The Big Read

Swagger chez nous: Caisse’s Thomas Birch has $5.7 billion under his belt and a chip on his shoulder

Thomas Birch, global managing director, venture capital and technology, Caisse de dépôt et placement du Québec Roger Lemoyne for The Logic

Espace CDPQ feels like a startup that hit big. Located in Montreal’s Place Ville Marie, the investment and development hub is 55,000 square feet of glass and gleaming white spaces—think 2001: A Space Odyssey with spiral staircases, a coffee bar and the whiff of institutional money.

Huddled behind a desktop in the well-lit confines of his fourth-floor workstation, Thomas Birch watches the collective weight of $1.5 billion swish around the market. As global managing director of venture capital and technology for the Caisse de dépôt et placement du Québec, the province’s public pension fund manager, part of his job is to pan the lot of 853 mostly North American software companies for the gold they might produce, given proper time and capital.

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Talking Point

English-speaking and relentlessly informal, Thomas Birch is an anomaly in Quebec’s business community. Raised in Kenora, Ont., the serial entrepreneur moved to the province as soon as he learned enough French to hustle his way to five-x returns. As the Caisse’s VC point man, overseeing some $5.7 billion in capital, he is introducing the world of Quebec institutional investing to another anomaly: risk.

Numbers migrate around the screen. A map of the continent pulses with activity, with hotspots in Montreal, Toronto, San Francisco, New York and Boston. Of those 853 companies, 222 are in Quebec and 287 in the rest of Canada, with 284 in the U.S. and 60 in the rest of the world. 

There is a top 50 list, from which Birch and his team have chosen 19 in which to invest. The value of those 19 companies is that $1.5 billion bouncing around on his desktop. Birch wouldn’t comment on the returns, except to say they “are much higher than the industry norms.” 

Birch’s goal is to solve a longstanding problem facing Canada’s startup scene: the seemingly inevitable migration to the greener pastures and deeper pockets in the U.S. To do it, Birch has taught himself to walk and talk like there’s $5.7 billion under his belt—which, in a way, there is.

“I got turned down by one key fund in the Valley for one of my personal companies,” Birch says. “They said, ‘Tom. You’re too Canadian, you’re too nice. We need a fire-breathing American evangelist to be our leader.’ And he was right. Now I’ve become a lot more aggressive, a lot more assertive. Canadians and Quebecers are too nice. You got to go for the jugular.”

The vast majority of the $340 billion-plus under the Caisse’s management is in equity markets, private equity, infrastructure and real estate—the familiar and relatively safe guts responsible for churning out the Caisse’s 8.1 per cent five-year annualized return.

That $5.7 billion, the sum total overseen by the 15 investment funds at Espace CDPQ and the Caisse’s VC investment team, represents the firewall Birch wants to build to keep Canadian startups in Canada. From his perch at Espace CDPQ, the Caisse’s entrepreneurial investment and development hub, Birch practises what he calls “conservative venture capitalism”—“an oxymoron,” he admits, but one that’s indicative of his role at the Caisse: foster and mitigate risk within a historically risk-averse institution.

Since his arrival in 2015, the Caisse’s VC investments in Canada have increased more than sixfold to $2 billion, while direct investments in technology companies with the Caisse’s VC partners have increased from zero in 2014 to an expected $250 million a year in 2020. “We are the largest VC in Canada no one has ever heard of before,” he says.

Birch wants to make it so Canadian tech entrepreneurs don’t need to go to Sand Hill Road for capital—they will instead be able to germinate within the walls of Espace CDPQ.

The Caisse de dépôt may seem an odd fit for the VC game of swagger and risk. Founded in 1965 as the keeper of Quebecers’ collective bas de laine—wool socks—it long repeated the typical pension fund mantra of prudent investments and steady growth, with a hearty nod to the economic nationalism that drove much of Quebec’s Quiet Revolution. 

Its dollars, diligently wrung from the paycheques of Quebecers, helped birth the likes of Couche Tarde, Alcan Aluminum, Bombardier, Air Transat and CGI, among other Quebec, Inc. luminaries. It owns some of the province’s most prominent bricks and mortar, including Place Ville-Marie, that 47-storey ode to Montreal’s economic might.

In 2008, when the Caisse lost $40 billion after investing in asset-backed commercial paper under then-head Henri-Paul Rousseau, it was widely seen as a cautionary tale about gambling with Quebec’s retirement dollars. Appointed in 2009, Michael Sabia would tame the Caisse’s profligate risk-taking by ending its participation in potentially lucrative but risky real estate mezzanine debt financing, fortifying internal stress tests and otherwise refocusing on core businesses and key activities. Translation: the Caisse was back to being reliably boring. 

Birch joined Montreal-based technology holding company Telesystem in 2006, right around the time the Caisse’s appetite for “top-quality” commercial paper was growing steadily larger. Born in Quebec City, Birch was raised in Kenora, Ont., but was attracted to Quebec for age-old reasons: joie de vivre and a girlfriend. He moved to Montreal in 1991 as soon as he had learned enough French. 

As a French-speaking English businessman, Birch was both a novelty and a hot commodity; between 1991 and 2005, he was hired to helm four VC- and angel-backed tech companies. He secured exits for three of them, in each case netting what Birch calls a “five-x return”; a fourth, DataChest, was dissolved in 2004. Then he met Charles Sirois. 

Rough hewn, successful and a relentless economic nationalist, the Telesystem founder and CEO is a potty-mouthed paragon of Quebec, Inc. The firm peddled pagers in the 1980s and launched the low-cost mobile network Fido in the ‘90s. Telesystem was an entrepreneur school of sorts; among others, Inovia Capital’s Chris Arsenault and Alan MacIntosh of Real Ventures both did stints at the company; Pascal Tremblay was a partner at Argo Global Capital, a VC firm co-founded by Telesystem, before moving to Novacap. 

In the 2000s, Telesystem sold off its telecom holdings (Fido went for $1.4 billion in 2004) to concentrate on VC funds. One of those funds, an early-stage outfit called Propulsion Ventures, had $75 million under management. Sirois brought in Birch because of his Rolodex and ability to speak the language of the Queen.

“We were a bit Pepsi, if you’ll excuse the term,” Sirois says today, invoking a derogatory epithet describing French Quebecers. “Tom had good contacts and a good reputation, and we needed someone who could address the market outside of Quebec, and I said, ‘Can we at least have an Anglophone somewhere?’”

As Sirois puts it, early-stage venture capital investing is “a hard, stupid job”—one in which the investor must sift through acres of entrepreneurial blarney for nuggets of opportunity, all the while bearing opening and development risks. And Birch went at it as an entrepreneur would: with zeal.

“Tom went out in the world—and Tom does PR. That was his advantage. My other guys didn’t go out, and it bothered me. He knew that the people who asked for money weren’t the ones you wanted to invest with. He knew the entrepreneurs; he went to cocktails. That’s how you build a deal flow,” Sirois says.

Unlike his software-obsessed Propulsion colleagues, Birch was an early adopter of internet-based services, Sirois says. His deals include investments in eBillme, an online payment platform, sold to Western Union in 2011; Adcentricity, a location-based marketing platform acquired by Bee Media in 2012; and FileTrek, an Ottawa-based file tracking firm which rebranded as Interset in 2014 and sold to U.K-based Micro Focus early last year. Though Interset’s sale price wasn’t disclosed, Birch says it was $120 million.

One cautionary tale of Birch’s tenure was Woozworld. In 2011, Telesystem and Inovia Capital placed a $6-million bet on the virtual gaming outfit aimed at tweens. Birch, who was a key part of the deal, had designs to sell to the Tornante Company, owned by former Disney CEO Michael Eisner, and make a mint. Instead, the deal died with one question.

“When we pitched it to Eisner’s people, they asked a very simple question: ‘Who will purchase this, the kid or the mother?’ We didn’t have an answer,” Birch says. “That was a loss.”

By 2014, Birch was looking for something else. As it happened, so was the Caisse—which, by mid-decade, was becoming more tech-friendly thanks in large part to an accountant, businessman and politician named Christian Dubé.

Birch might be the only Caisse executive who is perpetually, conspicuously tie-less—and likely the only one with a Ford F150 in the parking lot Roger Lemoyne for The Logic

After six years of Sabia, the Caisse was decidedly less Camry-grey. Sabia’s tenure began in the crucible of both the financial crisis and of the province’s ever-roiling identity debate. Many Quebec nationalists were weary that the Ontario-born, English-speaking Sabia would sic his “Canadian national culture” on an unwitting Quebec, as former premier Bernard Landry once suggested.

Nationalist ire toward Sabia has mostly snuffed itself out, thanks in no small part to the near-tripling of the Caisse’s assets during his reign. He also turned the Caisse’s investment strategy outward; when Sabia took over in 2009, nearly two-thirds of its assets were invested in Canada. He leaves with the situation reversed, with 64 per cent of those assets invested outside Canada as of December 2018.

Sabia looked for new revenue streams, as well. Perhaps the best example was a $6.3-billion, 67-kilometre ribbon of light rail system it is currently grafting onto the island of Montreal. Announced in 2015, the Réseau express métropolitain (REM) was pitched as a win-win for everyone involved. Montrealers would get a new 26-station rail line to rival its storied Metro, while the Caisse could tap revenues from increased land values around these stations, as well as from selling the REM model around the world.

Sabia had also hired Dubé, then a National Assembly member with the opposition Coalition Avenir Québec, as an executive vice-president with a mandate to develop the Caisse’s tech-sector investments, which had more or less dried up in the early 2000s. “Tom and I came up in the same professional circles over the years,” Dubé says. One such circle was Montreal’s budding ultimate frisbee scene circa 1995; they first met while their wives played the frankly ridiculous game together.

Twenty years later, Birch was among Dubé’s first hires, and the pair piloted the Caisse’s new foray into technology. “Christian and Tom changed the direction of la Caisse,” says Inovia’s Arsenault. “They got the support of the CEO and basically started doing things that were not really in line with its reputation.”

However much the Caisse has evolved from its staid origins, Birch, who could pass for an Avatar-era James Cameron, remains a novelty. Along with his native anglais, he is one of the few, if not the only, Caisse executives who is perpetually, conspicuously tie-less—and likely the only one with a Ford F150 in the parking lot.

Espace CDPQ, opened in 2015, is in many ways a product of the Caisse’s new outlook. Teralys Capital co-founder Jacques Bernier calls the pedestrian walkway outside its windows “Snow Hill Road,” a play on Sand Hill Road, Silicon Valley’s mythically moneyed artery. 

In 2015, the Caisse co-led an $80-million investment in Lightspeed, a Montreal-based point-of-sale provider. Part of the company’s appeal for Birch was that it wasn’t Canadian e-commerce trailblazer Shopify—and therefore didn’t bear the development and marketing costs of birthing a new market. “We’re drafting behind Shopify. It makes economic sense for us to back number two,” Birch says.

The Caisse has since steadily raised its investment in Lightspeed; the fair market value of its investment in the company was between $300 million and $500 million as of December 2018, according to Caisse spokesperson Yann Langlais Plante. That investment has been key in keeping the company in Canadian hands. 

“It’s really under Tom that the Caisse started doing direct investments. Lightspeed is the prototype success story of this. If they hadn’t stepped up, [American early-stage Lightspeed investor] Accel would’ve forced a sale, and it would’ve become a development office for some U.S.-based company,” says AlayaCare CEO Adrian Schauer. 

If Tesla were Canadian, it would’ve been sold. We don’t have enough f---- you money.

In this sense, Snow Hill Road is also aspirational. Birch wants to make it so that Canadian tech entrepreneurs don’t need to search out Sand Hill’s denizens for capital—they will instead be able to germinate from seed to Series C within the walls of Espace CDPQ.

In that top 50 list on Birch’s desktop is a raft of such companies, who together provide a glimpse of the AI-powered future, in which everything from medical imaging to forklifts is stuffed with machine learning for what Birch calls “the pending [internet of things]/5G revolution.”

“We’re a pension fund so we need to invest in technology companies that have proven their business models,” Birch says. “So our VC funds invest in the seed. We watch them migrate to Series A then to Series B, and when they get to Series C, they’re hitting $5 million in recurring revenue. We know the fund, the company and we probably know the CEO and the management team. And we’ve known them for eight to 12 quarters, so if they need a $5-million round, I can lead it with a $30-million cheque, which means that our CEOs don’t have to go down to California to raise money, they can stay home now and focus on building their business.”

Sirois puts it this way: “If Tesla were Canadian, it would’ve been sold. Elon Musk has fuck-off money. We don’t have enough fuck-you money.”

Keeping startups from leaping southward requires more than capital, however. “Historically, we have sold our companies to the Americans, in Quebec especially, because we have this bizarre mentality where we have to have a U.S. fund price our companies. It’s like we don’t really own our own tech independence,” says Frederic Lalonde, co-founder and CEO of Montreal-based startup Hopper, which uses AI to track flight prices. 

Schauer is himself an example of how Birch’s plan may be working. In 2012, the Montreal entrepreneur sold Vortex Connect, his mobile workforce management startup, to Atlanta-based RedPrairie. “We took an eight-figure exit rather than trying to build a nine-figure-value business,” Schauer says. “[Eight] years ago, that’s what success looked like.”

No longer. AlayaCare, which Schauer launched in 2014, is a cloud-based home health software company. It has recurring revenues harvested from a growing demographic—in large part, those aging and techno-savvy baby boomers who prefer home to hospital for their care. In the summer of 2019, the Caisse invested about $20 million in the company. (Inovia has also invested nearly $50 million.)

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The benefits of having the Caisse as a partner, Schauer says, “will come down the road when they don’t force us to do something unnatural for the business given a term horizon of a fund.” AlayaCare itself has acquired two rival companies: Victoria, B.C.-based Procura in January and New York-based Arrow Solutions in February.

Though the Caisse’s support of companies like AlayaCare are based on sound economics—namely, growth and $19 million in annual revenue—Birch admits that spite, in part, drives his desire to keep companies here. “I got a chip on my shoulder. I hate being the poor cousin to the Californians. I want to build massive companies in Quebec and Canada, then make even bigger companies out of them.”