OTTAWA — The federal government has picked four familiar firms to receive and invest its latest funding injection into Canada’s venture capital ecosystem—a program that has been keenly anticipated as financing for tech startups and scale-ups slows amid economic uncertainty.

The asset managers will split up to $350 million, and must raise private-sector money to fill out their funds. “I want companies to get the benefit of venture capital that is in Canada, and incent for growth anchored in Canada,” said Small Business Minister Mary Ng, who is set to announce the selections on Monday afternoon.

The firms chosen for the Venture Capital Catalyst Initiative’s (VCCI) main stream are Boston-headquartered HarbourVest Partners, Montreal’s Teralys Capital and Toronto-based Kensington Capital Partners and Northleaf Capital. The four managers all participated in both previous rounds of the program. Each will launch a new fund-of-funds, which will in turn provide capital to VC funds and invest in tech companies. 

The asset managers are required to raise three times as much private money as they receive from Ottawa. They must disburse at least 60 per cent to Canadian VC funds, and spend no more than a quarter taking direct stakes in startups and scale-ups.

“It’s really important [for government to] keep providing that first dollar that will then help raise more capital, so that the venture capital system continues to be strengthened,” Ng said in an interview with The Logic Sunday.

Earlier this year, some VCs expressed concern about the timing of the new round’s rollout, which they had hoped would be quicker. Ng said the government has been focused on pandemic-relief programs. Alice Hansen, the minister’s spokesperson, said it will “move quickly towards a first close” with the chosen managers, and “support funds raising in 2023.”

The then-Conservative government established a $390-million program to foster VC investment in the domestic tech sector in January 2013, after startup financing plummeted following the 2008 financial crisis. The four funds-of-funds raised and deployed a combined $1.36 billion, including the federal capital. In June 2018, the same firms were among five asset managers the Liberal government chose to invest $350 million from the rebranded and revised VCCI; their funds totalled $1.18 billion.

Ottawa announced the third round of the program in the April 2021 budget, following lobbying from industry groups who expressed concerns that the COVID-19 pandemic would cause another drought in tech financing. Last year instead proved to be a record one, with startups and scale-ups raising $14.2 billion in 751 deals, according to the Canadian Venture Capital & Private Equity Association. But financing activity in 2022 was down 69 per cent year-over-year through the first three quarters, according to Pitchbook data. 

“We’re heading into a recession, the tech sector in the public markets has been hammered, and a lot of people are pulling out capital,” said Rick Nathan, senior managing director at Kensington. “Having a program like [VCCI] available is critically important at this time.”

Kensington is aiming to roughly double its last $150-million Ottawa-seeded fund, which it finished deploying in 2020; the firm has since continued to invest out of its main private equity fund. Kensington’s new VCCI fund will likely back about 15 VC funds, including both returning and new managers. 

Despite the economic climate, the chosen asset managers say their current and prospective limited partners (LPs) are still interested in committing capital to funds. “Our investors understand that these are long-term investments based on the technology innovation cycle,” said Nathan.

“The markets are particularly strange right now, but we have a very strong demand,” said Senia Rapisarda, managing director in HarbourVest’s Toronto office. “There is a flight to quality.” Some of the best fund vintages and companies are created during downturns or recessions, she said, noting that industries’ accelerated adoption of technology during the pandemic has continued. “For smart investors, this is an excellent time to get into the market.”

HarbourVest’s previous VCCI-seeded fund amassed $326 million, of which the firm still has “small amounts to deploy,” Rapisarda said. The new one is likely to be about the same size, she added, although she said she couldn’t comment on fundraising timelines or plans because of HarbourVest’s U.S. regulatory obligations.

Teralys and Northleaf raised $400 million and $300 million, respectively, for their last VCCI funds. Ottawa had initially picked five asset managers for the fund-of-funds stream in June 2018. But Philadelphia-headquartered Hamilton Lane Advisors withdrew in March 2020, citing fundraising challenges. While the government ran an application process for the current round, it ended up with the same four firms as in previous editions. Ng said that’s not a concern. “They clearly have the expertise in the marketplace and … a track record of raising the kind of capital that is needed.”

Ottawa has raised the capital-matching requirements in each round of its VC program, from two times as much private money as public to two-and-a-half, and now three. It’s also reduced the preferential return fund managers can offer their LPs. 

Tech founders and investors have credited VCCI with helping to increase the availability of financing in the sector, which, despite blips like the one in the early pandemic, has lately produced an increasing number of mega-rounds and major exits. Teralys (first), Northleaf (sixth), Kensington (seventh) and HarbourVest (14th) were among the leading LPs in Canadian VC funds over the decade through May 2021, The Logic’s analysis of Pitchbook data showed.They’ve backed some of the country’s most prominent financiers, including Georgian Partners, Inovia Capital and StandUp Ventures.

Canadian scale-ups like Bluedot, Hopper, Lightspeed Commerce and SkiptheDishes “have all benefited from Canadian venture capital through an early version of this program,” said Ng. She aims to diversify that list. Of the 153 companies the last round VCCI money helped support through December 2020, 48 disclosed that they had women in senior management or senior positions, she said. To earn renewed support this time around, the four funds-of-funds were required to submit diversity, equity and inclusion strategies. 

In May, CVCA CEO Kim Furlong told The Globe and Mail the organization won’t seek another round of VCCI after the current one, saying it’s not “not a crutch the industry should rely on.” In an August 2021 internal deck The Logic obtained via access-to-information request, officials at the Business Development Bank of Canada, which administers the program, described the renewal as a way to “complete [the] drive toward a sustainable VC industry in Canada and supporting Canadian firms.” 

Nathan said any decision on another edition should be based on market conditions, not the number of renewals to date. Rapisarda supports it continuing. “It’s the most successful public-private partnership that Canada has ever done,” she said, noting that other countries also finance their tech sectors. “These funds have been returning capital to the private sector and to the government.”

Ng did not directly say whether the program will be renewed following the current round. “Let’s get this out there,” she said, referring to the current round of catalyst funding. The program, she added, is “doing the job that we intended to do—creating a solidly good foundation for venture capital in Canada.”

The most recent VCCI renewal also included $50 million each to seed funds in life sciences and ones focused on women, racialized communities and other underrepresented groups. Applications for the former stream closed last month, while those for the latter remain open through June 2023.