BDC Capital has allocated $150 million for a bridge-financing program meant to help Canadian startups weather the COVID-19 pandemic, but investors say it isn’t enough—and that the program’s terms are too prohibitive to address the sweeping need companies face as venture capital retreats from the economy. 

Several VCs who spoke to The Logic raised concern over what they consider high interest rates BDC Capital, the venture arm of the Business Development Bank of Canada, plans to collect from companies it backs through the program, given it’s billed as emergency financing. Some also criticized BDC’s plan to prioritize companies with the least amount of cash on hand, arguing the program will prop up losing startups at the expense of those better positioned for long-term success.

The Logic spoke to 10 VCs, many of whom it agreed not to name because they worried it could compromise their ability to secure future financing from BDC, the largest active investor in the country. 

“This was supposed to be all about supporting the most promising companies that have been knocked off their stride by the pandemic. Now what you have is effectively predatory pricing,” said one managing partner at a prominent VC firm. That investor said they had several portfolio companies qualified and interested in applying for funding when they learned about the program last month, but have since opted not to pursue the financing after seeing the terms.

The Logic first reported last month that BDC Capital was launching a program to co-invest in venture-backed startups using convertible notes. The program is intended to fill gaps in the federal government’s COVID-19 relief funding, for which many startups don’t qualify despite being impacted by the virus. When the firm announced the Bridge Financing Program more than a week later, it offered few details on the terms and conditions with which startups would have to comply to access the financing. In a webinar last week, Thomas Park, BDC’s vice-president of operations and strategy, and BDC Capital’s executive vice-president Jérôme Nycz offered more information on the program, revealing the 8.5 per cent interest rate, the fund’s $150-million budget and the maximum $3 million BDC will invest per deal. 

Of particular concern to VCs is the interest rate—BDC will collect four per cent interest on its co-investments, plus its floating interest rate, which currently sits at 4.5 per cent. The firm will also take a 20 per cent discount on the convertible notes with which it matches investments, and has discretion over whether to convert its investment, including interest, to discounted shares in the company on a sale or liquidity event or be reimbursed for that funding. Some investors said the terms could leave BDC with much more control of startups that accept the money than they originally anticipated. “It would actually be helpful and fair if it were our option, but it’s [BDC’s] option, that’s the problem,” said one founder. 

“While VCs are working hard to keep these companies going, BDC is coming into the round to help double up the money—that’s good,” said Patrick Lor, managing partner at Panache Ventures. “The bad: it’s debt, and it’s not cheap. This debt sits senior to equity, so in a downside liquidation event, they get paid before shareholders. In an upside acquisition, they get the chance to take advantage of the upside and get their interest.”

One VC who spoke on condition of anonymity said one of their portfolio companies estimated BDC could walk away with as much as 25 per cent of their company under one of the scenarios the firm had laid out. “Why would [the founders] do that? They can go out and raise equity—maybe not right now, but at some point—and sell 25 per cent of their company and get a lot more money.”

In an interview with The Logic Wednesday, Park said BDC would be open to negotiating the terms, but that they’re designed to balance its responsibility to taxpayers with support for companies in need. “We’re not here to maximize return, but we do have a fiduciary obligation to the federal government and to taxpayers to make sure their interests are protected, too,” he said. “If you compare it to a lot of term sheets on the market, these are very founder-friendly.”

Some investors agreed that the terms were fair, given how difficult they expect raising money will be over the next few months. They said the BDC program was a well-intentioned effort to address the short-term disruption that has hit businesses and private capital markets, while weighing the uncertainty of what the markets will look like post-pandemic. One VC described the challenge facing BDC as akin to “laying tracks right ahead of a speeding train.”

However, a number of VCs and startups said that prior to last week’s webinar, they had been working off piecemeal and sometimes conflicting information from representatives at BDC or what they gathered from colleagues. The investors with whom The Logic spoke in the past few days had varying understandings of the program’s details. 

Two sources said BDC representatives suggested they had to choose one or two firms from their portfolios to apply for the matching funds, regardless of how many might qualify; another said BDC told them as many of their firms can apply as qualified. Three investors told The Logic they were encouraged to endorse the portfolio companies that are lowest on cash, raising concerns that the funding will bolster VCs’ weakest firms. Two investors said it wasn’t clear to them which companies BDC will prioritize; they’ve been told it is dependent on who can prove they have the least runway to survive this crisis, they said.

“There’s going to be a large group of startups that need cash immediately within the next couple of weeks or they just go out of business,” said Park. “That’s one way we’re prioritizing, but that doesn’t mean we won’t support the others—we will look at deals; we will find ways to support them if they meet our criteria,” he said, pointing to other BDC programs like the Industrial Innovation and Women in Technology funds. 

Beyond the terms and conditions, three VCs worried other investors were privy to information before the program officially launched, putting them at an unfair advantage for applying for the funds. Most of the VCs who spoke to The Logic said BDC hasn’t budgeted enough for the program—some worried that would cause funding to roll out on a first-come-first-serve basis to firms that were better armed with information upon its launch.

Park noted that BDC had engaged some investors on the program before it launched to get their input on its design, but dispelled concerns that they had a headstart on the evaluation process. “This is not a race to the gate; this is really about us trying to support those startups that have been really impacted by COVID-19. It’s based on need,” said Park, adding that BDC would consider topping up the budget, depending on demand.  

Park declined to say whether BDC has already signed any deals to flow funds through the bridge program, but said the firm is processing “a large number of applications.” 

With files from Fatima Syed and Zane Schwartz