Nearly a decade after the federal government launched a flagship program meant to bolster venture capital investments from Canadian private companies, governments and foreign investors are still overrepresented in the country’s funding landscape, The Logic’s analysis of Pitchbook data shows. 

Of the 100 most active limited partners (LPs) in Canada-based venture capital and private equity funds, nearly two-thirds are foreign investors. Government agencies make up the bulk of local LPs. 

Experts in the field say the imbalance speaks to the relatively small Canadian market, and the country’s fairly young venture ecosystem. But as the sector matures, they’re looking to private-sector investors to play a larger role in funding Canadian startups.

Just five of the domestic LPs—which invest capital in venture capital and private equity funds to allocate to companies—are private funds-of-funds, according to data showing LP affiliation with Canadian funds over the past decade. (PitchBook data does not capture all limited partners, given some funds do not disclose their LPs.) Three of those funds are backed with money from the federal government. Nine of the top 100 LPs are local government bodies, four are Canadian public pensions, four are Canadian banks and four are corporations. 

While there are far fewer Canadian LPs in the domestic ecosystem, they tend to be affiliated with more funds than do foreign investors. The 34 Canadian LPs contributed to 282 funds, compared to the 66 overseas peers that invested in just 224 funds. Domestic government agencies were involved in 79 of the domestic funds. 

Domestic firms were better represented in venture capital funding than in private equity. Eighty-three of the 91 LPs affiliated with Canadian VC funds over the past decade were headquartered in Canada. Ten government agencies were affiliated with 80 funds, compared to 19 corporations affiliated with 37 funds. Seven funds-of-funds (including four backed by government) invested in 69 funds, and four direct investment firms backed 13 funds.  

Gilles Duruflé, a senior advisor at the Institutional Investors Roundtable, said Canada’s VC landscape looks similar in some ways to the fledgling ecosystem of the 1990s. Back then, much of the money came from governments, banks and public pension funds. But returns on venture investments suffered after the dot-com bubble burst in 2000, and many of the institutions propping up the sector retreated. 

Duruflé credits the sector’s revival in large part to the federal government’s Venture Capital Action Plan (VCAP), a program announced in 2013 that spent $340 million to establish four funds-of-funds—Kensington Ventures, Teralys Capital, Northleaf Venture Capital and a Canadian fund from Boston-based HarbourVest—in a bid to stimulate investment in the middling domestic sector. 

“These four funds-of-funds have played a very important role in financing the ecosystem,” said Duruflé. Those LPs have participated in 67 funds in the past decade, according to PitchBook. Teralys is identified as the most active LP in Canada over that period, having affiliations with at least 26 funds. Northleaf ranks sixth most active and Kensington ranks seventh, with money in 17 and 16 funds, respectively, while Harbourvest is 14th most active, with participation in eight funds. 

Venture capital activity has certainly ballooned over the past decade, with a fleet of new investment firms funneling money into the sector. The ecosystem saw $4.4 billion invested in 2020, down from $6.2 billion the year before, but up significantly from $1.5 billion in 2011.

Kim Furlong, CEO of the Canadian Venture Capital & Private Equity Association, noted that, given the risk associated with venture capital in particular—especially in the early stages—it makes sense for governments to support the sector. However, public funding should be used as a tool to attract co-investments from the private sector, she said. “It demonstrates to private investors that it believes in the asset class and believes in the return, and that’s helping attract [private investors],” said Furlong, adding that federal VC programs have been designed to focus on co-investment. 

Beyond the four LPs Ottawa bolstered through the VCAP program, the federal government has spent billions of dollars on a series of programs to support venture capital activities, including the Strategic Innovation Fund, the Innovation Superclusters Initiative, and VCAP’s successor, the Venture Capital Catalyst Initiative (VCCI). In its budget tabled last month, the government committed another $2.6 billion to BDC—which was the most active VC investor and third most active PE investor in 2020—including another $450 million for the Crown corporation to run VCCI. 

Furlong said that support has been vital for building other institutions’ confidence in venture capital investing and attracting them back to the ecosystem. She noted that banks are returning to the space—citing RBC’s contribution to Toronto-based life-science fund Lumira Ventures—as well as pensions, albeit slowly. “I really think the pensions need to spend more time playing not only as direct investors, but LPs as our industry matures,” she said, noting that Canadian venture deals have historically been too small for the country’s large pension funds to entertain. 

Private corporations, however, still represent a minuscule portion of LPs in the country. OpenText, Corus Entertainment, Alberta Enterprise Corporation and Knight Therapeutics were the only corporate investors—domestic or foreign—among the 100 most active LPs, according to PitchBook. “We’re going to be spending more time at CVCA this year talking to corporates,” said Furlong. “There’s a lot of Fortune 500 companies in Canada that will do the odd investment here and there, but are not very active.” 

Duruflé said that as Canada’s ecosystem grows, venture capital firms should start seeing more independent LPs stoke their funds. “We don’t have many large corporations in Canada,” he said, “but as the industry matures, we’ll see more [private] Canadian and international LPs investing in the industry.”

That said, governments will likely continue to play a critical role as Canada’s funding ecosystem progresses, particularly in smaller markets outside Toronto and other big cities and in stages of the industry and in sectors where risk is higher—like early-stage investments and commercializing basic research. “Even in the U.S., outside the hotspots in California and the East Coast, governments play an important role in supporting the development of the tech ecosystem and industries,” said Duruflé. Europe’s tech sector is also highly dependent on government venture capital. A 2019 analysis by Yan Alperovych, an associate finance professor at Emlyon Business School in France, found that almost half of all VC investments in the region involved government-owned funds or private firms backed by government LPs. 

Duruflé added that government involvement in funding, however, should be collaborative with private-sector stakeholders that are entrenched in the industries the public programs aim to serve. “Governments are not in the best position to make the kind of investment decisions that are needed to invest in venture capital,” he said. “What is important for government is to work with and stimulate the private sector.”