After years of government efforts to bolster Canada’s tech ecosystem, almost every venture capital fund in the country includes public money. But Halifax-based Tidal Venture Partners is trying something different.

For the past year, Tidal managing partner Ian Whytock has traveled across Canada and the U.S. seeking funding with no public strings attached. Last week the firm closed its initial pool of capital, raised strictly from private sources—four family offices, including Toronto-based firms Yabema Capital and Farpointe Investments (the other two declined to be named), and a smattering of high-net-worth individuals—the majority of which came from outside the Atlantic region. 

“We have a real focus on raising dollars that aren’t directly attached to government so that we can be as free as possible in how we run the fund,” said Whytock. 

Whytock said there can be issues with relying on government funding, especially early in the fundraising cycle. One of the challenges, he said, is private investors’ perception that government focuses too much on full-time employment numbers as the gauge of whether a fund is successful. Tidal believes that metric should be return-on-investment. The other challenge is structural, said Whytock. “If you have different provinces as [limited partners] within venture funds, they will quite rightly say that a percentage of the fund needs to be dedicated to within provincial boundaries. That’s something that I think is a particular challenge in Atlantic Canada,” he said. While Tidal is a regional fund, it doesn’t have restrictions on how much it has to invest in which province. 

The fund, which is focusing on pre-seed and seed startups in Atlantic Canada, is small so far—just over $4 million. The team plans to prioritize private capital as they continue raising, said Whytock, but they’re not ruling out public money as they grow. “It’s about sequencing,” he said. “It should start with private capital and if there was government funding, that should come afterwards.” The firm declined to disclose their final close target. 

When the four founding partners—all first-time fundraisers with backgrounds as tech entrepreneurs and consultants—started Tidal in June 2021, they approached it like a startup, said Whytock. They set short-term goals and agreed that, if they didn’t hit them within six months, they’d fold the venture. 

First, they had to raise at least $500,000, and they had to find at least two competitive companies in which to invest the money. They had to source at least a third of the capital from outside the Atlantic provinces and none of it could be public. “If we can’t do it in six months, that means the market doesn’t like what we’re selling,” said Whytock. 

The firm hit its goals, raising just over $600,000 by their target date. Seventy per cent of the capital came from outside the region and all of it from private investors. 

“That was when we were like, all right, I think we’re onto something,” said Whytock. “Let’s scale.” 

Government money seeds virtually every venture capital fund in Canada. That backing is both direct, through investments from Crown corporations like BDC Capital and Export Development Canada, and indirect. Since 2013, Ottawa has committed over $1.2 billion for VC funds to invest through the Venture Capital Catalyst Initiative (VCCI) and its predecessor, the Venture Capital Action Plan (VCAP). That money fuels large investment funds meant to invest in smaller VCs, which ultimately deploy capital to startups. 

In Atlantic Canada, four of the 10 most active venture capital investors are government entities, according to PitchBook. The other six are seeded either entirely or in part by government money. 

The government’s heavy venture capital involvement was originally meant to kick-start financing for Canada’s fledgling startup ecosystem in the late-2000s. It’s mostly done that, with the amount of funding and number of investors ballooning in the country over the past 15 years. 

Kim Furlong, CEO of the Canadian Venture Capital and Private Equity Association, an investor interest group, said smaller funds—in the sub-$100-million range—may now be able to find enough private money to sustain them. But she said the Canadian VC ecosystem is still young and not ready to be weaned off government support entirely. 

“We’re still not a full 12 years in [since] the first VCAP dollars started to flow,” she said. (A typical venture capital investment cycle is about eight to 12 years.)

There are very few independent limited partners in Canada, said Furlong. “That’s a conversation we’ve had with the government when we argued for a continuation of VCCI.” Panache Ventures was the only CVCA member Furlong could think of that didn’t have VCCI funding. The firm’s managing partner Patrick Lor said it’s primarily privately financed, but not entirely. He said having a government-sponsored fund in the round can give private investors more confidence in the due diligence process and entice them to back the fund. “Overall, government-sponsored fund-of-funds … are doing exactly what they set out to do,” he said, “which is to catalyze and increase investments from the private sector.”

Raising without early public support may be particularly hard for first-time funds, said Furlong, since government-backed funds usually act as anchor investors for emerging general partners. 

But Whytock said reliance on government capital can obscure how much potential a fund actually has and how successful it will be. “We believe a bit in the efficient market theory,” he said. “If the market said this is good, then we think that we’ve got a lot of runway ahead of us.” 

Whytock said breaking the venture capital conventions that tie Atlantic Canadian startups in particular to local and public money helps overcome barriers for those companies and the investors that back them. “One of the problems with Atlantic Canada is just connectivity. We’re so cut off from the rest of the country,” he said. “For founders, their market is never going to be Atlantic Canada, it’s always going to be elsewhere.” He said connecting startups with investors outside the region will help them break into those markets. 

While Tidal wants to keep fundraising mainly from private sources, Whytock said the team isn’t fully opposed to tapping government money as the fund grows and plans to do so for its final close. “We are not anti-government, we just think there’s a more efficient way of doing all this,” he said. “We don’t think government should be leading and initiating venture funds, they should be coming behind private capital.” 

Although public funding is often marketed as a way to attract private backers by de-risking the investment, Whytock said it might actually have the opposite effect. “There is this perception amongst the Canadian LP community that if government is there, then I’m probably not going to get the best return on my investment.” Whytock said there’s an understanding among Tidal’s limited partners that the fund has to succeed because it doesn’t have a safety net. 

While BDC in particular has faced criticism for crowding out private funders, Furlong said private investors are more likely to be attracted to funds with backing from government affiliates, given that they tend to have rigorous due diligence processes. Still, she said more funds focusing on private dollars is good for the sector, and she expects them to become more common as the ecosystem matures. 

“I hope there’s more capital,” said Furlong. “Many of our members call for institutional investors like our hospitals or universities or pension plans to deploy more dollars in this asset class,” she said. “If they did, we would have more funds that do not have BDC VCs. But that requires patience and staying the course.”