Highlights from interviews conducted at the Quebec City Conference

US-based corporates are playing an increasing role in the Canadian venture capital sector, but their Canada-based counterparts have some ground to make up, Mike Woollatt, CEO of the Canadian Venture Capital andPrivate equity association, pictured, told Global Corporate Venturing.

“US corporate activity in Canada, whether it is Cisco, GE, Google, you name it, is playing an increasing role,” Woolatt said. “They are recognising that Canada has a ton of amazing start ups coming out, [along with] innovation and groundbreaking technology. They are also noticing that it is a way to avoid [investing] your money in a higher-tax jurisdiction, which the US is now. For instance, Cisco Canada can get a better return than it would from a higher-tax regime in the US. US corporates are beginning to play a very active role in Canada.”

Although he singled out telecoms company Rogers Communications and enterprise software producer OpenText as corporates with active corporate venturing units, Woollatt said Canada-based companies could often be risk-averse, particularly on the telecoms side, and that there needed to be a greater realisation that venture capital (VC) is often a profitable investment.

“Part of the problem is that some of the banks used to have their own venture wings, but they spun them out,” Woollatt explained. “For instance, TD Bank [had] Northleaf Capital Partners, and now Northleaf is one of the biggest VCs in Canada.

You get triple bang for your buck. You get that great investment, you stay at the cutting edge of your industry and you get the intellectual property. I think corporate Canada has been late to realise that. They are more wary of VC investments than they need to be.

“They need to realise that this alternative asset class is an attractive one, and that they should be part of it for share-holder value. For lack of a better word, I think they are quite Canadian in terms of being risk-averse. Track records show that for the last seven or eight years now, VC has been a great investment for them, and they should be making it.”

VC investment in Canada is currently stagnant, and Woollatt attributed this partly to the government being slow to implement its C$400m ($354m) Venture Capital Action Plan (VCap).

VCap, announced in early 2012, could be matched by up to C$1.2bn in private and provincial investment in VC funds, but limited partners (fund investors) have been waiting for the VCap cash to be invested before they commit their own.

“Part of the problem we have is geography,” Woolatt explained. “We are sitting right next to the largest VC [industry] in the world by something like a four-times margin. When you are right next to that, the heat is hot, and it is also easy for our Canadian companies to be down there [in the US] so they often get to a certain stage and leave.
 
“We have successes but they are down there, so what the VCap has to do is figure out how to keep them in Canada, and there are a couple of promising signs. Our job is to be a little less Canadian – brag a little more and be a little more out there.”
 
State-backed investment is also likely to play a crucial role. There are several active state-backed funds in Canada, including the Canadian government-funded Business Development Bank of Canada, the Ontario Capital Growth Corporation, Alberta Enterprise Corp, and British Columbia-based Renaissance Fund, but they cannot match the level of support offered by US regions such as Silicon Valley or Boston, and Woolatt suggested there was also a problem of perception.
 
“One thing on which we need to educate governments in Canada is the mindset around it being an investment,” he said.“It is not a grant or a subsidy. It is an investment, an asset you are holding. It is a good investment and you need to make it in order to help your economy grow. Often, they think of it as charity or a grant to the VC community. That is not the way we see it and it is not the way they should see it – it has great returns.

“The problem is these funds are constantly under scrutiny because of the way they are interpreted government-wise. We need to think of it as government investing in an asset class, as opposed to throwing money down. With VCap, government will see returns on its money. Taxpayers are not on the hook for anything, they will make money. They just need to talk about it that way and see it that way, and then we will turn a corner.”

Enertech eyes corporate partners for fund
 
US-based venture capital firm Enertech Capital is in talks with prospective corporate partners that would join a range of strategic limited partners (LPs – investors) in its fourthfund, according to Enertech Capital managing director Wally Hunter, pictured.

Enertech closed its Enertech Capital Partners IV fund at $120m in September 2013, securing contributions from LPs including energy company GDF Suez, waste services provider Waste Management, engineering, project and construction management company Hatch and oil recovery services provider Newalta. It is also in talks with additional strategic investors over additional contributions.

 
“The ones we are talking to right now are in a couple of other areas,” Hunter told Global  Corporate Venturing. “Water, and there are some more, what I would call foreign strategic corporates who want exposure to the US on the energy side.
 
“We are talking to a bunch of players out of Korea and Asia, guys that want to get access to North American technology, there are some oil and gas technology companies we are talking to out of Calgary, and [vice president of investments Anne-Marie Bourgeois] is talking to some strategics out of Europe and South America. Most of them have the view that Enertech can provide a window on technologies for anything around energy, oil and gas.”

Founded in 1996 as a spin-out from utility Atlantic Energy, Enertech focuses on energy technology, investing along a 
continuum Hunter describes as “from wellhead to wall socket”. It typically provides between $3m and $7m as a first investment, reserving a similar amount for follow-on funding.
 
Atlantic was one of the largest investors in Enertech’s first fund, establishing a pattern of investments from prominent corporates in the energy space.

“From there we have had a multitude of strategic LPs,” Hunter said. “In Enertech 2 about 65% to 70% of that fund was 
electric utilities. We saw the value in getting access to technologies.
 
“Now we are investing out of our fourth fund, and between those funds we have managed about $500m in capital and 66 investments. In the new fund we have done eight new deals across Canada and the US, and there are a series of new strategic investors that came in as limited partners.”
 
In addition to providing capital for Enertech, its corporate LPs can also be consulted on potential deals and used to help on due diligence, though they do not dictate the direction of the firm’s investment strategy. What they do get is an early look at the technology and an opportunity to form links with the firm’s other LPs. 
 
“They become a pretty good resource for us to evaluate deals,” Hunter said.
 
“If there is a deal in Waste Management’s area of expertise, we will go to them and say: ‘Can you help us evaluate the technology?’ or: ‘What are your views from a customer perspective?’.
 
“We get access to a broad North American dealflow that it would be hard for those corporates to try and replicate, just because they have limited resources [and so cannot] focus on technology scouting.”

Enertech is about 45% drawn on its fourth fund, and if it keeps investing at its present rate it will look to begin raising a fifth fund in late 2016 or early 2017. The firm aims to maintain a diverse range of backers, and will continue to target a mix of financial LPs and corporate strategics across the energy technology space.


“We stuck to the energy tech theme as a way to differentiate Enertech in the market,” Hunter explained. “I think financial LPs saw that as part of their evaluation of our strategy.

You do not want too heavy a weighting, you want a good balance between your strategics and financial investors,” he added. “In some cases strategics can be interested in a sector one year and then three years later they decide on a strategy change and may be out, so it is good to diversify as well. You want to make sure you have follow-on LPs that are both financial and strategic.

“The financial investors also like the fact we have a series of strategics in the fund. It validates for them the fact it is not all financial. They like to see both types of investors in the fund, and the value-add those strategics can provide to help the portfolio be successful just increases the odds we are going to get a better return.”

OpenText eyes new fund

Canada-based enterprise software company OpenText is looking to close its C$100m ($86m) corporate venturing fund, Luc Filiatreault, OpenText vice-president for venture development, pictured, told Global Corporate Venturing.

Filiatreault is one of the general partners of the OpenText Enterprise Applications Fund, which is targeting $100m. Of that sum, 20% will come from OpenText.

Fund of funds Teralys Capital and the state-backed Business Development Bank of Canada are also set to commit capital to the fund. OpenText is also open to compatible corporate partners, but the company plans to secure support from the government’s C$400m VCap funding initiative before it closes the fund.

The fund has a significant strategic basis as OpenText seeks to secure access to technologies that are not yet a big part of the enterprise software
world, but which could be crucial in three to five years time. Healthcare technology will also be considered but in general, it will have a fairly tight focus in terms of investments.

“The fund has an investment thesis to invest in enterprise applications,” Filiatreault explained. “So we are in the business-to-business space, in enterprise apps that are being disseminated today, as more and more people within companies are working on mobile on various systems and need access to these technologies almost as if they were in the office.

“That is our main focus. We will also look at health, but always in the business-to-business space, especially for large types of systems and large corporations. We are not a business-to-customer investor. We are not looking for video games or a Facebook-type application but really looking to invest in technologies that increase productivity for larger corporations.”

OpenText will look to centre its investments around the late-series A, early-series B mark, primarily targeting companies that can demonstrate a product and a customer base, but which are looking to scale their businesses rapidly.

“That is where OpenText could use one of its strong assets,” Filiatreault said. “It has a little over 100,000 customers around the world right now in 140 countries, and we have some 3,000 sales people to sell to that base, which obviously could be leveraged by the OpenText fund, where some of the companies we might invest in might be able to access that distribution network to sell products.”

Although the fund will look to invest worldwide, its location and LPs mean in practice it will be working with a good deal of Canada-based start ups.
Filiatreault described the country’s venture capital scene as “very hot”, and talked up the early-stage support available for start ups, but warned that there was also a funding gap at commercialisation stage where OpenText’s fund would operate, meaning that Canadian companies often move south in order to grow, or are acquired by US-based companies.

“We are good at funding companies for research and development, and we have lots of accelerator and incubators, lots of universities, so we are good at putting in initial, relatively low amounts of money,” he said.
 

“We are also good at the other end of the spectrum. We have large companies and large funds like [private equity firm] NovaCap, and if you are looking to build another plant we have that. But in the middle where you might be a $2m to $5m business looking to scale from 20 or 30 customers to 1,000 or 10,000 and looking to raise $30m, $40m or $50m, the VC system in Canada is just not there.”