Venture Capital

BDC’s Jérôme Nycz on where Canada’s largest VC will invest in 2019

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The man in charge of Canada’s largest venture capital fund has big plans for 2019. Jérôme Nycz, executive vice-president of the Business Development Bank of Canada (BDC) Capital, is riding high off a decade of investing heavily in Canadian IT companies.

Now, he’s looking to use some of BDC Capital’s $3 billion in assets under management to be an early investor outside of traditional tech sectors.

The Logic spoke with Nycz about where BDC Capital is looking to invest, the inner workings of the firm and what’s holding Canada back from having more tech IPOs.

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Talking Point

Jérôme Nycz, executive vice-president of BDC Capital, spoke to The Logic about which industries he’s looking to invest in this year, what’s holding Canada back from having more tech IPOs, and what needs to change for Canada to grow more billion-dollar tech companies.

How will BDC approach investing in 2019?

The first change this year is that two of my internal funds are open for [investment from] external funds—the IT fund, which is called Framework Capital, and Amplitude [for healthcare].

These funds perform really well, and in some cases outperform some of the market. Our return on investment on life sciences is an example. We did two IPOs 18 months ago—Zymeworks and Clementia—and we did a reverse takeover for Profound Medical.

BDC has always been active in moving early where there’s a gap. Seventy per cent of our investments are in IT, and depending on how you count, that can go up to 76 per cent. It’s very IT focused. The question was: do we want to double down in IT, or, via our investment in Framework and 68 [external] funds—of which 75 per cent are focused on IT—is the best usage of our capital to triple down in that sector?

We said, “Perhaps not.” The market needs an early mover in certain areas. The same way we moved in fintech and AI a couple of years ago—[we thought], ‘Is there something in advanced manufacturing?’

Advanced manufacturing is tech, but it’s not e-commerce. It’s data, security, it’s AI application to industry 4.0, it’s connectivity, it’s robotics, automation, it’s a system of IoT and connected devices. We said, “In Canada, no one is doing this.”

If Canada misses the third wave of the Industrial Revolution, then we’re not better off. So we decided to move in that sector and address the digitalization of certain established industries. This rationale applies to more traditional sectors like agfood, agtech or oceantech, where you’ve got resources, but can you bring technology to increase the efficiency or productivity of a sector that has lacked investment?

We concluded that maybe BDC can gather some of our resources and start investing in certain sectors. We’re going to do the same thing as we did in the past where we’ll move first as a direct investor, and then we’ll make sure that we’re not the only investors. We’ll start looking at funds that have a marginal interest in those sectors and we’ll give them the means to co-invest with us. We want to partner with like-minded investors that have the same vision to build successful companies, and try to keep a Canadian influence on those companies as they grow. It’s not really far off from the superclusters initiative.

Right now, I’m rebuilding a team internally; I’m in the market to recruit investors and partners; we’ve got reports under Karl Reckziegel, who oversees all direct investments. We’re looking at identifying funds that could be likely partners. So we’ll be investing upwards of $250 million in that sector.

Are you investing in a particular stage of company in your Women In Tech fund, and have you had any challenges?

The Women In Tech Fund is meant to be sector- and stage-agnostic. The industry already has a gender bias, so if you have a sector bias, stage bias, then you lose the pool of investment opportunity. The whole purpose of the fund is to cast a pretty wide net so we can see who is active, which companies are performing well and which founders and sectors are doing well.

This is a new initiative and I’ve got my leader [in Michelle Scarborough]. It’s not a one-person show. The size of that fund would command a team of five. So she’s building her team. The challenge has been building the team and the pipeline. The fund has attracted a lot of attention, and the pipeline is at 150 people at any given time.

Your BDC IT Venture Fund now operates as an independent fund in Framework Ventures and recently closed $100 million—will you be spinning out more funds in the next year?

I don’t like the term “spinning out” because it has the connotation that we’re getting out of a sector. It’s really co-creation, because it’s a project that comes from the team, highly-supported by BDC and anchor investors. Co-creation was a strategic option we embedded in the strategy in 2010.

We’ve done two IT [Venture] Funds. [Framework Ventures] was the third one, and we’re at the point where we are going to re-up the life sciences fund, and we thought, ‘Maybe it’s a good solution that we can bring to the market.’ Now that we’ve done it, I’ll keep it as a strategic option. We’ll wait to see if the experience is fully satisfactory to us, but early indicators tend to be very positive and there’s a real interest from a diverse pool of investors to invest in those two platforms.

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What has been the challenge for Canadian tech companies to IPO in the same way as their American counterparts?

What we’re not seeing in Canada—and what I want to see more of—is in the States, you have crossover funds, which [are for companies] that are well up there, but are maybe two years from an IPO. The crossover fund will finance that growth component and put $100 million on the table to continue to support growth in preparation for the IPO.

In the case of [biotech company] Zymeworks, it was mezzanine financing, so it was debt to be converted into equity. That was to give them enough money to continue to sustain growth. So I’m hoping that [the] Caisse de dépôt et placement du Québec (CDPQ), which was involved with Lightspeed in Montreal, will be able to act as a crossover fund [along with] other funds like the Ontario Municipal Employees Retirement System (OMERS) and the Canada Pension Plan Investment Board (CPPIB), who can step in with a $150-million fund and invest in companies to bring them to the level that would enable a successful IPO.

One of the challenges is you do an IPO because you don’t have an alternative, you don’t have a crossover fund, you go to the public market and then you become an orphan. There’s no analyst coverage, and then you miss milestones and you fall out of love with the investment community, and it’s a difficult path to get back [from]. That’s why some of the companies, after a number of years, are contemplating coming back private to be able to have access to different sources of capital.

What does Canada need to build billion-dollar companies?

The market has tremendously matured over the last decade, and I still think we’re at an inflection point.

The size of funds is still too small. The average fund size in Canada is $111 million, which is, in reality, too small to build real winners. If you think that a company will need $100 million to $150 million, and you’re a $100-million fund, at the onset you can take 20 per cent.

But as rounds go on, you’re diluted to 10 percent. You hit a guardrail of 15 or 20 per cent. So challenge number one: fund sizes remain too small, with the recent exception of Georgian [Partners]. I’ll put an exception on Novacap, which is a technology fund but also private equity. It operates on both sides, a bit like Georgian.

You also have iNovia, with the establishment of a large fund to do scale-up investment, and a  larger early-stage fund, so the platform now is probably around $800 million. This is welcome.

VCAP [Venture Capital Action Plan] was replaced by the Venture Capital Catalyst Initiative (VCCI), and within VCCI I have co-investment rights, and 25 per cent of the money raised can be invested as a co-investor. It was 20 per cent with VCAP, and with VCCI, we brought it up to 25 per cent so these funds could write bigger cheques in support.

That was one of the issues of going back to the size of funds in Canada. Small funds can’t really execute or participate in a meaningful way in Series C and D. This is where you have great companies where you go from $100 million to a billion dollars.

We’re seeing the impact of VCCI; the impact of larger funds is starting to bear fruit. In the last five years, we’ve had about deals above $200 million, you only have 11 in Canada. So you have to ask yourself, “Is $200 million, first of all, a really big company?” And is that all we can do in Canada? It’s good, but not good enough. You’re not going to develop a global champion with a company making $225 million in revenue.

This interview has been edited and condensed for clarity.