Halifax traders buck Canadian VC norms, forgo authorities cash for brand new fund

After years of presidency efforts to bolster Canada’s tech ecosystem, virtually each enterprise capital fund within the nation consists of public cash. However Halifax-based Tidal Enterprise Companions is attempting one thing completely different.

For the previous yr, Tidal managing companion Ian Whytock has traveled throughout Canada and the U.S. in search of funding with no public strings hooked up. Final week the agency closed its preliminary pool of capital, raised strictly from non-public sources—4 household places of work, together with Toronto-based corporations Yabema Capital and Farpointe Investments (the opposite two declined to be named), and a smattering of high-net-worth people—nearly all of which got here from outdoors the Atlantic area. 

You are reading: Halifax traders buck Canadian VC norms, forgo authorities cash for brand new fund

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Halifax-based Tidal Enterprise Companions has closed the primary tranche of its first fund with no authorities funding and nearly all of capital coming from outdoors the area. The method is novel for a Canadian fund, significantly one from Atlantic Canada, most of that are capitalized solely or partially from authorities sources. 

“Now we have an actual give attention to elevating {dollars} that aren’t straight hooked up to authorities in order that we might be as free as attainable in how we run the fund,” mentioned Whytock. 

Whytock mentioned there might be points with counting on authorities funding, particularly early within the fundraising cycle. One of many challenges, he mentioned, is non-public traders’ notion that authorities focuses an excessive amount of on full-time employment numbers because the gauge of whether or not a fund is profitable. Tidal believes that metric ought to be return-on-investment. The opposite problem is structural, mentioned Whytock. “In case you have completely different provinces as [limited partners] inside enterprise funds, they’ll fairly rightly say {that a} proportion of the fund must be devoted to inside provincial boundaries. That’s one thing that I believe is a selected problem in Atlantic Canada,” he mentioned. Whereas Tidal is a regional fund, it doesn’t have restrictions on how a lot it has to take a position wherein province. 

The fund, which is specializing in pre-seed and seed startups in Atlantic Canada, is small thus far—simply over $4 million. The workforce plans to prioritize non-public capital as they proceed elevating, mentioned Whytock, however they’re not ruling out public cash as they develop. “It’s about sequencing,” he mentioned. “It ought to begin with non-public capital and if there was authorities funding, that ought to come afterwards.” The agency declined to reveal their ultimate shut goal. 

When the 4 founding companions—all first-time fundraisers with backgrounds as tech entrepreneurs and consultants—began Tidal in June 2021, they approached it like a startup, mentioned Whytock. They set short-term targets and agreed that, in the event that they didn’t hit them inside six months, they’d fold the enterprise. 

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First, they needed to increase not less than $500,000, and so they needed to discover not less than two aggressive firms wherein to take a position the cash. They needed to supply not less than a 3rd of the capital from outdoors the Atlantic provinces and none of it may very well be public. “If we will’t do it in six months, meaning the market doesn’t like what we’re promoting,” mentioned Whytock. 

The agency hit its targets, elevating simply over $600,000 by their goal date. Seventy per cent of the capital got here from outdoors the area and all of it from non-public traders. 

“That was after we have been like, all proper, I believe we’re onto one thing,” mentioned Whytock. “Let’s scale.” 

Authorities cash seeds nearly each enterprise capital fund in Canada. That backing is each direct, by investments from Crown firms like BDC Capital and Export Improvement Canada, and oblique. Since 2013, Ottawa has dedicated over $1.2 billion for VC funds to take a position by the Enterprise Capital Catalyst Initiative (VCCI) and its predecessor, the Enterprise Capital Motion Plan (VCAP). That cash fuels massive funding funds meant to spend money on smaller VCs, which in the end deploy capital to startups. 

In Atlantic Canada, 4 of the ten most lively enterprise capital traders are authorities entities, based on PitchBook. The opposite six are seeded both solely or partially by authorities cash. 

The federal government’s heavy enterprise capital involvement was initially meant to kick-start financing for Canada’s fledgling startup ecosystem within the late-2000s. It’s largely carried out that, with the quantity of funding and variety of traders ballooning within the nation over the previous 15 years. 

Kim Furlong, CEO of the Canadian Enterprise Capital and Non-public Fairness Affiliation, an investor curiosity group, mentioned smaller funds—within the sub-$100-million vary—might now be capable of discover sufficient non-public cash to maintain them. However she mentioned the Canadian VC ecosystem remains to be younger and never able to be weaned off authorities help solely. 

When the 4 founding companions began Tidal in June 2021, they approached it like a startup, mentioned Whytock. Darren Calabrese for The Logic

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There are only a few impartial restricted companions in Canada, mentioned Furlong. “That’s a dialog we’ve had with the federal government after we argued for a continuation of VCCI.” Panache Ventures was the one CVCA member Furlong might consider that didn’t have VCCI funding. The agency’s managing companion Patrick Lor mentioned it’s primarily privately financed, however not solely. He mentioned having a government-sponsored fund within the spherical may give non-public traders extra confidence within the due diligence course of and entice them to again the fund. “General, government-sponsored fund-of-funds … are doing precisely what they got down to do,” he mentioned, “which is to catalyze and improve investments from the non-public sector.”

Elevating with out early public help could also be significantly arduous for first-time funds, mentioned Furlong, since government-backed funds normally act as anchor traders for rising normal companions. 

However Whytock mentioned reliance on authorities capital can obscure how a lot potential a fund truly has and the way profitable it will likely be. “We imagine a bit within the environment friendly market principle,” he mentioned. “If the market mentioned that is good, then we expect that we’ve bought a number of runway forward of us.” 

Whytock mentioned breaking the enterprise capital conventions that tie Atlantic Canadian startups specifically to native and public cash helps overcome obstacles for these firms and the traders that again them. “One of many issues with Atlantic Canada is simply connectivity. We’re so reduce off from the remainder of the nation,” he mentioned. “For founders, their market isn’t going to be Atlantic Canada, it’s all the time going to be elsewhere.” He mentioned connecting startups with traders outdoors the area will assist them break into these markets. 

Whereas Tidal desires to maintain fundraising primarily from non-public sources, Whytock mentioned the workforce isn’t absolutely against tapping authorities cash because the fund grows and plans to take action for its ultimate shut. “We’re not anti-government, we simply suppose there’s a extra environment friendly means of doing all this,” he mentioned. “We don’t suppose authorities ought to be main and initiating enterprise funds, they need to be coming behind non-public capital.” 

Though public funding is commonly marketed as a approach to appeal to non-public backers by de-risking the funding, Whytock mentioned it’d even have the alternative impact. “There’s this notion amongst the Canadian LP group that if authorities is there, then I’m most likely not going to get the perfect return on my funding.” Whytock mentioned there’s an understanding amongst Tidal’s restricted companions that the fund has to succeed as a result of it doesn’t have a security internet. 

Whereas BDC specifically has confronted criticism for crowding out non-public funders, Furlong mentioned non-public traders usually tend to be interested in funds with backing from authorities associates, on condition that they have a tendency to have rigorous due diligence processes. Nonetheless, she mentioned extra funds specializing in non-public {dollars} is nice for the sector, and she or he expects them to grow to be extra widespread because the ecosystem matures. 

“I hope there’s extra capital,” mentioned Furlong. “A lot of our members name for institutional traders like our hospitals or universities or pension plans to deploy extra {dollars} on this asset class,” she mentioned. “In the event that they did, we might have extra funds that don’t have BDC VCs. However that requires persistence and staying the course.” 

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