The Business Development Bank of Canada (BDC) has told VCs it’s open to lifting restrictions that have kept some of the venture capital (VC) funds it backs from investing in defence-related startups.
In an email sent to investors on Monday, BDC Capital executive vice-president Geneviève Bouthillier wrote that BDC was willing to “alleviate” restrictions in fund documents in order to permit VCs to invest in companies that make or sell military-related products in support of the defence and security of Canada or other allied nations.
The news was first reported by The Logic and has been confirmed by BetaKit, which obtained a copy of this letter. As part of this shift, Bouthillier indicated that BDC is asking managers of VC funds considering any defence-related investment opportunities to conduct “enhanced due diligence” on target companies and ensure that they comply with all applicable laws and regulations.
BDC is asking managers of VC funds considering any defence-related investment to conduct “enhanced due diligence.”
BDC also requests that participating VCs ensure their fund’s activities remain aligned with Canada’s national security objectives and human rights commitments, and work with it to develop a new reporting framework for any defence-related investments.
This shift comes as a US trade war has spurred the Government of Canada to hike its defence spending after decades of underinvestment compared to its peers. Canada is now on pace to spend two percent of its GDP on defence this year as it targets five percent by 2035.
Prime Minister Mark Carney’s first budget allocated nearly $82 billion CAD over five years towards rebuilding and rearming in the Canadian Armed Forces, including $6.6 billion to build Canada’s defence industrial base under the forthcoming Defence Industrial Strategy.
T3 $6.6 billion includes a $1-billion commitment to BDC to create a new program designed to provide loans, VC funding, and advisory services to small and medium-sized businesses looking to contribute to Canada’s defence and security.
BDC Capital is Canada’s largest and most active VC. It is also the most active limited partner (LP) or fund-of-funds investor in Canadian VC—the Crown corporation’s website indicates that it has committed over $1 billion to date as an LP to funds led by 59 different VC firms.
BDC president and CEO Isabelle Hudon told BetaKit in September that the Government of Canada-backed bank was gearing up to serve the country’s defence tech sector in “a less shy” and “more aggressive way.”
At the time, Hudon shared plans to launch a defence tech-focused successor to its Deep Tech Venture Fund—whose existing portfolio companies are already developing dual-use solutions with both civilian and defence applications—and said the Crown corporation had no need to rewrite its governing rules to make direct investments in defence-related startups.
Hudon also indicated that a few notable restrictions, such as supporting businesses that produce arms for sale to non-allied countries, remain. She noted that BDC will ultimately play by the rules dictated by Global Affairs Canada and the country’s Department of National Defence.
Feature image courtesy Madison McLauchlan for BetaKit.