new companies, with new opportunities arising every day, building on the success of each new technology development.
Investors looking for the right entry point to participate in the continuing technology growth cycle may be attracted to the VCCI strategy, including its unique structure for risk reduction. Kensington is proud to have been selected as a fund manager under the VCCI program, and we look forward to speaking to investors interested in learning more about this opportunity.
