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BDC Capital to provide matching funds for VC investments

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BDC Capital is launching a program that will see it match investments by Canadian venture capital firms, The Logic has learned.

Two sources with direct knowledge of the program, which could be announced as early as Thursday, said it will provide startups with one-to-one matching funds, as the Crown corporation tries to keep capital flowing to growing companies to help them weather the COVID-19 pandemic. The sources said the matching program would apply to companies that can raise capital from a qualified venture capital fund, and that deals would be available to companies outside BDC’s existing portfolios.

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Talking Point

BDC Capital will help finance startups by matching funds from qualified venture capital investors using convertible notes. The program, set to launch this week, will be available to BDC-backed companies as well as those outside its existing portfolios.

BDC Capital, the venture arm of the Business Development Bank of Canada, will provide financing through convertible notes at market rate until the maturity date. The bank is still deciding what funding-round sizes it will match, according to a source. The Logic agreed not to name the sources because they weren’t authorized to speak on the record. 

“BDC Capital is working diligently on a response program that we will deploy in collaboration with existing venture capital investors,” spokesperson Shawn Salewski said in an email to The Logic. “At this time, we are not ready to share further details of this program. More information will be provided in the coming days.”

The venture capital community is anticipating a plunge in early-stage startup funding, as investors stop taking meetings with new founders and focus instead on damage control within their portfolios. Global seed-stage funding has dropped 22 per cent since January, according to a report from CB Insights.  

Last Thursday, the Canadian Venture Capital and Private Equity Association (CVCA) sent a letter to Small Business Minister Mary Ng, in which it called on BDC to help close funding rounds that are currently open and to match VC funding with up to $2 million in convertible loan notes for venture-backed startups. The letter, signed by CVCA CEO Kim Furlong, warned of “prolonged fundraising timelines and the inability to start deploying capital into the market, resulting in a severely constrained flow of capital into the Canadian innovation ecosystem.” 

Jim Orlando, managing partner at Wittington Ventures, said one upside of issuing convertible notes is it removes the need to set a company’s valuation in a time of dramatic flux for businesses and the economy: “That could be a good vehicle for investors to get behind companies that will emerge after this as strong businesses.” 

The matching program would come on the heels of a similar program announced in France, where public investment bank Bpifrance is putting up €80 million (nearly $125 million) to match private investors. 

Ottawa has announced a suite of measures to help workers and businesses cope with economic challenges triggered by the COVID-19 pandemic. On March 13, it announced a $10-billion Business Credit Availability Program program, with credits flowing to small businesses through BDC and Export Development Canada. Last week, the government also pledged to cover up to 75 per cent of wages for small businesses which have seen revenues drop at least 30 per cent, and to offer interest-free loans of up to $40,000 through commercial banks.  

Both measures have been criticized as insufficient for helping startups, many of which are focused on growth, not profitability, and so are less likely to be eligible for the wage subsidy.

“The COVID-19 crisis has created an acute liquidity challenge for Canada’s high-growth technology start-ups and entrepreneurs,” Furlong said in an email to The Logic. “We urge the Government of Canada to implement CVCA’s recommendation to roll out a fund-matching and convertible note program to provide Canadian companies the much-needed liquidity required to endure these challenging times. We are optimistic that deploying this recommendation will ensure Canada’s innovation ecosystem remains resilient and provides it a fighting chance to overcome this crisis stronger than ever.”

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Several VCs who spoke to The Logic said they have had conversations with BDC Capital in recent weeks, urging it to initiate a fund-matching program. “We have a whole bunch of startups in Canada that are not going to be able to raise capital because venture has effectively frozen,” said one investor familiar with BDC Capital’s fund-matching plans who wasn’t authorized to speak on the record. “Insiders are most likely going to step up and support the companies, but that will not give them enough of the capital we think they need to last them this nuclear winter.

“If we’re handing out dollars to all kinds of corporations and we’re handing out wage subsidies to keep money flowing and keep people employed, the best way to keep all our startup talent employed is to get funding rounds closed.”