A review of Ottawa’s flagship venture capital programs found the incentives are achieving their goal to grow Canada’s startup investment sector while making it less reliant on federal funding.

The report, obtained by The Logic through an access to information request, analysed the Venture Capital Action Plan (VCAP) and the Venture Capital Catalyst Initiative (VCCI), funding programs introduced in 2013 and 2017, respectively, to help grow Canada’s fledgling VC market. The government renewed VCCI with a second fund in 2021.

The programs “have successfully ‘crowded in’ private capital,” the report reads, “enhancing the overall investment landscape in Canada.”

The government has invested $1.2 billion across three funds since launching the initiative. That money, which is managed by the Business Development Bank of Canada (BDC), goes to select asset managers, who then raise additional capital from the private sector to invest in other venture capital funds, in what’s known as a fund-of-funds model. As of December 2023, VC funds supported by VCAP and VCCI have invested $5.2 billion in Canadian companies.

The study, conducted by University of Toronto assistant finance professor Camille Hebert and Duke finance professor David T. Robinson in collaboration with BDC, analysed the performance of the first two fund vintages up until 2024. It found that venture funds backed by VCAP and the first VCCI generally performed in line with global benchmarks in the U.S., Europe and Canada. VCAP, in particular, “consistently performed above or near the median for all benchmarks,” the analysis found. By 2024, the value of all VCAP funds-of-funds had about doubled their original investment value. The benchmark funds varied “considerably” with some returns below one times the amount of invested capital and some as high as five times. 

VCCI-backed funds, meanwhile, were tracking on or slightly below benchmarks. The authors said they could catch up, however, noting that the funds were relatively early in their 10-year life cycle, and citing research showing funds that end up having high returns tend to perform less well early on.

The authors said the programs were not designed to generate outsized returns, and that performance far above the benchmarks could signal structural problems in Canada’s venture capital market, preventing private investors from reaching “appropriate scale.”

Other metrics suggest the programs are working as designed, according to the authors. The funds raised money at about the same pace as industry averages, and many eventually regenerated without government backing. They found that 17 of the 36 Canadian venture firms supported by VCAP or VCCI had gone on to raise at least one other fund. Those follow-on funds were about 69 per cent bigger than their government-backed predecessors.

Ottawa’s role in Canada’s VC market has also shrunk over the two programs, even as the market itself grew. Under VCAP, the federal government committed about $228 million to VC funds that funneled the money to 30 other funds that together raised $6.8 billion to invest in startups. Under the newer VCCI program, Ottawa committed less money, about $179 million, but supported 41 venture funds that raised $10.9 billion in total. At the same time, BDC’s average stake in government-backed funds dropped by about half, with 3.35 per cent ownership under VCAP and 1.64 per cent under VCCI. 

The report, which has yet to be published, was delivered to the government in June, ahead of its budget announcement of a $1-billion VCCI-style fund, its biggest yet. BDC is tasked with distributing the money over three years, starting in 2026.