New Kensington vehicle aims to bolster Canadian VC

For far too long, the Canadian venture ecosystem has been stuck, dealing with a decade-long hangover from the dot-com bubble.

To rejuvenate the venture sector, the Canadian government announced in 2013 it would invest C$400 million in several new funds over seven to 10 years through its Venture Capital Action Plan (VCAP) that will match and attract private-sector funding for Canadian startups.

A year ago, the first such fund, Northleaf Venture Catalyst Fund, raised C$217.5 million from institutional and corporate backers, including some of Canada’s biggest banks, as well as the federal and Ontario governments. In November, a second fund, Teralys Capital Innovation Fund, raised C$279 million from private sources, as well as the federal and Québec governments.

The latest fund to benefit, dubbed the Kensington Venture Fund, is being run by Toronto-based Kensington Capital Partners.

The Canadian government is pumping C$100 million into the fund, almost one-third of which will be directed towards the energy industry. Investors also include Richardson GMP, OpenText Corp, Royal Bank of Canada, BMO Financial Group, CIBC, TD Bank Group, Scotiabank, as well as individual investors,

Kensington Capital Partners is also investing C$24 million from its existing hybrid private equity vehicle to the new fund.

Canadian banks and financial institutions have also participated in the C$160 million first close of Kensington Venture Fund, and private investors should form two-thirds of the LP base by final close, targeted at about C$300 million for mid-2015.

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Rick Nathan, managing director, Kensington Capital Partners

Source: Photo courtesy of Kensington Capital Partners

Kensington Managing Director Rick Nathan said the fund will back about eight IT-focused firms, though he will also consider maiden funds, including a Toronto family office that is expanding its VC operations.

“For the first time they are raising money from third-party investors and we’re looking to establish them as an important independent player,” said Nathan, who’s former chair and president of the Canada’s Private Equity & Venture Capital Association, or CVCA.

Direct investments will account for 20 percent of the new Kensington fund, which will typically invest at Series B stage or later across the IT, energy and cleantech sectors, and with about $6 million per company.

He said the fund’s first deal should be concluded around the beginning of the year, along with a couple of LP commitments.

Partnering Kensington on several direct deals are likely to be Silicon Valley VCs, which have been increasingly active in a Canadian market that offers similar time-zones as the U.S. market, cheaper valuations than in the United States and an available talent pool stemming from ailing Canadian technology giants of Nortel and BlackBerry.

Nathan said that by giving Canadian technology companies the ability to grow and thrive at home, the fund will help stem the pull that is driving many of Canada’s leading entrepreneurs, engineers and others to the tech hub of Silicon Valley.

“There is this massive gravitational force in Silicon Valley that draws entrepreneurs to sell their companies there,” Nathan said. “There’s lots of reasons for it, but one of the big reasons for it is the access to capital. There has not been enough risk capital in the Canadian market for technology.”

The VCAP intends to remedy this by offering businesses an alternative to foreign mergers.

“Let’s give entrepreneurs a choice so when they want raise funding they have Canadian money as one of their options,” Nathan said.

The aim is to create more businesses, such as Vancouver-based Hootsuite, and Ottawa-based Shopify, both of which have attained billion-dollar valuations in the past year.

Kensington, meanwhile, has high hopes for portfolio company D-Wave, which is trying to build the world’s first quantum computer.

Summarizing the potential for venture investors, Nathan said: “We haven’t seen this kind of opportunity and this kind of playing field in Canada since the dot-com era.”

Alex Derber is a London-based contributor. He can be reached at alexderber@hotmail.com.

Reuters News contributed to this report.