Brightspark looking to upend Canadian venture capital with $60-million fund and new financial instruments

Mark Skapinker and Sophie Forest. Brightspark

Brightspark Capital has closed a new $60-million venture fund, and wants to use it to upend the Canadian venture capital industry. 

The 21-year-old firm established itself as one of the country’s most successful VCs by investing in early-stage companies, betting on outstanding technology rather than financial projections. Now it’s registered as an exempt market dealer, a status it hopes to use to democratize the industry by letting individual investors buy in for as little as $10,000.

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Brightspark is already one of the most successful VC firms in Canada. Nine of its portfolio firms have been acquired by companies including Salesforce and IBM. It’s pushed the industry to change before, and now it’s looking to challenge it again, with the selling of secondaries to accredited investors and its new status as an exempt market dealer.

It’s also started allowing individual investors to buy and sell secondaries to each other, transforming the VC asset class from one that usually requires waiting years for a return to one that can be sold quickly.

The company is trying to emulate the success of U.S. firm Andreessen Horowitz, a VC fund invested in Facebook, Twitter and Lyft, which has similarly experimented with new financial products—even registering as a financial adviser last year so it can make riskier bets than it legally could as a VC. 

The change is just one way Brightspark is looking to challenge the rest of the industry, said managing partner Mark Skapinker. 

“Many VCs spend a lot of time telling other people how to pivot their businesses and how to change with the times and make absolutely no change to their own business for decades,” Skapinker told The Logic

In August the firm began offering secondaries, which allow individual investors to purchase shares in Brightspark portfolio companies. In the first week they sold about $200,000 worth.

“We were surprised by the level of interest,” said managing partner Sophie Forest. “There are some sellers, but there’s a lot of interested buyers. 

The new fund’s backers include major institutions like RBC, BMO Capital Partners and BDC Capital, through its Venture Capital Catalyst Initiative.

“The current pandemic has been transformational,” RBC chief strategy and corporate development officer Mike Dobbins told The Logic. “We need to think bold and invest in ideas and opportunities that will redefine society—our investment in the fund will help us be at the forefront of these breakthroughs.” 

Fondaction and Teralys Capital are also among the backers. “The fund brings a long-standing and differentiated expertise to the seed-stage ecosystem throughout the country, including a significant footprint in Quebec,” said Seif Belhani, Teralys principal.

It’s not just large investors, though: 15 per cent of the amount raised comes from individual investors. 

Brightspark has invested in six companies through the new fund so far. It had completed an initial close in January, but largely took March and April off due to the pandemic. Talks with backers resumed in May, and it closed the full $60 million last month. All in, the firm is looking to invest in between 15 and 20 companies.

About three-quarters of the fund will be used to invest at the Series A level, where Brightspark typically writes cheques for between $1 million and $1.5 million, with most of the rest aimed at earlier stages. 

“Canada is going through a little bit of a seed crisis with not enough seed money. And so we are getting a little earlier and are investing in companies that are pre-revenue,” said Skapinker. 

Canadian VCs are increasingly investing in their own portfolio firms or in later-stage companies. In the first half of 2020, later-stage firms brought in 50 per cent of all money invested, up from 22 per cent from the same period in 2019. That was especially true for the second quarter, with 69 per cent of investments being for $20 million or more. 

Part of the problem is that due to the pandemic, some accelerators and incubators for early-stage firms have slowed down their programming, which is designed to help young firms grow. There’s also been a slowdown in angel investment activity, according to Forest. 

The firm has a track record of success with early-stage companies. Nine of its startups have been acquired by firms including IBM and Canada Post. Its last fund, which launched in 2006 with $60 million, brought in significant returns for investors.

“We returned the entire fund with one company, actually more than the fund with one company. And then we tripled that with another one,” said Forest. “All the other exits were just nice to have.”

Brightspark has been an early backer of firms that have gone on to raise much larger sums, like Montreal-based airline-ticket-broker Hopper. Brightspark wrote Hopper a $500,000 cheque in its early days; the company has since gone on to raise over US$250 million, and its roughly 14 per cent ownership stake is now worth over $150 million, or two and a half times Brightspark’s last fund. When Fredericton social media monitoring company Radian6 sold to Salesforce for US$326 million in 2011, Brightspark’s $3.5-million investment turned into an $88 million exit—a 25-times return. 

The firm’s innovations have transformed the Canadian venture capital industry before. In 2014, it created a mini fund to invest in Hubba, with a management fee of 1.5 per cent and a 15 per cent share of the profit. A number of Canadians VCs now use such special-purpose vehicles (SPVs) to invest in startups. 

Brightspark has used the model to invest over $40 million in 16 firms. The model effectively democratizes venture capital, making it easier for accredited investors to access VC investments. Accredited investors include people with at least $1 million in financial assets or a net pre-tax income of over $200,000. They need to be willing to invest a minimum of $10,000 per individual SPV. By 2017, Brightspark had built up a network of 2,500 high-net-worth individual investors. It now has over 5,000. 

Brightspark is planning to continue deploying SPVs alongside its new fund, with about 50/50 invested in each. It’s hoping to raise an additional $15 million for the fund, which would bring its size up to $75 million. Forest said she’s “very confident” Brightspark will raise that money by the end of the year. If they do, it would put Brightspark on track to invest $150 million in new companies. 

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The firm’s innovations don’t always work. It originally tried to emulate another facet of Andresseen Horowitz’s model: hiring a large team and running the fund like a Hollywood talent agency, with staff helping firms with everything from engineering problems to marketing. In its early days, Brightspark had 80 staff. It’s now down to about 10, because it felt it was attracting firms that were relying on it too much to perform basic tasks. More recently, the firm looked into crowdfunding, but balked at regulations barring firms running crowdfunding exchanges from investing in individual deals themselves. 

Trying new things is part of the fun for Brightspark, though. “We’re inspired by people who do things slightly differently,” said Skapinker. “We’re starting to see some early-stage companies that are post-COVID thinkers, and people coming up with post-COVID companies. I think there’s gonna be some really interesting opportunities that start coming out of that.”