July 15, 2014
Interviewed by: David Snow
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Canadian VC Giant Hunts Innovators

Business Development Bank of Canada’s Jerome Nycz tells Privcap how the bank—the nation’s largest VC investor—stepped in to help entrepreneurs find funding, after noticing a gap in the seed-capital market three years ago.

Business Development Bank of Canada’s Jerome Nycz tells Privcap how the bank—the nation’s largest VC investor—stepped in to help entrepreneurs find funding, after noticing a gap in the seed-capital market three years ago.

Canadian VC Giant Hunts Innovators

With Jerome Nycz of Business Development Bank of Canada

What is the Business Development Bank of Canada and how has it evolved?

Jerome Nycz, BDC:

BDC is a family-owned corporation that focuses on support for the entrepreneur. We do it via term lending, venture capital investment, and advisory services. We have 30,000 clients across Canada from coast to coast and we serve our clients via a 100-branch service network. We do about $17 billion of assets in term lending and we’re the largest VC investor in Canada. Venture capital is housed within the BDC family under BDC Capital, which does mezzanine financing and venture capital. We do the broad spectrum of early-stage seed investment to the later-stage, more mature company via our mezz instrument.

Do you also commit capital to venture capital funds?

Nycz: We do it via direct investment and entrepreneur via fund investment. We’re invested in over 29 funds. We also do it via support of the ecosystem, in supporting accelerator and new company-creation platforms. Smaller teams and smaller funds helping new models to be able to develop over time and develop the proof of concept to be later supported by larger types of GPs.

How much capital will be put to work in 2014?

Nycz: This year, we did about $160 million in venture capital investments and about $190 million of mezzanine financing.

How much later-stage investing do you do?

Nycz: We do a bit of later-stage investment via our fund. The funds we invest are mostly involved around financing but they can do C round and D round. We also do it via mezzanine and mezzanine portfolio. A typical client would be 10 to 15 years in operation in a more traditional sector. 40% of the transactions we support are ownership transition. So, that’s 40% of our portfolio and 30% of our portfolio in mezzanine financing for high-growth projects. High, 20% growth per year for a minimum of three years. So, we finance projects related to more traditional type of companies.

How do you support accelerator and new companycreation platforms?

Nycz: This is one of the most exciting things we’ve done at BDC. Three years ago, we looked at how we were doing in venture capital in Canada and we realized there were several gaps in the market—gaps in terms of being able to have solid teams that are able to attract LP money and deliver results. But also, we saw that there was a lot of seed investment held in the Canadian landscape. Instead of trying to fill all the gaps directly, we decided we would do it via partnership. We went out with a white piece of paper and we tried to map out who the new players in the marketplace are and try to bring institutional discipline to some of those teams and allow them to raise additional funds.

We’re an active investor in six accelerators across Canada—some in Vancouver, Toronto, Montreal, and New Brunswick. We’ll come in and sometimes take a small equity participation in the accelerator. The accelerator does recruit cohorts. Typically, the accelerator would be going through about three to 400 applicants per cohort. They would sell about 10 of them and then, the 10 companies would go through a 12-week program. They will graduate and maybe five to 10 of those graduates would be coming out of the accelerator. Also, we’ve developed a convertible note program, a first in Canada, which allowed to bridge the seed investment to the A round. We’ll put in $150,000 as loan, but you can convert it into equity position in an A-round type of financing.

What happened in the Canadian venture capital market in the wake of the financial downturn?

Nycz: The last decade’s been fairly difficult for venture capital in Canada. We saw a lot of small funds that were not able to do follow-up on investment for their portfolio company, very few exit opportunities via IPO or merger or just corporate acquisition. We had a lot of tired syndicate around the investment table.

We decided to take a more disciplined approach to our direct investments. So, we formed three teams with razor-sharp focus on health, energy, clean tech, and IT. We’ve brought in best practices to those teams, we gave them guardrails, and we provided sufficient capital for them to be able to execute on their investment thesis. On the other side, we say we need larger fund formation in Canada.

During the financial crisis, in Canada at least, the credit condition tightened. As a bank, we’re able to provide additional financing. We increased our financing by 43% and, with our VC activity, we continue to be a steady hand in the market, stabilizing the downturn in the marketplace a bit. We’re seeing the fruit of our hard work that we did three years ago and seeing the market getting back to norms now.

Are you backing a lot of energy-related innovation?

Nycz: One of our three internal funds is focused on energy and clean tech. The energy clean-tech team focuses on energy efficiency. Light capital requirements to develop technology that addresses the need of some of the big players. There’s a lot related to water purification for the industrial sector, some lighting technology and efficiency-lighting technology. We even have the D-wave computer that’s part of our portfolio, which has very low energy consumption for the equivalent of a large-scale server farm. We have switched technology and Agrizoom, which is an interesting portfolio company in our health portfolio where it’s the transformation of seed into oil that can be used as an alternative, an additive to the gasoline.

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