As traditional Canadian VC activity has exploded, Plaza Ventures has been quietly working in the background with its micro-funds while more money and publicity gets pumped into the space. Following the launch of its secondary market fund this summer—a first in Canada—general partners Matthew Leibowitz and Rob Richards spoke to BetaKit about why they think Canada is finally primed for its next stage of growth.
“You’re seeing companies grow and become successful and evolving out of startup to scale-up to an institutional company. It’s really just a byproduct of the investments that the Canadian-wide tech ecosystem has made over last decade or so.”
Plaza Ventures, real estate developer PlazaCorp’s venture arm, has been acting as a gateway for family offices and angel investors to enter the tech space since its launch in 2009. The firm argues that its micro-fund model is more accessible both to private investors and entrepreneurs.
Richards said that traditional VC funds have a 10-year structure (unlike a micro-fund’s four-year horizon) and charging management fees in the meantime.
“It typically wasn’t a good structure for private investors,” he said. “Institutional investors that have a long horizon and patience, it works for them. But it doesn’t work for the average family. It was hard for families to invest in this VC asset class.”
For entrepreneurs, Richards said a micro-fund with a smaller number of deals means not having to deal with the pressure of reaching a billion-dollar exit or raise at high valuations to make a return. Plaza closes $15 million to $20 million annually for each micro-fund.
“If we get a 3x [return] on invested capital, it can return a big chunk of the fund because we’re not in a ton of deals. It’s not a spray-and-pray like a big fund that has 70 or 80 deals in it,” he said. In those larger funds, at least two or three deals are expected to provide significantly higher returns to cover the rest of the fund. “There’s many examples of big funds in Silicon Valley turning down early exit offers that would have been great for the entrepreneurs, and great for the angel investors in the file, but not for the big fund.”
Plaza Ventures launched around the time that Canadian accelerators and incubators were starting to pop up, while angel investor groups were focused on helping early-stage businesses get off the ground. So the firm decided to focus on growth stage investments.
With Canada finally reaching that A and B stage, Plaza’s already looking further down the horizon with its Special Opportunity Fund.
“We identified a gap because a lot of our seed stage companies were achieving some success, and going back to the market for a Series A, and you could count the number of Series A funders on one hand quite literally,” Richards said. “We recognized there was a lack of early growth stage capital, and Canadian companies were having a hard time raising here and moving down to California or they were selling early and not realizing as much value as they could.”
Since then, the firm has invested in companies like Drop, CareGuide, and Busbud. Canada’s ecosystem has grown as well; there are countless hubs across Canada like the Creative Destruction Lab, the DMZ, Propel, Communitech, and Techstars; more active angel investors coming from exited companies; and government support. Tying many of these organizations together is a desire to keep operations in Canada.
With Canadian tech companies now regularly seeking significant A and B stage funding, Plaza’s looking further down the horizon with its Special Opportunity Fund. Dedicated solely to buying out securities from early investors and employees for promising companies with at least $30 million in revenue, Plaza announced the fund’s first close in August. The firm is staying tight-lipped on August numbers, but is aiming for a second and final close of around $50 million this fall.
The thinking behind the SOF is to buy these securities in anticipation of an IPO or private equity mega-round within three years. The partners note that the secondary market is an active one in the US, but this is a first for Canada.
“We’re in a great space where there’s a whole cap table that’s sitting underneath these tenfold companies, and some of the early backers…even though the company’s performing extraordinarily well, haven’t had a vehicle to have some liquidity or partial liquidity,” said Leibowitz.
“Here we are, five to 10 years later, you’re seeing companies grow and become successful and evolving out of startup to scale-up to an institutional company,” said Leibowitz. “It’s really just a byproduct of the investments that the Canadian-wide tech ecosystem has made over last decade or so.”
Leibowitz said the firm is also keeping a close eye on the news, as the past year has seen more companies invest in Canada like Uber, Microsoft, Intel, and others making moves into Canada, indicating the strength of the talent to the partners.
“There’s a reason why that’s happening, and it’s because of the investments that have been made over the last decade. We just saw this opportunity that existed therein and decided to go after it,” said Leibowitz.