To Create More Canadian VCs, We Need More Canadian LPs

Starting a new VC firm is hard. On average, it takes 18 – 24 months for an emerging manager (the term for a first-time VC fund manager) to raise a new fund.

San Francisco VC Monique Woodard spent more than two years raising the recently-announced debut fund for Cake Ventures

In Canada, starting a new VC firm is near-impossible.

Just as first-time founders in Canada often struggle to find angel investors and Pre-Seed VCs willing to take a chance on their startup, emerging managers in Canada struggle to find investors willing to take a chance on their VC firm.

Why? Because Canada doesn’t have enough risk-taking LPs.

How VCs Raise Funds

When startup founders raise their initial capital, they look to friends-and-family, angel investors and Pre-Seed VCs as potential investors. Emerging managers do the same thing: they target friends-and-family, high net worth individuals and family offices, and institutional investors that focus on emerging funds.

In the US, firms like Cendana Capital have built incredibly successful “fund-of-fund” businesses that focus on emerging managers. They effectively act as “Pre-Seed investors” for VC firms. Cake Ventures, a new VC focused on investing in opportunities created as the result of demographic change, recently closed a debut fund that boasts a number of such investors, including Cendana Capital, Foundry Group, Pivotal Ventures, Plexo Capital and Screendoor.

In Canada, there isn’t a single institutional investor dedicated to investing in emerging managers.

That’s not to say that their aren’t any institutional investors in Canada that have invested in emerging funds. However, those “emerging funds” have traditionally been large funds founded by experienced VCs with lengthy track records — safe bets — rather than $10-20M funds launched by up-and-coming investors.

As a result, when a Canadian investor wants to start a new VC firm, they generally take the same approach Canadian startup founders do: they look for angel investors to fill the gap. Unfortunately, in Canada there aren’t enough VC “angel investors”.

By some estimates, there are more than 1 million accredited investors in Canada (individuals and organizations that are eligible to invest in VC firms). Fewer than 5,000 have ever invested in a Canadian VC.

In other words, Canada doesn’t have any dedicated “Pre-Seed” LPs and we don’t have enough “Angel” LPs.

Actual footage of a Canadian founder hearing that it’s hard for new VCs to raise money

Why Does This Even Matter?

Why does Canada need more VCs?

In my opinion, the biggest challenge with Canadian early-stage funding today isn’t the lack of capital (despite how vocal I am that we don’t have enough of it), it’s the lack of capital allocators. Canada simply doesn’t have enough people and firms making investment decisions.

As investor Sylvain Carle recently noted, “While we need more generalist [VCs], we need many many more specialists.” Whether they be experts in climate tech, deep tech or the things that Gen Z likes that I’m way too old to understand, Canada needs more investors whose unique interests and backgrounds align with the startups being founded here.

This is also hugely important from the standpoint of diversity and inclusion. Like every country, Canada needs more investors from diverse backgrounds with a seat at the VC table. We know that underrepresented founders aren’t seeing enough investment dollars and we know that VCs from diverse backgrounds are more likely to invest in diverse founders.

One way to change this is to hire more diverse investors into existing funds (something that’s already starting to happen), but that’s a slow process.

If we really want to pour rocket fuel on Canadian tech, we need to make it easier for the next generation of Canadian investors to start their own funds.

Easier Said Than Done

Over the years, a variety of government-backed initiatives have been launched to bolster the Canadian VC ecosystem. Many of these have had an immensely-positive impact on the funding landscape. Unfortunately, only a handful included the creation of new VC firms as part of their mandate (the Government of Quebec’s Seed Fund Competition being the most recent).

The challenge with relying on government-backed programs to fund emerging managers is that they typically aim to deploy amounts of capital that are too large to be absorbed by a $10-20M emerging fund. In addition, their diligence expectations are frequently at odds with what an emerging manager is capable of. (Any Canadian founder who’s been asked for 5 years of financial plans for a pre-product friends-and-family round knows what I’m talking about).

The result? We see repeated cycles of government programs that funnel money into a relatively small number of established firms without driving expansion of the investor landscape.

Setting Canada up for Success

So how can we meaningfully accelerate the creation of new Canadian VCs if the top-down approach isn’t working?

Here are 5 ways Canadian tech leaders can help:

1. Investor Education

We have amazing angel groups across Canada that are dedicated to helping high net worth individuals learn how to invest in startups, but nothing equivalent for learning how to invest in VC funds. In fact, most angel investors have never even had the opportunity to invest in a VC fund. So investor education is the first step.

We also need to better support family offices that are looking to expand into the venture capital asset class. These investors are capable of investing millions of dollars into organizations that align with their professional and philanthropic missions, but many don’t know where to start when it comes to VC.

2. Emerging Manager Diligence Programs

A second function performed by angel groups is to centralize diligence into startups. A similar function could be performed for VC investments. What would it look like to create a program to “certify” emerging managers (or at least standardize their investment materials) to make it easier for angel investors and family offices to invest? (And, no, I’m not talking about the 58-page ILPA Due Diligence Questionnaire.)

3. Government Matching Programs

Rather than a heavy, top-down investment approach, could Canada or the provinces ever support a lightweight “matching” program for emerging managers? e.g. Any emerging fund that raises at least $5M and fulfils reasonable / stage-appropriate governance requirements automatically receives matching (which could, in effect, act as the fund anchor).

4. Emerging Manager Fund-of-Funds

What about the creation of a private “fund-of-funds” for emerging managers in Canada?  As a country, Canada will likely never create more than a handful of high-potential emerging funds each year, but I suspect there might be demand amongst investors for a “Cendana of Canada”.

10 new funds/year @ $1M/fund is only $50M over 5 years…

5. Emerging Manager Scholarships

Most people assume that by the time someone decides to start a VC firm, they’re independently wealthy and can afford to take two years off to fundraise. In reality, virtually no emerging managers have that priviledge.

Instead, most work side gigs as advisors, consultants or EIRs/Venture Partners/Scouts at larger firms to pay the bills.

Imagine a program where promising emerging managers received two-year scholarships along with mentoring, legal grants (to actually form the fund) and other support to launch a new VC.

If we want to accelerate early-stage investment across Canada, we need to make it easier for promising investors from a variety of backgrounds to launch new funds. And that starts with minting new LPs who are willing to take risks.

Let’s come together and make it happen.