BDC’s Jérôme Nycz talks about a new approach to venture capital

The Business Development Bank of Canada (BDC) embarked three years ago on a new venture capital strategy that has placed it at the centre of many key trends now taking place in the Canadian market — the introduction of VCAP, improving fund-raising conditions, growth in angel and accelerator communities, and the emergence of more high-growth startups.

Jérôme Nycz is BDC’s executive vice-president of subordinate financing and venture capital. Last week, Jérôme gave a speech to the Research Money Conference about the rapidly changing face of the Canadian VC landscape, and the role that the new BDC is playing in this regard.

An exclusive to peHUB Canada, Jérôme’s speech is presented here in full.

A new approach to VC : How BDC is building a new generation of entrepreneurs – remarks by Jérôme Nycz to the 13th Annual Research Money Conference, Ottawa, April 23, 2014

Today, I want to talk about how we at BDC are using venture capital (VC) to help build a new generation of entrepreneurs, and how we are turning great ideas into great companies. I also want to talk about how we are bringing innovation to the business of innovation itself.

What is exciting about technology today is that anyone can rent the means of production to start a business. This means entrepreneurship is becoming truly democratized. It also means established companies and traditional models are no longer safe.

Companies are all too aware of the disruptive power of technology. All the downsizing over the past 20 years has made people rethink the corporate world. They see value in creating their own companies and being in greater control of their destiny. We need to encourage this and help people see entrepreneurship as a desirable profession.

Most importantly, we need to encourage and support those individuals who want to create, build and grow their own companies.

There are many ways to build a new generation of entrepreneurs. One is through venture capital. We now have the empirical data to prove that VC makes a difference — a big difference.

According to a joint study by Industry Canada–CVCA published this winter, Canadian VC-backed companies have:

•  2.5 times sales growth compared to non VC-backed firms;
•  Greater employee growth;
•  More than 3 times the investment in R&D;
•  And higher long-term survival rates.

These are all great reasons why we do venture capital at BDC. That’s what venture capital does for our country and our economy.

About BDC

For those of you who don’t know much about BDC:

• You may know … we are a commercial, crown-owned bank;

• You may know … we are an $18 billion organization;

• You may know … we have 29,000 clients from coast to coast to coast.

But I hope you also know, we are the only bank dedicated exclusively to entrepreneurs.

I will describe later what that means for BDC Venture Capital. But first, let me tell you a story about one investee company we’re very proud — D-Wave Systems of Burnaby, British Columbia.

About D-Wave

D-Wave has been getting a lot of recognition lately for its quantum computer — a computer that can help solve problems that could not otherwise be solved. It is based on a chip the size of your fingernail, running at minus 273 degrees — not unlike Ottawa this winter — and that can now replace a football field full of servers. They call it the infinity machine.

It’s not every company that makes it to the cover of Time Magazine. And certainly not many Canadian companies — but D-Wave has.

D-Wave received early funding from the TPC Program. BDC first invested in it back in 2003. Since then, there have been 15 rounds of VC financing. And BDC was part of every round. Today, we have over $16 million committed to the company. During their last round of funding, they raised $30 million. As you can imagine, building a super-machine of the future doesn’t come cheap.

Let’s talk about their early success. D-Wave is fourth in patent power for computer systems, after IBM, HP and Fujitsu. They have recruited top talent across the world. Their CEO is from Boston. He used to be CTO of Goldman Sachs, with an annual IT budget of $1 billion. The new president of D-Wave USA is the former president, CTO and COO of Cray, a global leader in supercomputing.

And over 15 other employees immigrated to Canada just to work for D-Wave. These people could work anywhere in the world, but came to Canada, and to D-Wave, because they believe it will give them a chance to make history.

Like them, we believe D-Wave is a real game-changer. And we want the company to grow, to reach scale, and to have a positive impact on employment. And we want them to stay in Canada — so we can keep their genius.

That’s the story of D-Wave. A tremendous example — there are many others. We have also had the good fortune to be associated with companies like Ballard, CREO, Q1 Labs, Radian 6 and, most recently, Layer 7.

About VC in Canada

As you know, it has not been smooth sailing for VC in Canada. When the dot-com bubble burst, investors stopped making money. And institutional investors left the market. The bottom line — funding dried up. Those were dark days for venture capital and even darker days for would-be high tech entrepreneurs.

It became plainly obvious to us that we were in a structural, not just a cyclical, downturn. So we had to rethink the way we were doing things. In 2010, we did a review of the Canadian venture capital industry and BDC’s role in it. I’ll share a few of the guiding highlights:

• We have great brains in Canada.

• We have world-class research.

• We have entrepreneurs who are as smart as any you’ll find anywhere in the world.

• BUT, there were also significant gaps:

• A shortage of  serial entrepreneurs and skilled managers with global networks.

• Too many small investments, so entrepreneurs chased money instead of building companies.

• Canadian angel networks that were not as well structured as elsewhere.

• And we had, and some believe we continue to have, a lack of commercialization of innovation.

I could go on…

What we are doing

So at BDC we rolled up our sleeves and we began implementing a new VC strategy in 2011. The strategy was based on three pillars.

FIRST — we rationalized our focus into three funds dedicated to investing in companies in the fields of health, information technology and energy/cleantech. And we structured these internal funds as private, independent, well-capitalized funds. We also imposed best-in-class features.

The objective was to demonstrate that if you have the right ingredients you can be successful in this asset class.

One company we have invested in is Monteris Medical from Winnipeg. They specialize in treating brain tumours, instead of cutting open a person’s skull. They are commercializing an MRI-guided laser technology used to melt tumours from the inside. It is much less invasive than traditional treatments. They are currently in clinical trials in six U.S. hospitals.

SECOND — we began to invest more money into fewer external VC funds to build scale.

And THIRD — we developed a strategy to increase the support of early-stage funding, and to leverage private sector relationships.

Strategic investments & partnerships

We wanted to try something different because we saw a gap in seed funding — helping startups. So we created a new team, working with private sector. They are called the Strategic Investments and Partnerships team. This is the big game-changer for us.

The team’s mandate is to help stimulate the Canadian venture capital and innovation ecosystems in new and different ways. They started with a blank piece of paper three years ago. Their mission: To get out there and find the innovative new ideas, new teams and new models.

And here’s what the BDC team has come up with:

ONE — we are investing in non-traditional, atypical VC funds that are often new models with first-time teams who may not have a track record. These small funds often fall below the radar for a typical fund-of-funds.

TWO — as an institutional partner, we are working with angel investors to strengthen their model and processes.

And THREE — the team has developed an accelerator strategy and convertible note program that is gaining traction in the market.

Accelerator Strategy

So what is an accelerator? Think of it as a boot camp. The goal is to turn someone with a bright idea and who has founded a company into a real entrepreneur. I’ll use GrowLab in Vancouver as an example.

GrowLab gets 300 to 400 applicants per cohort, often students, and they pick ten of them. The process is extremely competitive. GrowLab is looking for talent, the best of the best. For a very small piece of equity, selected companies get three to four months of intense mentorship, access to exclusive networking events, a network of alumni, a possible trip to Silicon Valley — where they have access to incredible resources — and up to $30,000 in funding.

They go through highs and lows. It’s messy, but full of energy and creativity. It’s not unusual to find 20 people huddled in a room at two in the morning, eating pizza and working on their app. They develop it the best that they can, leveraging the lessons they have learned. And then, they graduate by presenting their pitch. Graduates are eligible for $150,000 in seed financing as part of BDC VC’s convertible note program — a first in Canada.

In a nutshell, we purchase equity in startups. The equity is structured in the form of debt — with the key difference from debt being that there is no repayment of principal and interest. The notes are generally converted into shares later on as part of a financing round.

What we do with our accelerator strategy and convertible notes is give them the opportunity to get a lot of “nos” in a fast-paced and secure environment where they can test ideas, fail fast and lose the least amount of money possible. That way they can learn from mistakes, bounce back and start again.

We back them, we mentor them, we encourage them, and we connect them with angel investors, other investors and potential clients. So they can get the “yes” they need to take their company to the next step. After all, entrepreneurship is an iterative process.

BDC has partnered with six accelerator groups like GrowLab, all in IT, all across the country. Altogether, they have had over 1,500 applicants to their programs and graduated 100 of Canada’s best and brightest, of which 74 are supported by BDC’s convertible note financing. This is $11 million of invested capital. Even better — this $11 million has been leveraged over two times with private sector capital.

We’re still in the early days with our accelerator strategy, but we’re encouraged with the momentum and we are looking to expand it to life sciences and clean technology. The best news? Accelerators are graduating some 50% of their cohorts — a rate unheard of in the Canadian venture capital space.

So we’re pretty excited. And the federal government is excited too. In fact, they have asked us to invest another $100 million in this area.

Through these accelerators, we are seeing a new crop of entrepreneurs:

• Young people who are not afraid to pivot their company when things don’t go according to plan.

• A generation that is socially connected.

• People who are open to advice and mentorship.

• And people who want to make a difference.

Some of them will go on to be very successful. It’s great to see this courageous next generation. It makes me hopeful for Canada’s future.

About the Venture Capital Action Plan

Another significant innovation in the field of VC is the federal government’s Venture Capital Action Plan — or VCAP. BDC has been asked to support its deployment.

The government has committed to invest $400 million: $50 million in new, high-performing funds and $350 million to establish or recapitalize up to four, large-scale private sector-led funds-of-funds.

The government will provide one-third of the funding, and institutional and private investors will provide two-thirds, to experienced fund-of-funds managers.

The goal is to stimulate the market and get more money flowing to commercialize new ideas being developed by Canadian companies. It’s an incentivized program for the private sector. Public money goes in first and comes out last, so the investment timeframe is compressed for the private sector investor. And returns as a function of time increase.

We’re already seeing results:

Two of the high-performing funds — part of the $50 million — have completed first closings:  Lumira Capital and Real Ventures.

And one of the funds of funds is up and running — the first national fund of funds — Northleaf Venture Catalyst Fund, which had its initial closing in January with $217 million in commitments. Of this total, $145 million came from institutional and corporate investors, and the balance from the federal and Ontario governments. The fund has an overall target size of $300 million. They have already started investing.

We hope to see up to three more of these funds-of-funds.

About our impact

So we believe our work, in collaboration with our partners, is starting to have an impact. Here’s why we feel this way:

• Canada saw a 31% increase in VC investments in 2013 over the previous year.

• That is the highest level since 2007.

• And there has been increased access to capital.

• Plus there have been some good exits as well.

We can’t take the credit for all of this, but we’ve helped.

Conclusion

In closing, a stagnant venture capital sector is bad for Canada. It’s bad for innovation. And it’s bad for entrepreneurs.

I’ve always been a believer in VC. And I’m excited about this new way of doing things. The industry still is not perfect, but we are seeing real light at the end of the tunnel. And I truly believe that, collectively, we are building a new generation of entrepreneurs who will carry Canada well into the second half of this century.

In fact, I have never been so confident about Canada’s future as I am right now.

Thank you.

Photo of Jérôme Nycz courtesy of the Business Development Bank of Canada

Photos of entrepreneurs courtesy of Shutterstock