After 15 years of incubating some of Canada’s most promising startups, the University of Waterloo is spearheading a new fund to invest in them directly. 

The school is using up to $5 million from its $800-million endowment to create a venture capital fund that will invest in early-stage companies, many of them built at UWaterloo. 

The fund, which will be spun out of the university’s in-house startup accelerator, Velocity, is working to raise a total of US$25 million to invest in new companies, general partner Ross Robinson told The Logic. It will operate independently of the university and the accelerator. It is currently looking for other investors, and aims to announce a first close in the first quarter of 2024.

It is the first time the University of Waterloo’s endowment will invest in venture capital. Michael Ashmore, chair of the endowment’s finance and investment committee, said it’s also the first time a university endowment in Canada has established a VC fund to support startups incubated at the school. 

UWaterloo has famously positioned itself as an institution where inventors retain 100 per cent of their intellectual property and the income that IP generates. That’s helped attract entrepreneurs, but with the trade-off of limiting the university’s ability to collect returns on its investments. The fund offers a source of revenue on the research conducted at the school—a perennial challenge for many of Canada’s post-secondaries. 

As a limited partner in the fund, the endowment won’t get equity in the fund’s portfolio companies but rather will get a cut of the profits the investments generate. 

Ashmore said the Waterloo model was inspired by endowment- and university-backed VC funds in the U.S., which have produced hefty returns for their schools. 

His team consulted with The Engine—an MIT-led venture fund which mostly invests in industrial technology companies—and the University of California, Berkeley’s The House Fund, which mainly backs software and AI companies founded by its faculty, students and grads.  

The endowment team considered investing in established funds like Sequoia Capital or Lightspeed Venture Partners, Ashmore said, but ultimately decided they could earn bigger returns by investing in early-stage, local companies. 

“Looking at the venture capital market, both globally and within Canada, it just so happened that one of the biggest and best opportunities was right in our backyard,” he said. 

“We wanted the ecosystem to put more early-stage capital into companies coming through the Velocity ecosystem,” said Adrien Côté, executive director at Velocity. Data on the incubator’s alumni companies—which include the likes of North, Mappedin, Kira Talent and BufferBox—showed it was missing out on potential profits, he said. “Had we invested in those companies directly, it would have created a return that was really attractive.”

Ashmore said despite Waterloo’s reputation as a startup hub, there’s a funding gap for early-stage companies that are past the incubator stage but not yet ready for a million-dollar-plus cheque. 

The fund is aiming to invest half of its capital in companies founded by entrepreneurs at the University of Waterloo, whether or not they’re part of the Velocity incubator, said Robinson. The fund will invest at the pre-seed and early seed stages, cutting cheques of between $25,000 to $500,000, said Robinson. 

If the fund raises less than its US$25-million target, the endowment will reduce its planned $5-million contribution to stay in line with regulations that limit the university from owning more than 20 per cent of the fund, Ashmore said.

U.S. university endowments have shifted more money into venture capital and private equity assets in recent years, in search of bigger returns than what public markets can generate. 

A recent study by the National Association of College and University Business Officers and TIAA, a financial-services firm for U.S. teachers and researchers, found that private equity and venture capital assets have overtaken public holdings in American university endowments. It also found larger post-secondary institutions—which are more exposed to VC and private equity—also outperformed smaller institutions on their endowment portfolio returns. 

The fund will be called Velocity Fund II, as it is technically the second Velocity-linked VC program, though the first one structured as a traditional venture fund. The accelerator, which launched in 2008, initially offered $25,000 grants as prizes via pitch competitions for UWaterloo students who started companies. 

In 2019, Velocity raised its first equity fund—a microfund of about US$1 million—on AngelList, an investment platform where companies raise typically small funds from a pool of accredited angel investors.

Ashmore, who became chair of the UWaterloo endowment’s finance and investment committee in May 2022, said now is a particularly good time to be investing in venture capital. “VC markets, and startups more broadly, have experienced levels of stress and market-environment troubles over the last 12 months, but that is exactly when you want to be getting into the market,” he said. “Recessions build great companies.” 

If the move succeeds, the endowment could put more money into VC in the future. “When we contemplated venture capital as an asset class, we discussed in a really constructive manner as to how we should go from zero to potentially five per cent [of the endowment] over time,” Ashmore said.

Côté said there’s a growing pool of prospective portfolio firms at UWaterloo ready for investments once Velocity funds start flowing. He said that at last count, the Velocity team had identified about 130 teams on campus on track to form a startup. “Post-pandemic, as students are coming back,” he said, “there’s a lot of ambition to try and create and build things.”