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Unlikely venture capital shop a savior to Canada’s startups

Unlikely venture capital shop a savior to Canada’s startups

Posted by PanamericanWorld on April 29, 2015

You’ve probably heard of top venture capital firms like Andreessen Horowitz, Accel Partners or Khosla Ventures. How about OMERS Ventures?

Maybe, if you run a Canadian startup.

In just four years OMERS Ventures has helped revive Canada’s technology sector, putting money into 23 of the country’s most high-profile startups, helping double venture capital spending, and luring investors from Silicon Valley. Among the beneficiaries are e-learning company D2L Corp., social media firm Hootsuite Media Inc. and Shopify Inc., which earlier this month filed plans for an initial public offering.

OMERS Ventures is not your traditional VC firm. It’s an arm of the Ontario Municipal Employees Retirement System. While other pension funds have long poured billions into venture capital firms, OMERS has taken a riskier approach by directly backing startups. The strategy will face its first test soon with Shopify’s planned IPO. OMERS Ventures owns six percent of the 11-year-old online software company, valued recently at about C$1 billion.

“What used to drive me nuts was the conclusion that there aren’t Canadian entrepreneurs around that wanted to create these $1 billion businesses,” said John Ruffolo, 49, a onetime accountant for Deloitte who leads the fund. “I don’t believe that was ever the case. Many of these top-tier U.S. investors really want a Canadian partner to be the eyes and ears here as they invest.”

OMERS Ventures was started in 2011 in response to the dearth of startup funding in Canada. After the recession, Canadian institutional investors shied away from such high-risk moves and Silicon Valley had little interest in sending money North, according to Ruffolo. Venture capital spending in the country dropped to $300 million in 2009, its lowest point since 2003, data from Pitchbook Data Inc. show.

Lacking private funding, Canadian tech companies often sold themselves too early, or went public before they were ready, Ruffolo said.

OMERS Ventures was seeded with C$200 million ($166 million), a sliver of its parent’s C$72 billion in pension assets or, for example, the billions managed by Accel. Its first investment was in online accounting software firm Wave Accounting Inc. in 2011.

“We invest in businesses, not the technologies per se,” Ruffolo said. “Our bet is based really strongly on their ability to generate revenue.”

OMERS Ventures has sold only one business — digital security business PasswordBox Inc. — so Shopify’s IPO looms large. OMERS Ventures is now its fourth-largest shareholder. U.S. venture capital firms Bessemer Venture Partners and FirstMark Capital LLC are also investors.

Shopify, which helps merchants set up online shops, is unprofitable, according to the filings. Its revenue more than doubled last year to $105 million.

The lack of profitability will not likely spook equity investors, said Jay Ritter, a professor at the University of Florida, who tracks IPOs. Of the 53 technology IPOs in the U.S. last year, only 17 percent were profitable at the time of the initial stock sale, he said.

OMERS Ventures’ money and presence has been a catalyst to attract foreign capital to Canada. Canadian technology companies raised a record $1.2 billion in 2014 compared with $565 million in 2010, according to Pitchbook.

Of the C$1 billion worth of funding rounds OMERS Ventures has participated in since its inception, C$750 million has come from mostly U.S. investors, Ruffolo said.

“OMERS has helped us understand the dynamic in Toronto,” said Devdutt Yellurkar, general partner at Menlo Park, California-based Charles River Ventures, which invested in Wave Accounting. “How difficult is the recruitment market, how do you identify the right management talent, how competitive it is. You need to be there, you need to understand that stuff.”

Canadian entrepreneur Michael Serbinis said he noticed OMERS Ventures’ influence in luring other money when he hired it to lead a round of fundraising for an e-health venture called LEAGUE. In about four days of marketing, OMERS Ventures helped raise C$4 million in seed funding for the company last November.

That was a stark change from a few years ago, when it took several months to raise C$50 million for his e-reader company Kobo Inc., Serbinis said.

“OMERS brings a certain degree of credibility and support,” said Scott Miller, chief executive officer of Vision Critical, a Vancouver-based business communications firm that got C$20 million from the fund in 2012.

That support includes finding executives. Derek Smyth, Vision Critical’s chief operating officer, is a former OMERS Ventures managing director.

Most other pension funds, including Canada Pension Plan Investment Board, Ontario Teachers’ Pension Plan and CalPERS, have shied away from investing directly in startups.

Canada Pension, the country’s largest pension fund manager with C$239 billion in assets under management, said the size of each investment would be too small to justify the staff needed to manage it. Like most pensions, it instead invests in venture capital funds managed by others, said Mei Mavin, Canada Pension spokeswoman.

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