Despite tough market conditions leaving many emerging managers struggling to fundraise, FinTech-focused Luge Capital closed its second early-stage fund last month after securing $96 million CAD in total commitments.
The Montréal and Toronto-based venture capital (VC) firm ultimately came in just shy of its $100-million target for Fund II, which has a list of limited partners (LPs) ranging from large banks to insurance carriers, pension funds, funds-of-funds, family offices, and angel investors. This brings Luge’s total assets under management to more than $180 million.
With Fund II, Luge’s strategy will be “substantially similar” to its approach for its first, $85-million fund, co-founder and general partner (GP) Karim Gillani told BetaKit in an interview. The VC firm plans to keep backing seed and Series A-stage FinTech startups across Canada and the United States (US), building a portfolio of 20 to 25 companies. This time around, Luge intends to write bigger cheques and establish an Alberta presence in Calgary.
With Fund II, Luge intends to write bigger cheques and establish an Alberta presence.
The final close of Fund II comes about a year after Luge announced a $71-million first close for Fund II from a group that included Fund I LPs Caisse de dépôt et placement du Québec, Desjardins, BDC Capital, Sun Life, Industrial Alliance Financial Group, Fonds de solidarité FTQ and new investor Inovia through its Discovery Fund.
Since then, Luge has added more first-time backers, including provincial government-funded Venture Ontario and the Alberta Enterprise Corporation (AEC), and Washington, DC’s AAF Management. In a shift compared to Fund I, Luge has also brought on other undisclosed family offices and strategic angel investors, many of whom are trusted advisors with knowledge of the FinTech space and have supported Luge in various ways since its launch in 2018.
To support its growing operations, Luge has added Ha Duong—former head of finance at Toronto-based software-focused growth-stage investor Georgian—as vice president of finance and operations. “[Duong] is one of the most experienced, well-rounded finance and operational leaders in the venture space,” Gillani said. “He spent more than ten years at a leading [VC] firm, developing and enhancing their core operations.”
Luge also plans to hire an investment team member in Calgary and establish a presence there to capture the opportunity it sees in Alberta. “We’ve been seeing a great deal of quality deal flow coming out of Alberta more recently,” Gillani said. To date, Luge has backed Calgary and Toronto-based wealthtech startup OneVest and Edmonton proptech firm HonestDoor.
“The Luge investment team has deep knowledge and experience in FinTech and we see a great fit with their investment focus,” AEC president and CEO Kristina Williams told BetaKit. “FinTech is a growing sector in the province with companies such as Neo Financial and Helcim to mention a few. We have a number of early-stage FinTech-focused companies that would benefit from Luge’s capital and expertise.”
With Fund II, Luge will write slightly larger cheques and have more room for follow-on investment to adjust for valuation growth over time. The firm has upped its maximum cheque size from $2 million to $5 million, investing $500,000 on the low end.
Luge, which has the capacity to lead or support rounds and tends to take an active role with portfolio companies, plans to invest the majority of Fund II in Canada and deploy one-fifth to a quarter of it in the US, Gillani said.
This final close of Luge’s second fund comes amid a challenging tech market and what is on pace to be the worst fundraising year for Canadian VC in a decade in terms of dollars allocated, according to research from RBCx.
As BetaKit has previously reported, LPs have become more cautious and selective amid the tech downturn, which has led to smaller funds and longer fundraising timelines for Canadian VC firms. Many LPs have focused on more established VC firms, slowing down or pausing their commitments to emerging managers. Per RBCx, 2024 is on track to have the lowest volume of first and second fund raises in 10 years—something that has led many to pull the plug.
Last year, Luge co-founder and GP David Nault claimed to BetaKit that Luge’s “very disciplined” approach to investing through Fund I, which included steering clear of the “crazy high valuations” of 2021 and providing “meaningful distributions” to its LPs, played an important role in helping the emerging manager secure the commitments it has for Fund II.
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Those distributions have come through National Bank’s majority stake investment in Montréal financial data aggregator Flinks, and the firm’s secondary payout during Burlington, Ontario-based payments startup Tiptap’s growth financing before its restructuring last year.
Gillani noted that fundraising is never easy, but said the support Luge saw from existing LPs gave the VC firm the momentum to bring on new investors and come close to meeting its goal. According to Gillani, almost all of Luge’s LPs from Fund I returned for Fund II, and many increased their commitments.
Luge has already made four investments out of Fund II, three of which have yet to be announced. The fourth was in Montréal insurtech startup Inscora, which is developing risk assessment and sales software for cyber insurance brokers. Earlier this year, Luge led Inscora’s $2-million pre-seed round, which saw support from Luge Fund II LPs Desjardins and Inovia.
Since the “sugar rush” of 2021, FinTech funding has dropped precipitously, with total dollars invested and deal count both down. But Gillani argued that a longer-term perspective paints a clearer picture of where the market sits today.
RELATED: Deal volume in Canada’s FinTech sector fell by 50% in 2023
“If you have a very narrow historical view of FinTech, it looks like FinTech fell off a cliff in 2022,” Gillani said. “But if you zoom out a few years prior to that, what you’ll notice is that FinTech funding spiked heavily in 2021 … [and] has [now] reverted back to normal levels.”
Amid current market conditions, Gillani said that FinTech investors have become more focused on growing startups with strong fundamentals. Companies that meet this criteria have been able to fundraise, while startups with “upside down” unit economics that are struggling to deliver growth are facing more difficulties, he added.
Gillani noted that during the downturn, consumer FinTech has taken a harder hit than business-to-business FinTech, an area where Luge tends to focus more of its efforts. Luge primarily targets FinTech infrastructure plays, which Gillani claimed tend to be more durable over the long run, have higher gross margins, and scale faster, but does make select investments in consumer FinTech provided the startup has an unfair advantage.
Despite challenging market conditions, Gillani said Luge is seeing “tremendous” investment opportunities in Canadian FinTech today to back growing startups with strong fundamentals.
By strong fundamentals, Gillani means companies with high-quality revenue—such as long-term, “durable,” often recurring revenue—and strong gross margins in a big market with growth. If the startup is profitable, all the better, he said, but noted this is not always reasonable to expect at the stages where Luge invests.
Feature image courtesy Luge Capital.