The Business Development Bank of Canada (BDC) has launched a new $50-million CAD Seed Venture Fund, committing $10 million annually over the next five years to pre-seed and seed-stage software startups across Canada through BDC Capital.
The Crown corporation’s pan-Canadian, self-sourced fund will have a particular focus on entrepreneurs in underserved regions like Atlantic Canada and the Prairies. Via its Seed Venture Fund, BDC Capital aims to back a total of 40 companies and lead as the first institutional investor in the majority of these rounds. The fund is now actively exploring new investments.
The Seed Venture Fund marks BDC’s first foray back into general seed-stage investing since its Strategic Initiatives Program (SIP) ceased making investments in new companies around 2017. According to BDC Capital leadership, the organization’s return comes in response to current market conditions and calls from accelerators, incubators, and other tech hubs across the country to provide more support to startups at the earliest stages of development.
“We want to become and remain an anchor player at the seed stage in good economic times and bad economic times.”
– Dinar Ahmed, partner BDC Capital’s Seed Venture Fund
“The call is for us to re-engage and so the launch of this fund is a response to what we’ve been told in the market,” BDC Capital executive vice president Jérôme Nycz told BetaKit in an exclusive interview.
Citing the lack of early-stage Canadian funding round growth that Canada has seen over the past six years and today’s challenging venture capital (VC) market—where it has become more difficult for startups to fundraise—Nycz said that BDC identified a need to wade back into the seed financing space.
With the move, the organization aims to to help ensure that Canada has a strong “continuum of funding” across the startup lifecycle. Per Nycz, BDC views its new Seed Venture Fund as the start of a longer-term commitment to seed-stage startups.
“Intentionally dedicating more time and resources to seed-stage companies in underserved regions and ensuring that we sufficiently nurture startups all across Canada are important levers to help cultivate a pipeline of scaling businesses and global champions over time,” BDC president and CEO Isabelle Hudon said in a statement.
The Seed Venture Fund will be led by managing partner Ron Warburton, with support from partner Dinar Ahmed and principal Saif Hashmi. The trio has previously worked at BDC Capital’s SIP initiative and Information Technology Venture Fund, which was spun out into Framework Venture Partners.
The software-focused Seed Venture Fund will be sector-agnostic, with an eye towards enterprise software-as-a-service, FinTech, healthtech, artificial intelligence (AI), and proptech startups. Approximately 60 to 70 percent of its capital will go towards new investments, with the remainder allocated for follow-on support of those portfolio startups, including at the Series A level. BDC Capital’s cheque sizes will range from $100,000 to $1 million, with the flexibility to invest up to $2 million per company in total “on an exceptional basis.”
The Seed Venture Fund intends to price rounds where possible, preferably at the seed stage. At the pre-seed level, the fund plans to make some convertible note and SAFE investments. For BDC-led investments at the seed level, the fund will take board seats. “The whole goal is to get these companies hands-on experience and then get them venture ready for a future Series A,” Ahmed told BetaKit.
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BDC has a history of investing in seed-stage startups, including through a previous Seed Venture Fund in the early 2000s and SIP, which it launched back in 2012. SIP was a $55-million convertible note program that worked closely with accelerators, incubators, and other tech hubs to source deals and support early-stage entrepreneurs. In total, SIP seeded over 190 Canadian tech startups that went on to collectively secure over $1 billion in funding. Some notable SIP-backed companies include Paper, Kepler Communications, Procurify, and Xanadu.
Through SIP, BDC Capital helped with cohort selection, provided mentorship, and sat on investment committees. “We had tremendous success because we showed up early,” Nycz argued. Through that program, Nycz said BDC Capital learned that convertible note investments were useful, but also that there was a need for early-stage equity funding and more help to set companies up for success at the Series A stage.
“This is taking the best of what we learned from [SIP],” said Nycz.
With its new Seed Venture Fund, Ahmed said that BDC Capital hopes to play a leadership role in Canada’s seed-stage VC market and have an impact beyond just capital by providing more on-the-ground training, support, and guidance to early-stage entrepreneurs.
Ahmed and Hashmi have been managing BDC Capital’s remaining SIP portfolio, which now consists of 50 companies. While neither has run a fund themselves before, Nycz said that BDC Capital has been grooming them to become investors for some time.
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In its stage-specific focus, Nycz noted that BDC Capital’s Seed Venture Fund differs a bit from some of its other investment vehicles, many of which are full cycle with a built-in allocation to make early-stage investments. The executive vice president sees room for the Seed Venture Fund to serve as scouts and a potential pipeline for some other internal BDC Capital funds.
Compared to BDC Capital’s massive Thrive Platform, which also has the capacity to make early-stage investments in software startups but has a specific focus on women entrepreneurs, the Seed Venture Fund is “gender-neutral.” Asked how BDC Capital plans to approach deals that fall into the wheelhouse of both funds, Nycz noted that they may collaborate and co-invest, hand things over, or see the Seed Venture Fund put in the first capital and Thrive come in later on.
Speaking with BetaKit, fellow early-stage VC Alex McIsaac—founder and general partner of Northside Ventures—hailed BDC Capital’s new Seed Venture Fund as a positive development for the Canadian tech ecosystem. He noted that it represents “one piece of the puzzle” alongside other recently launched private VC funds like Northside, Staircase Ventures, CMD Capital, Gambit Partners, and Storytime Capital.
“I launched Northside Ventures because there is a gap in the market,” McIsaac told BetaKit. “The gap that I’m trying to fill is [backing exceptional founders as] the first cheque in … my fund is not leading rounds. I think there is a gaping hole in the early-stage [Canadian VC] market that one fund alone is not going to fill. I think we need multiple seed funds that provide different types of value, as follow-on cheques, and we need multiple seed funds that provide lead cheques.”
Speaking on background with BetaKit, other VCs from across Canada’s early-stage tech ecosystem echoed McIsaac’s sentiments about BDC Capital’s new Seed Venture Fund and the market need it helps address.
“It’s great that they’ve recognized that there’s a gap,” one source told BetaKit, noting that data indicates seed investment in Canada has remained flat or fallen in recent years, alongside company creation. “There’s a very large concern now that the market’s in freefall that it’s going to get even worse.”
But according to sources BetaKit spoke with, this Seed Venture Fund is just one part of the solution for addressing Canada’s early-stage funding gap. “This is not the only solution that we need,” one source claimed to BetaKit, arguing that BDC Capital is not funding enough Canadian seed funds, which are typically run by emerging managers.
While BDC Capital is Canada’s most active limited partner (LP), its support for emerging managers has been a source of disappointment for some Canadian VCs given the lack of other institutional LPs in Canada that back emerging managers.
During the downturn, it has become especially tough for emerging managers to raise capital. In Canada, as The Globe and Mail and BetaKit have reported, some are struggling to close funds and reach their targets. Meanwhile, PitchBook data puts emerging VCs in the US on track for their worst fundraising performance in seven years. For its part, Inovia Capital recently stepped up to help address this issue, formalizing and expanding its efforts to support emerging managers with its new $34-million Discovery Fund.
Sources expressed hope to BetaKit that BDC Capital’s new Seed Venture Fund marks the start of a broader, longer-term commitment.
According to Nycz, over the years, BDC Capital has invested in 13 first-time VC funds. But some still believe that Canada’s largest tech investor could be doing more to back emerging managers, and expressed frustration to BetaKit at the lack of clarity regarding its approach to doing so.
“The most frustrating part about BDC is that we don’t understand what they support and what they don’t,” one source told BetaKit.
Asked about BDC Capital’s approach to supporting emerging managers, Nycz argued that the Crown corporation has “a track record of being a first-mover in uncertain areas,” citing the BDC Capital fund-of-funds team’s support for VC firms like BKR Capital, Garage Capital, Golden Ventures, and StandUp Ventures, and noting that BDC Capital also administers the Government of Canada’s Venture Capital Catalyst Initiative.
“We’re very well aware of the challenges in raising first-time funds,” said Nycz. “When you’re the first institutional investor coming into a first-time fund, it’s a lot of work.”
Nycz added that BDC Capital takes pride in doing that work, but noted that the organization can’t back all of the first-time VC funds in Canada. “We can’t do them all,” he added. “We tend to do some that are very much aligned with our strategy to be more inclusive.”
Sources expressed hope to BetaKit that BDC’s Seed Venture Fund marks the start of a broader, longer-term commitment towards supporting Canada’s seed-stage tech ecosystem, and not just a one-and-done or temporary stop-gap initiative. According to Nycz, BDC Capital views its Seed Venture Fund as more than just a standalone solution.
“We want to become and remain an anchor player at the seed stage in good economic times and bad economic times,” said Ahmed.
Feature image courtesy BDC Capital.