Montréal-based Inovia Capital has launched its first Discovery Fund, closing $34 million CAD ($25 million USD) to invest in emerging North American venture capital (VC) fund managers focused on pre-seed and seed-stage startups.
Inovia has already backed over a dozen VC firms through Discovery Fund I. It has also reserved a portion for direct investments into select early-stage companies. The fund’s limited partners (LPs) include several existing Inovia backers and some new strategic investors, including Deloitte Ventures and Roller Labs Ventures, Canadian Tire’s corporate VC arm.
Inovia’s broader strategy involves supporting founders across multiple stages; “from idea to IPO,” as Inovia partner Karamdeep Nijjar put it. “We also understand that investing at those really, really, really early stages is an art on its own, and there are people that are as well suited—if not better suited—to do that,” Nijjar told BetaKit in an interview.
Inovia Discovery Fund I’s LPs include Deloitte Ventures and Canadian Tire’s corporate VC arm, Roller Labs Ventures.
“For Inovia to thrive long term, it has to work within an ecosystem that is well-supported and has a lot of interesting folks doing interesting investing at stages earlier than us,” said Nijjar. To help ensure this, Inovia plans to back more emerging managers through its Discovery Fund.
The Discovery Fund formalizes Inovia’s existing efforts to invest in emerging VC firms as many face difficulties fundraising. Amid the downturn, it has become harder for startups and VCs alike to raise capital, but this is particularly true for emerging managers. In Canada, as The Globe and Mail and BetaKit have reported, some are struggling to close funds and reach their targets. In the United States, PitchBook data puts emerging managers on track for their worst fundraising performance in seven years.
“It is certainly a more challenging time for emerging managers and very early-stage companies to get funding,” Deloitte Ventures managing partner Talia Abramowitz told BetaKit, noting that the tech sector represents a significant part of Canada’s economic future. “The Inovia Discovery Fund is playing an important role at just the right time. History has also shown that great, category-defining companies have been started during an economic downturn, so we think the timing couldn’t be better.”
Emerging managers typically draw from a much different pool of LPs than more established firms like Inovia. Inovia’s investor base consists largely of institutions, like pension funds, many of which have regular capital inflows regardless of economic conditions. Conversely, emerging VCs often fundraise from high-net-worth individuals, other entrepreneurs, and family offices.
Nijjar noted that many LPs in the latter group overallocated their portfolios towards tech in recent years and have reduced their investments and concentrated their remaining commitments on established firms in response to public market corrections and private market writedowns amid what he described as a “flight to safety.”
At the same time, firms like Inovia have still felt the impact of the downturn. As BetaKit reported earlier this year, LPs in large Canadian VC funds have also pulled back, fuelling capital call and liquidity issues for some investors. These conditions, coupled with rising interest rates, have forced some Canadian tech startups to shut down, including Inovia portfolio firm RenoRun.
Still, given the makeup of its LP base, Nijjar argues that Inovia stands on stronger footing than many investors that typically back emerging managers, affording it an opportunity to double down on early-stage VCs while others retreat.
“We’re in a position where, while not completely immune to [these market conditions], we’re somewhat protected, and so we can step in when other people are stepping back and then make a really good return as a result, and hopefully build something better longer term for the overall ecosystem,” he said.
Nijjar declined to disclose which existing Inovia LPs invested in its Discovery Fund alongside Deloitte Ventures and Roller Labs Ventures, noting only that there is a “strong overlap” between the Discovery Fund’s investors and the firms that financed Inovia’s fifth venture fund, which closed at $420 million CAD in 2022. The LPs in that fund include players like the Alberta Enterprise Corporation, BDC, CDPQ, Fondaction, Fonds de solidarité FTQ, HarbourVest, Investissement Québec, Kensington, Northleaf, and Scotiabank.
Since Inovia’s inception in 2007, pre-seed and seed investing has been part of the multi-stage VC firm’s strategy. Per Nijjar, Inovia began backing emerging managers in the mid-2010s when it became an LP in Kitchener-Waterloo-based Garage Capital’s first fund. Launched by a trio of University of Waterloo engineering graduates who co-founded Vidyard and BufferBox, Garage Capital has grown into a pillar of Canada’s early-stage tech ecosystem.
Nijjar said Inovia has since built the flexibility to support early-stage VCs and nascent startups alike into all of its venture funds, adding that the percentage the firm has allocated toward this has increased with each successive fund.
When Inovia was raising its fifth early-stage VC fund last year, Nijjar said the firm realized that its efforts to support emerging managers and startups had reached a level where they warranted a dedicated team, mandate, and investment vehicle.
Doing away with the timing mismatches and other complexities associated with baking these investments into a broader fund, Inovia began building a standalone discovery fund. Inovia started taking commitments for Inovia Discovery Fund I in the second quarter of 2023 and deploying capital before fully closing the fund a couple of months ago.
Inovia Discovery Program vice-president Prem Kalevar and Discovery Program manager Marianne Dubois have been tasked with leading Inovia Discovery Fund I, while Nijjar and other Inovia partners will help oversee the initiative.
“Internally, we’ve proven a 15-year track record of delivering strong returns to our [LPs] through Inovia’s Discovery Program so it only made sense that we would want to formalize and scale the strategy,” Kalevar told BetaKit. “We believe the best way to do this is with an increased focus on investing in emerging managers, who are key to a healthy environment of collaboration and competition throughout the VC ecosystem in Canada. This allows us to indirectly support a far greater number of budding companies than if we were to try to invest into them directly ourselves.”
The majority of the Discovery Fund’s capital will go towards emerging managers and “less than half” will fuel direct investments in early-stage startups. Some of these direct investments will be alongside the VC funds in its portfolio, while others will be independent, as Inovia looks to take advantage of inbound deal flow through its Discovery Program. Nijjar also sees room for this Discovery Fund to serve as a funnel for later-stage direct company investments from Inovia’s other funds.
“This is a pretty unique asymmetrical bet we can take.”
– Karamdeep Nijjar, Inovia Capital
To date, Inovia has done diligence on around 80 different funds, committing a significant amount of the Discovery Fund’s capital toward over a dozen emerging managers and more than six direct investments in undisclosed startups. The Discovery Fund’s portfolio includes Garage Capital, Northside Ventures, Maple VC, Front Row Ventures, Two Small Fish Ventures, The51, N49P, Roar Ventures, and Boon.
Nijjar said that many of the VCs in Inovia’s Discovery Fund portfolio are former founders with the knowledge and networks required to support early-stage startups.
Ultimately, Inovia aims to make its Discovery Fund more than “just a one-and-done,” with designs to support emerging managers across multiple funds.
Nijjar argued that while there are some institutional VC funds in Canada doing a good job of backing pre-seed startups at scale, the country could use more of them. From his perspective, more diversity in terms of funding sources will ultimately lead to better outcomes.
“This is a pretty unique asymmetrical bet we can take,” said Nijjar, pointing to its low-risk, high-reward potential. While he said the Discovery Fund is unlikely to generate strong short-term results, over the longer term, it could have “a dramatic impact” on both Inovia and the ecosystem at large.
Feature image courtesy Inovia.