Building the thesis behind the Brightspark Canadian Opportunities Fund

Posted by Brightspark on Sep 10, 2020

Earlier this week, we announced the third closing of our Brightspark Canadian Opportunities Fund (or “BCOF”, for short), with commitments of $60m to fund the next wave of exceptional Canadian tech startups. It certainly has been an interesting endeavour to raise a venture capital fund in – dare we say it – unprecedented times. We thought you might be interested in knowing the background story on timing, strategy for the fund, and our investments so far.

Timing: Why raise a VC fund now?

Brightspark has been investing in the Canadian tech industry since 1999. Through the past 21 years, we evolved into different venture capital structures. The last time Brightspark raised a VC fund with a traditional structure was in 2004. Brightspark Ventures II LP (vintage 2004) invested in 10 Canadian early-stage companies that had to endure the 2009 financial crash - but some were incredibly successful: notably Radian6, Protecode and Hopper. The Fund delivered top-quartile results.

We held off raising a traditional fund for a while. We waited for the market to be optimum for investing. First, in 2013, we launched a different way of investing in Canadian VC: a deal-by-deal model with capital from individual accredited investors. And then, in 2019, after 5 years of successfully investing in Candian early-stage companies through SPVs (Special Purpose Vehicles), we started the process of raising the Brightspark Canadian Opportunities Fund, which will invest alongside our deal-by-deal funds.

Admittedly, when we began fundraising for BCOF, a global pandemic was not something we had envisioned. While COVID-19 and its effects on markets, the economy and pretty much every industry are undeniable, it did not affect our enthusiasm or our thesis for raising a fund. In fact, we think it’s one of the best times in history to start investing in the next wave of innovative Canadian companies. After all, previously Brightspark has twice invested during downturns, with great success.

The tech industry as a whole is having an easier time managing during this turmoil because, by nature, startups have learned to run their businesses reactively and with change in mind - COVID pivot is one more part of the rollercoaster they ride. Tech is generally seeing enormous value created during COVID and many new tech habits will not end when COVID does. The top tech titans (Microsoft, Google, Amazon, Facebook, Apple, Shopify etc) have seen huge growth and this mostly leads to huge opportunities for earlier stage tech companies in this ecosystem. Even with a broad-based recession, we expect tech to continue to grow in use in every aspect of society.

We believe that Canada is in an unique position to gain leadership in tech on a global level while the US is struggling with extremes, health, political and social crises. Canada started attracting top international talent thanks to favourable immigration policies and a striving innovation economy before COVID - and this trend will continue. Vibrant tech hubs have established themselves across the country, and it has attracted world-leading experts that will help foster the next generation of tech successes. The Canadian tech industry was well on its way to becoming mature, and these additional factors have now led to a stable tech ecosystem with renowned success stories (such as Shopify) with meaningful room for future growth and investment.

BCOF is still in its early days of investing from the new fund, allowing us to be proactive in our investment approach rather than reactive. Over the next few years of our investment period, we expect to unearth new and unique opportunities in the Canadian tech industry – our “across the board approach” instead of investing in specific verticals allows us to unearth new investments with awesome leadership and management.

Thesis: What’s the investment strategy of the fund?

Cherry-picking with a long-term view. The plan for BCOF is to invest in 15-20 companies over the next 4 years. Brightspark has always favoured a “quality” vs “quantity” approach. With this approach, we will reserve 60% of the fund’s capital for follow-on investments. We do this because we have learned to understand Fund economics and what makes investments successful – we carefully choose investment and opportunities that are sized to maximize overall fund return. We balance initial investments with an approach of ongoing support of winners. In many cases, we maintain meaningful ownership in our winners and stay hands-on with management over multiple years.

Lead position in early-stage rounds. We aim to enter each investment as the lead (or co-lead) investor in pre-growth rounds. Our “playground” is Seed to Series A with initial cheque size ranging from $500k to $2.5m. We work closely with founders to prepare for the growth stage. Generally, we prefer to invest in companies that already have a product in the market and verifiable customer validation - although this can take many different forms. Even as we look for breakthrough technologies, we invest in markets that are active as opposed to nascent, and in which money is being spent today. We have learned that the key to a VC fund's success is based on "home run" wins. Our focus is to invest in companies that have the potential to become large wins that will return capital in excess of the entire fund.

Focus on teams. At the top of the list of what we look for is an exceptional leadership team. It takes a unique CEO and executive team to achieve superior results. A significant amount of our time is spent evaluating the team before investing: we evaluate their industry expertise and their ability to identify trends; their motivation, ambition and focus; we look at how they interact with members of our team, how they communicate with each other, take feedback, share their vision and corporate culture – until we feel like we know them inside and out, and them us. This mutual respect/trust with founders is more important during current market conditions than ever. Without naming names, we can point to our existing portfolio and how they’ve adapted to COVID very well, and that speaks to the grit of their teams. The “spark” of our CEOs have been key to our success and remains our secret sauce.

Ambitious ideas backed by intellectual property. We consider ourselves as “industry agnostic”. We invest in markets and areas that we understand, without limiting our focus to a specific industry or market. We are excited about solutions that truly challenge the status quo and redefine markets - not features providing limited incremental value. By definition, most of our investments have strong and unique intellectual property (IP).

We are, by nature, a diversified team. We have a strong culture of collaboration, integrity, inclusion and mutual respect. We treat our portfolio companies with this same approach and expect them to treat their teams in the same way.

When we started this journey, we continued a long dialogue with Canadian institutional and individual investors interested in our approach. On that path, we have found investors that share our vision. The lead investor in the fund is VCCI, a program managed by BDC Capital for the Government of Canada - they chose us because we are unique, because we are diverse and because they share our vision of believing in the Canadian market. We are also proud to partner with some of Canada’s leading institutions such as Investissement Quebec, RBC, BMO, Fondaction, and Teralys. Finally, over 16% of the BCOF was funded by individuals and family offices from the Brightspark network. We are grateful that they stepped up to investing in the future during these uncertain times.

Since the first closing of the fund, BCOF has invested in 6 companies based on this thesis: Potloc, BuyBack Booth, Prevu3D, Elevate Farms, Classcraft, and Potential Motors.

We are actively looking to meet with founders that are building the next wave of innovative tech companies. Reach out or send your intros to dealflow@brightspark.com.

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