Diagram Ventures remains bullish on FinTech companies as it launches its latest venture fund with a first close of $100 million CAD.
In an exclusive interview with BetaKit, Francois Lafortune, co-founder and CEO of Diagram, indicated that the Desmarais family-connected venture builder isn’t concerned about the current dip in the FinTech market and sees tons of problems in the financial sector that still need solving.
Diagram will invest in both companies it helps create as well as companies it does not.
While much remains the same for Montréal-based Diagram in the third iteration of its fund, one change is that the venture builder is moving beyond company creation. Through this latest fund, the firm will invest in both companies it helps create as well as companies it does not.
Lafortune said the idea is to not limit the fund’s ability to invest when it comes across existing companies it sees potential in.
“It makes a lot of sense, when we find the right team, just to invest in that team instead of building something,” he said.
Speaking of teams, Diagram is also expanding its own with the addition of two new, United States-based partners. Steve Schultz, previously of Amazon Web Services, and Ken Nguyen, of Insight Capital, joined the Diagram team earlier this year. With the addition of Schultz and Nguyen as partners, Montréal-based Diagram is also looking to expand its presence in the United States.
The $100 million CAD raised for the fund represents Diagram’s original target size, but the goal post shifted, as Lafortune said the firm has commitments that bring it closer to $120 million CAD. This is more than double the size of Diagram’s second fund, which closed at $55 million CAD.
While this latest fund represents Diagram’s third fund to support its venture-building efforts, it is the firm’s fourth overall. In 2021, Diagram raised a $120 million CAD Opportunity Fund to continue investing in the promising companies in its portfolio. That portfolio spans 13 companies Diagram had a hand in building, from mortgage startup Nesto to Toronto Stock Exchange-listed healthtech company Dialogue.
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In terms of limited partners (LPs) for this fund, Diagram only disclosed Power Corporation’s asset management firm Sagard Holdings as its anchor, which was also the lead investor for the Opportunity Fund. Lafortune explained that other LPs include a mix of family offices and high-net-worth individuals that it brings into its network as advisors and co-investors. He added that new for this fund is “a handful” of corporate investors with whom Diagram sees opportunities to collaborate to find new ideas for startups, and which also could be future customers for those companies.
Sagard being the anchor investor in this fund represents a switch-up in the Power Corporation organization that is anchoring Diagram’s main fund. In its first two funds, the venture capital arm of Sagard, Portage Ventures, was the anchor.
Sagard taking over as anchor from Portage was about simplifying what is a complicated net of connections in the Desmarais family’s Power Corporation org chart. Sagard, owned by Power Corporation, is a multi-strategy alternative asset management firm that includes venture capital, private equity, private credit, and more, while Portage is more focused on direct investments.
Whichever organization is the anchor, Diagram has long been a key part of Power Corporation’s FinTech investing strategy. That strategy spans investments, through various subsidiaries, in Wealthsimple, Koho, Clearco, Borrowell, and Portage as its global FinTech venture investor. Paul Desmarais III, part of the third generation to be in the family business, has played an active role in this strategy. He is the co-founder of both Diagram and Portage, where he serves as chairman of both organizations. He is also the chairman and CEO of Sagard, as well as the chairman of Wealthsimple and Dialogue, and has a seat on Nesto’s board.
This commitment to building a broad FinTech portfolio comes despite the recent downturn in valuations and funding in the space. In recent years, Portage has launched multiple new funds that encompass more than $1 billion, and a special purpose acquisition company (SPAC) on the Nasdaq.
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This bullish focus on FinTech comes as the state of the sector has been a mixed bag over the last year. In 2021, the interest and investment in FinTech companies was high as COVID-19 accelerated the digitization of the financial industry. The tides turned in 2022 with the broader tech downturn. Previously high valuations dropped and access to capital slowed in a variety of sectors, including FinTech.
For Power Corporation and its subsidiaries, that meant a significant dip in the value of its net assets amid the broader public market downturn. Last year, the value of Power Corporation’s FinTech portfolio dropped as it wrote down the valuation of Wealthsimple and other FinTech-focused investments in two Portage funds.
But Lafortune is not concerned with the current state of the market specifically because of the area that Diagram invests in—pre-seed to Series A stage. Lafortune argued that the current decline in FinTech has little effect on Diagram companies, because the firm is still mainly focused on helping create companies. Those startups won’t come to market for a few years.
However, Diagram’s current portfolio has felt the effects, as recently seen with the closure of neobank startup Pillar. TSX-listed Dialogue has also seen its share price fall significantly since it went public on the exchange, amid the broader market downturn. However, Dialogue has also seen positive growth over the past year, reporting a 31.5 percent year-over-year revenue increase in the fourth quarter of 2022.
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Lafortune argued that, overall, Diagram’s portfolio has been fairly successful. He stated that the number of Diagram companies that have made it to Series A and B stages is greater than the overall average. On average globally, around 30 percent of startups make it to the Series A stage. While Lafortune didn’t share statistics about Diagram’s success rate, the majority of its companies appear to still be operating or have been acquired.
Because of this, Lafortune feels that since Diagram launched in 2016, its playbook has been proven to work through its first few funds. Beyond adding the ability to invest in companies it doesn’t create, Diagram is doubling down on that playbook. The new fund is set to invest in approximately 20 companies from pre-seed through Series A stages. The majority of the capital (two-thirds) will go towards startups that Diagram co-creates, while the remainder will be external companies. Overall, Diagram plans to invest between $3 to $5 million CAD per company.
The Opportunity Fund remains active, with approximately 50 percent of its initial investment capital remaining. It allows Diagram to continue to invest in its companies through the Series B stage. Lafortune expects Diagram to be in the market for its second Opportunity Fund at some point next year.
Feature image courtesy Diagram.