90 days into its new Federal mandate, Northleaf goes off script

News report: Canada’s new “Venture Catalyst Fund” invests in $46M Wattpad deal

I’m so utterly confused.

For years, Canadian entrepreneurs and VCs begged Ottawa to get involved in arresting the multi-year decline in our innovation ecosystem. When I did my five year stint as a Director of the Canada’s Venture Capital Association (CVCA), responsible for GR along with then-Exec Director Richard Remillard, it was one of our two key talking points with government.

We met with officials at Industry Canada, then-Bank of Canada Governor Mark Carney, then-Finance Minister Jim Flaherty, EDC, MPs and Committee Chairs, Senators. Even the Prime Minister. We wrote letters (see prior post “CVCA letters to Messers Flaherty, Clement and Ignatief” Dec. 26-08), and gave presentations. News releases were issued, even during an election campaign (see prior post “CVCA injects some fresh ideas into the federal election campaign” Oct. 6-08).

The byproduct of all of that work by dozens of people from across the land was an appreciation in Ottawa that all was not well in our ecosystem.

That led to Mr. Flaherty’s decision to personally weigh in — over the heads of the management team at the Business Development Bank of Canada — who he had come to realize were very much part of the problem (see prior post “Venture Capital advances drop 33% at BDC in fiscal 2010 part 2” Sept. 27-10). This ultimately became the Venture Capital Action Plan, which was announced by the PM in Montreal in January 2013.

It was designed with lots of industry input (see prior post “Feds on right path with Innovation ecosystem consultations” July 2-12), and the allocation of the $400 million made sense to most folks — me included. At the time, the simultaneous phasing-out of the Federal labour sponsored tax credit caused some to wonder if there were any net new Federal dollars going into the space. That fair observation never got traction, but lawyer Stephen Hurwitz recently took up the call to arms on that front (see “Trouble ahead for Canada’s VC action plan?“) — meaning the issue isn’t dead yet. Certainly not in Quebec, which had become the primary beneficiary of the Federal tax deduction when Ontario foolishly backed out of the LSIF business some years’ earlier (see prior post “Labour Fund Renaissance” Jan. 11-07).

After all that time and effort, and the attention of the highest office in the country, it seems incredible that Northleaf Capital Partners would use even one dollar of Canada’s new Venture Catalyst Fund to back an individual company. Using Federal funds from a program where the mandate was solely designed as:

“…a newly created fund of funds that will invest in high-potential venture capital fund managers across Canada.”

At least that’s what the January 2014 press release said when the federal government announced the choice of Northleaf as fund manager. The release went on to say something which is already untrue, less than 90 days post-launch:

Northleaf will execute on the Fund’s strategy by constructing a focused portfolio of high-potential fund managers with sufficient scale and resources to deliver world-class returns, and by promoting the ongoing adoption of global best practices across the Canadian venture capital industry.

Nowhere, in any of the public documents that I’ve read, was there anything about the Federal government wanting Northleaf to use the Venture Catalyst Fund to invest directly in companies; particularly companies such as Wattpad, that didn’t need Northleaf’s $2-$4 million rounder of an investment in any event. Wattpad’s $46 million round is about as large as you’ll find in Canada for a Series C deal, and with OMERS Ventures, August Capital, Raine Ventures, Union Square Ventures, Khosla Ventures, AME Cloud Ventures, Golden Venture Partners, and Version One Ventures already at the table…there are plenty of investable dollars at hand without drawing down scarce government tax dollars that have a higher and better use elsewhere. No matter how great a company it is, or how certain the financial return might be. Whether Northleaf chipped in or not, that round would have closed just the same. What was the point?

If it’s a guaranteed investment home run for the Crown, give it to BDC or EDC. Both have the mandate for direct corporate investments. Each is looking for great entrepreneurs to back and would always benefit from adding to the entity’s existing pool of U.S. VC relationships.

For those with a memory for such tactics, you’ll recall that Northleaf did the same thing with the original OVCF vehicle via its $1.8 million into I Love Rewards and $2 million stake in BlueCat Networks; at least in that case the 2007-era Ontario government mandate seemed to provide for co-investing (see prior post “UAE’s Sheikh Khalifa Fund vs. Ontario’s OVCF” Jan. 10-10), despite the fact that OVCF wasn’t already in the GP leading the company’s financing round. In those two direct investment cases, Northleaf’s OVCF could argue that they were getting to know potential OVCF GP partners via these syndicated deals; even if it just looked as though they were papering the Northleaf website with a couple of easy tombstones to make up for their slow-as-molasses fund investing. (Not long after, then-MRI Minister Glen Murray referred to the firm as “struggling” {see prior post “No sacred cows for Murray” Oct. 26-10}.)

That storyline won’t hold water here, unless the Federal government had intended Northleaf to use the Venture Catalyst Fund to invest in the $60 billion OMERS or US-based August Capital as part of the essential Fed effort to rebuild Canada’s VC industry. In the absence of that rationale, it would appear that Canada’s VC lifesaver is already off script.

MRM
(disclosure: this post, like all blogs, is an Opinion Piece and reflects a personal view and in no way reflects the views of the TPA nor the Federal government)