After a year operating in stealth, a new VC firm is ready to show its face to the Canadian tech community. Diagram today announced the close of a $25 million fund, led by Power-backed Portag3 and over 50 different angel investors.
The new firm is headed up by CEO Francois Lafortune, who has a long history in financial services (Diagram’s main focus, along with insurance and healthcare), having spent eight years as a consultant at McKinsey & Company’s Canadian technology practice, where he helped banks solve their technology problems.
Most startups “lack the capital, they lack the infrastructure, and they lack the strategic partners to scale quickly. We’ve kind of created something that brings all of it simultaneously.”
– Paul Desmarais III
“It gave me a perspective of what’s possible to do from the inside of an organization like this, versus what are the more disruptive things that, even with a lot of resources and capital behind it, are really difficult to execute from within,” Lafortune said.
Following McKinsey, Lafortune found himself an entrepreneur in residence at Power Corp, where long conversations with Paul Desmarais III (Executive Chairman of Portag3, VP of Power Corp and Power Financial, and now Diagram Chairman) led the two to concoct a new operating structure for firms looking to build FinTech companies. One that could leverage the reach and influence on incumbents while still fostering innovation.
“Paul is a driving force of change at Power but in FinTech in general,” Lafortune said. “We started discussing our respective views and how we could create a next generation company that would stay, hire people in Canada, be technology first, and really have a global reach. This is our high-level vision.”
That high-level vision for Diagram can be explained another way: “building from the ground up companies in a space that we know very well,” as Lafortune put it. Executing on that vision requires a slightly different approach from most VC firms in Canada.
“If you think of most startups, they lack the capital, they lack the infrastructure, and they lack the strategic partners to scale quickly,” Desmarais told BetaKit. “In the concept of Diagram, we’ve kind of created something that brings all of it simultaneously, while fiercely protecting the independence of the entrepreneur.”
Unlike other similarly-ranged funds, which would seek to make 20-25 investments, Diagram is looking to make five. For each startup, Diagram provides additional resources, such as space, recruitment, finance and accounting, PR and marketing, either free or at cost. By working alongside the founders in a space they are eminently familiar with, Lafortune hopes to create a better risk-return for Diagram than the traditional model, where tons of bets are made in the hopes that one or two show returns.
“We tried to remove as much noise as possible so the founders could focus on building,” Lafortune said. “To me that was key, that is how you shape the risk-return: you allow the founders to focus and not spend 50 percent of their time in their first year fundraising, going from small cheque to small cheque.”
Diagram has around $5 million earmarked for each startup in its portfolio, but doesn’t invest the full amount right away. Instead, Diagram deploys about $1.5 million initially (a relatively large seed round in Canada) with the additional revenue deployed as soon as the startups hit mutually defined milestones, keeping them liquid as they grow.
The focus on initial funding and liquidity also allows a lot of room for strategic partners (remember, Portag3 is backed by Power Financial, IGM Financial and Great-West Life) and Diagram’s long list of angels – which include familiar Canadian names like Ryan Holmes (Hootsuite), Tony Lacavera (Globalive), and Razor Suleman (Alignvest), along with US players like Quora CEO Adam D’Angelo – to jump in and provide additional cash or value. Lafortune says these partners are “a key in helping us achieve our mission and help give us a much deeper and broader network of support for our startups.”
“We’ve basically taken a page from the Wealthsimple book,” Desmarais told BetaKit. “We went out and tried to get the most impressive list of angels probably ever assembled by a startup in Canada.”
Diagram already had two companies in its portfolio prior to closing its round: Montreal healthcare startup Dialogue, and Toronto-based insurance disruptor Collage. Neither company had a single line of code as early as Q2 of last year, according to Desmarais. Lafortune said it was important for Diagram to test its model of building startups from the ground up before making a lot of noise.
“We thought it was really important for us to show real traction, the way a startup shows traction, before raising money from investors,” he said. “We wanted to show that what we set out to do works before raising capital.
“This is not a Manulife, or RBC, or Power Corp innovation lab. This is not taking ideas from the business and iterate fast on it. It’s quite the opposite. It’s entrepreneurs wanting to disrupt large companies, and large companies recognizing that this will never be done in an innovation lab internally or with the same type of people and talent that want to work in a large company.”