When Toronto’s MaRS Discovery District announced last week it was launching a new $100-million early-stage venture capital fund, its CEO Yung Wu heralded the move as “a historic milestone” for the organization. 

But while the centre was once the only public tech hub in Canada acting as both accelerator and, separately, venture capitalist, the fund is the latest in a growing number of investment vehicles run by government-funded tech accelerators as they face pressure from backers amid disruption from COVID-19.

MaRS’s new fund, called Graphite Ventures, isn’t its first venture capital play. The tech centre—which offers a broad range of services to help companies start and scale—began managing its first fund, MaRS Investment Accelerator Fund (IAF), in 2007 with $43 million in public funding. The Ontario government created the fund to spur venture capital in the province’s fledgling startup ecosystem. Since then, it’s invested $80 million in 175 companies and spun out another fund, StandUp Ventures. 

The IAF is now far from an outlier. In November 2021, The Logic reported that Kitchener-Waterloo-based Communitech, which gets most of its funding from the provincial and federal governments, was leading an effort to raise a $200-million venture fund for the True North Fund, a new vehicle for scaling companies. Last February, the Montreal-based accelerator Centech, another government-backed accelerator, launched Boreal Ventures, a $26-million fund seeded predominantly by pools of government money. 

“There’s more competition than ever in our incubation space,” said Dan Herman, former head of strategy for the federal innovation ministry. “Accelerators have got to have different offerings to keep pace.” 

Part of the competition, said Herman, may stem from equity-linked accelerator and incubator programs, like Techstars and 500 Startups, growing their presence in Canada. “Access to expertise, advice and a free desk isn’t sufficient in a world where someone will tag along an attractive cheque,” he said. But t​he increase in private venture investing among government-backed accelerators also comes at a time when they’re facing general uncertainty. 

Accelerators were originally designed as meeting hubs for in-person collaboration and mentorship, but the COVID-19 pandemic disrupted that core offering, calling into question their value in a virtual-by-default world. The Council of Canadian Innovators chair Jim Balsillie said it’s made accelerators’ mandates, and their income streams—like revenue from renting space to companies—less clear. “Accelerators traditionally offered subsidized event and office space, but with the working-from-home trend, their real estate becomes more of a liability than an asset,” he told The Logic in an email. “This is why it’s critical to revisit their role and mandate to assess where they can deliver value.”

In a briefing note a year into the pandemic, public servants in the federal innovation ministry laid out a list of concerns about accelerators’ ability to sustain themselves. The document, which The Logic reported on last August after obtaining it via access-to-information request, showed their worries included “a failure of [accelerators and incubators] to develop models that do not rely largely on continued support” and a “weak brand” within the investment community. 

Before the pandemic, Communitech had sought to rely less on government support, aiming for a 50-50 public-private funding model, a move meant to help address concerns it was overreliant on public funds. But the organization’s financial report for 2021 shows that year its revenue mix returned to 76 per cent from governments and 24 per cent from the private sector.

MaRS has also relied more on public money in the past year, with just over half of its 2021 funding coming from governments, compared to about 41 per cent in each of the three years before, according to the organization’s financial statements. Overall revenue declined from just over $49 million in 2019 to about $36.5 million in 2021. 

MaRS communications lead Karen Mazurkewich said in an email to The Logic that the higher share of government funding was mainly due to emergency wage subsidies during the pandemic and a “significant decrease in revenue from events and fee-for-service offerings.” She said the organization expects the “public/private ratio to rebalance post-pandemic.”

However, money is flooding into venture capital. In 2021 venture funding in Canada had surpassed US$12 billion across more than 1,000 deals by mid-December, according to PitchBook, nearly double the amount invested in 2019, the previous record year.

Asked if its venture capital investing helps address concerns around funding constraints for accelerators and their ability to generate measurable returns, Mazurkewich said, “MaRS IAF has been extremely successful in generating returns and driving follow-on investments in our startups,” noting the fund averages a rate of return of above 20 per cent, and 30 per cent from 2017 to 2020. “That’s a good commercialization story,” she said. 

Private investors may be more likely to support an accelerator’s venture capital fund, which promises to return value to them directly, than to donate to accelerator programs with outcomes that are hard to measure. 

Herman, whom the province has enlisted to design a public IP agency, said the prospect of measurable returns may also appeal to public funders—some of which have taken issue with accelerators’ lack of concrete returns on large sums of government money. 

In line with Ottawa’s concerns, the Ontario government has sought ways to close the gap between public spending on research and development at universities and accelerators and their commercial outcomes. An expert panel led by Balsillie made three recommendations, focusing on bolstering intellectual property and creating a consistent and transparent governance framework ​​for organizations that receive provincial funding for innovation and entrepreneurship.“If a proponent of a VC fund is able to come forward and say, ‘We’re going to leverage your $1 of government funding and turn it into $5,’ for example, that’s exceptionally attractive,” said Herman. 

Ontario Economic Development Minister Vic Fedeli told The Logic the government is more likely expecting to triple its investment in MaRS’s new Graphite fund. “For every $1 we invest in Graphite on behalf of taxpayers, we’re getting at least $3 in return,” he said in an email. “It’s a smart, innovative way to strengthen Ontario’s VC and innovation ecosystem.” 

MaRS has so far raised $77 million of its $100-million target for Graphite, including $25 million from the public pension fund OMERS and $25 million from the provincial government. The rest is from private investors, including entrepreneurs who’ve previously received funding from MaRS IAF. 

As part of the province’s agreement with MaRS, the government can request returns from IAF at its discretion. Asked whether the province has exercised that right, Mazurkewich said, “The government chose to reinvest the funds into ventures via the IAF and Graphite, rather than redeploy the proceeds elsewhere.” Any returns MaRS generates as an LP in the new fund will go into a “custodial account controlled by the province,” said Mazurkewich. After that, the government can do what it chooses with the funds. 

In an email to The Logic, Communitech CEO Chris Albinson said the True North Fund will operate independently from Communitech and that the accelerator will not invest as an LP. Communitech will, however, be paid for any support it delivers to the fund. “For example, any staff time will be reimbursed through the standard-rate management fees that Communitech would charge,” said Albinson, who’s leading the fund’s investment team as managing partner. 

Asked whether proceeds from the fund will support Communitech programming, Albinson said, “We envision the True North Fund dedicating one-quarter of any carried interest toward support for the tech ecosystem in Canada, including but not limited to Communitech programming for founders.” 

Balsillie told The Logic he thinks using venture funds to help fill gaps between public funding and returns is “worthy of discussion,” but noted the potential downside. “These VC initiatives are fraught with risk of public funds being used to compete directly with private enterprise,” he said. “Publicly funded accelerators should only be doing VC work if both the ecosystem needs them to do it and it is done with good governance practices, and not as rebranding strategies for institutions that have challenges delivering innovation outcomes.”

Gilles Duruflé, a VC industry advisor and content director at the Institutional Investors Roundtable, said that accelerators weren’t initially designed to return profits to their funders. “They are not meant, normally, to be self-sustainable. They are meant to be supported by some ecosystem money—be it philanthropy, universities or governments,” he said. “That doesn’t mean there shouldn’t be some kind of return for the ecosystem.” He said VC funds present one way to generate that value. “When you set up the VC funds around the ecosystem, one of the metrics will be the returns generated by the funds themselves. If these VC funds have a good return, that means there’s a good return for the ecosystem, as well.”

Accelerators and incubators taking startup equity, or connecting startups with VC investors, isn’t new in Canada. Programs like Creative Destruction Lab and Next 36 are designed to get startups to a point where they can secure funding from outside investors. Genesis, an accelerator tied to Memorial University in Newfoundland, takes a two per cent royalty fee for five years once a company it’s incubated hits $1 million in gross sales. “There’s always a question of how you link this movement of accelerators with funding,” said Duruflé. 

The difference with the traditional venture capital model is that the funds aren’t directly linked to the accelerator’s programming. In the case of Graphite Ventures and the True North Fund, investments can go to companies that aren’t members of their tech hubs, including those outside their home province. 

“There’s no structural link between the accelerator and the fund,” said Duruflé, noting that that doesn’t necessarily mean the funds don’t serve the startup ecosystem or the accelerators’ mandates. “If we have more sources of funding around accelerators, that can be a good thing—if they have good management teams,” he said. “It’s not just about capital, it’s about capital and expertise.”