Entrepreneurs raising money during the pandemic say BDC Capital has not delivered on its promise to offer quick access to capital on friendly terms to help companies affected by the pandemic close funding rounds. 

The Logic spoke with eight Canadian entrepreneurs who raised money since the Business Development Bank of Canada’s venture capital arm launched its fund-matching program on April 9. Two of them closed deals with BDC, while the other six explored partnering with the Crown corporation, but were either rejected or walked away from deals because of what they described as prohibitive terms. 

“I think BDC really missed an opportunity to step in here and help startups during COVID,” said Patrick Lor, a managing partner at Panache Ventures. “BDC said they were going to be fast and they said they were going to be friendly, and it turned out they were really neither,” said Lor, who’s tried helping three startups access BDC bridge financing; all of them spent several months in the application pipeline and none ended up closing a deal. 

The Logic first reported in late March that BDC Capital was launching a program to co-invest in venture-backed startups using convertible notes. The program was intended to fill gaps in the federal government’s COVID-19 relief funding, for which many startups did not qualify despite being impacted by the pandemic. The program launched officially on April 9. To date, BDC has allocated just over a third of its budget to help startups close funding rounds. 

A BDC spokesperson told The Logic it has co-invested $116 million of the $300-million program across 56 companies, and is currently reviewing 137 more applications. “We developed baseline terms and requirements for the Program that, when acceptable to both the syndicate and BDC Capital, can be adjusted to match the syndicate terms when appropriate,” said BDC Jean Philippe Nadeau. “For a large portion of the convertible notes we authorized, we adjusted our terms to the ones of the syndicate in place.” 

However, several founders who sought BDC funding throughout the pandemic said the VC offered stringent terms that could compromise the startups’ ability to raise their next rounds. Some founders said BDC representatives provided inconsistent and incomplete information about what funding they were eligible for; nearly all said they were able to close their rounds with private investments on friendlier terms. 

Lor attributes some of the pushback on the program to the surprise boom in private investments during the pandemic. “The economy has—at least in the private equity markets—recovered, so the need for this program just isn’t there like it was six months ago,” he said. In Canada, $1.7 billion in venture capital was invested across 145 deals in the second quarter of the year, up 23 per cent from the same quarter last year, and more than double the amount invested in the first quarter of 2020, according to the Canadian Venture Capital & Private Equity Association. While BDC’s terms may have appealed to companies struggling through the pandemic with no other investment options, heightened competition for deal activity has given startups more options than what the VC community had anticipated back in March. 

The other problem, said Lor, “is that BDC really oversold how helpful they were going to be to entrepreneurs.” 

Thomas Park, BDC’s vice-president of operations and strategy, told The Logic in April that BDC was open to negotiating its terms for startups. However, several founders said the VC held firm on some terms they said were particularly unfriendly to founders.

One startup that Lor has worked with on the program ended negotiations after BDC refused to adjust its terms. “They thought they had a modification of terms that ended up getting approved, but the terms reverted right back.” 

BDC’s Nadeau declined to address specific concerns raised by startups that spoke to The Logic, citing confidentiality considerations.

A founder who took bridge financing from BDC described the negotiation process as onerous and expensive. (The Logic has agreed not to identify some of its sources in this story because of concern it would compromise their ability to raise from BDC or affiliated funds in the future.) They said BDC insisted on certain changes to the firm’s operations—decisions typically made by the board, like executive compensation and employee stock-option plans—and wouldn’t compromise on several unfavourable terms, including allowing BDC to convert the note to debt on its terms and at a higher interest rate. At the end of a three-month negotiation that involved the startup tinkering its terms with other investors to appease BDC, the startup was saddled with a surprise legal bill from the Crown corporation that “was not insignificant,” said the founder. “Their whole ‘We’re the entrepreneurs’ bank’ didn’t always show in their terms,” he said. 

Another startup that applied for bridge funding said BDC rejected its application because its main investors—two family offices in Texas—didn’t have enough Canadian firms in their portfolios; the company didn’t end up closing the round. 

Several founders raised concern about the term that allowed BDC to maintain its financing as debt with compounded interest rather than convert it to equity—as is typical with a convertible note—after signing the deal, depending on what would offer better returns for the VC. Two founders who spoke to The Logic walked away from potential deals because of the clause. A term sheet from April obtained by The Logic shows BDC wanted the option to convert its investment into shares at a 20 per cent discount if there was a liquidation event before the note’s maturity date, as well as the ability to invest in the next funding round at the same discounted rate. 

One Vancouver-based founder initially sought $250,000 from BDC for a $1.3-million raise through another program in June. BDC representatives told him $250,000 was below the bank’s investment threshold, so the founder raised the Crown corporation’s prospective contribution to $1 million. As discussions progressed, however, BDC insisted on having a board seat at the company and super pro rata rights, a term that would give the VC the option to raise its ownership stake in the company through future investment rounds. “That starts to impinge materially on how our investors would feel about coming in on the Series A,” said the founder. “It just didn’t cut it for us, so we ended up walking away from the offer. We were able to get money with way less strict terms from other places than BDC.” 

That same founder, who was exploring BDC funding through the bank’s Industrial Innovation Fund, said the representatives to whom he spoke did not raise the bridge-financing option, but that his team would have considered the program had they known about it. “If there’s a matching program, we could have added to the $1.3 million we ended up raising; we would have been really open to understanding the rules of the game in that program.” he said. 

The founder who signed a deal with BDC said there were some terms the VC reps said they wouldn’t enforce, but refused to change on paper. “There were many points where they said, ‘You just have to trust us. We know this isn’t standard, but we’re trying to release a bunch of capital with maybe less due diligence, so we have to have certainty around these things.’”

BDC told The Logic it has helped with COVID-19 relief in other ways. Spokesperson Nadeau said by mid-September, the bank had authorized $579 million in loans from financial institutions through the federal Business Capital Availability Program. “As at August 31, BDC direct COVID-support lending totals $2.4B.”