Through the new $120 million CAD fund, Diagram is looking to place additional bets on its winners by providing growth funding to its most promising portfolio firms, after seeing some success with its venture builder model.
“It was a natural evolution for us,” said Francois Lafortune, Diagram’s co-founder and CEO.
“It was a natural evolution for us,” Francois Lafortune, Diagram’s co-founder and CEO, told BetaKit, Lafortune noted that, up to this point, Diagram has focused primarily on developing and proving its model.
Diagram’s new fund is anchored by Power Corp’s Sagard Holdings and supported by a group of Canadian, American, and European entrepreneurs and corporate leaders. Its backers include John McCall MacBain, Philip Fayer of Nuvei, Patricia Saputo, Andrew Chisholm, and Razor Suleman of Elevate, as well as “most founders of Diagram portfolio companies.” In its first close, Diagram, which focuses on individual rather than institutional investors, had more than 40 LPs for the fund. Lafortune declined to disclose the total number of investors following the final close.
Founded in 2016, Diagram is a quasi-accelerator and venture investor that conceives and launches tech companies in the financial services, insurance, and health industries, connecting “the right founders to the right ideas.” To date, it has helped launch 11 startups, including Novisto, Nesto, and Wingocard.
To date, through its first two seed stage funds, Diagram claims to have created over $1 billion in shareholder value and 600 full-time jobs across Montréal, Toronto, San Francisco and New York for its portfolio companies. Eight of Diagram’s portfolio firms are headquartered in Canada, and seven are based in Québec.
Lafortune said that after proving Diagram’s model is “a valuable and interesting way to do venture,” the firm is ready to cash in on its best creations by supporting their growth.
“We got to a point where we have a lot of confidence behind that [model], we have lots of success in our portfolio companies,” said Lafortune, citing recent fundraising events and exits involving Diagram-backed firms. “The model is working.”
One of Diagram’s most successful portfolio companies to date is Montréal-based healthtech company Dialogue, which went public on the Toronto Stock Exchange (TSX) in March, raising $100 million through its initial public offering (IPO). The move came less than a year after Dialogue raised $43 million, and less than two years after the company secured a $40 million Series B round. Lafortune said Diagram was unable to invest in Dialogue during any of these fundraising events.
“Those would have been a fantastic return for us to participate, so I think it just reinforced the fact that we needed this [Opportunity] fund,” said Lafortune.
Typically, Diagram stopped investing in its companies at the Series A stage. Lafortune said this is because of the size of its first two funds. “We cannot be more concentrated,” said Lafortune. “We have a high ownership, we tend to be really active, but we can’t be deploying [capital] if we have a $30 million or $50 million fund and a company raises $50 million,” he said.
Lafortune described Diagram, prior to the launch of its Opportunity Fund, as having great companies that are raising, but being “stuck” without the capital necessary to re-invest in them to support their next phase of growth. As a result, Diagram decided to launch a dedicated fund to address this problem—the Opportunity Fund.
“We said, ‘hey, we need a dedicated fund that is only going to be reinvesting in our winners,’” said Lafortune.
The CEO added that Diagram’s Opportunity Fund “is purely growth capital for our companies that are succeeding and getting more traction, and, for [Diagram], it’s a way to support them.”
“We know this company is doing well—we’re already an investor,” said Lafortune. “Everyone fights to get in so it’s just such a compelling product to say we have the right to be reinvesting in the winner [because] you don’t take all the early-stage risk.”
Lafortune said Diagram started with a goal of raising $80 to $100 million for its Opportunity Fund, and eventually got to $120 million after identifying demand. The firm decided to cap the fund at $120 million, the maximum Lafortune said it could deploy over its investment period of five years.
Diagram’s Opportunity Fund plans to invest mainly at the Series B to Series C stage, with some investments at Series A stage. The firm’s first investment through the new fund is in Synctera, a San Francisco-based FinTech startup with Canadian roots.
The venture builder intends to focus its new fund on Canadian companies, and plans to invest only in firms it has invested in previously. Lafortune said he expects its Series B investments to be, on average, in the $5 million to $8 million range, at 20 percent of the round. He anticipates its Series C investments to fall in the $10 million to $15 million range.
Ultimately, Diagram aims to continue to act as a venture builder, while, at the same time, leveraging the Opportunity Fund to support its portfolio firms at later stages.
Lafortunate said Diagram is still deploying capital from its Fund II, which is purely venture builder-focused. It plans to continue launching three and five new companies per year. In 2020, Diagram launched four new startups. Diagram expects to be finished with Fund II sometime next year.
“When Francois and I launched Diagram in 2016, our goal was to have an impact on the Canadian economy and create opportunities for entrepreneurs to build companies that could become global champions,” said Paul Desmarais III, co-founder and chairman of Diagram and chairman and CEO of Sagard. “It is highly rewarding to see how far we’ve come in five years.”
“Five [or] seven years ago, people were like, ‘I don’t like this, this is not real venture,” said Lafortune, regarding Diagram’s venture builder approach to investing. “Now, some of the best brand name funds in the world do this.”
Lafortune said Desmarais played an essential role in the development of Diagram’s model. “He’s been a champion of the ecosystem,” said Lafortune. “The person that took a bold big risk when nobody was taking these risks … is Paul.”
With support from Meagan Simpson.
Feature image from Diagram Ventures via Facebook