At 8:30 a.m. on a hot July day at StartupFest 2024, over 25 emerging managers from across Canada met in a small room designed to accommodate less than a dozen people. All seats were taken, and with standing room only - they'd gathered to hear some wisdom from Canada's most successful emerging manager, but one from the previous generation. Chris Arsenault, General Partner of iNovia, led a roundtable discussion to answer questions about his perspective on Canada's venture and LP markets.

He was uniquely situated to discuss this topic.

iNovia managed a Seed and Series A fund and raised its third Growth Fund a year earlier. Their AUM was in the Billions, and with offices in California, Toronto, Montreal, Waterloo, Calgary, and London, England (not that fake one in Ontario). iNovia was and is a truly international brand.

Chris politely and deftly answered all the questions from every manager. This allowed them to ask follow-up questions for clarity, but one question caught this observer's attention.

"How long did it take you to raise iNovia's fund?" asked a smart, newly minted GP on her first fundraising journey.

"You know, it wasn't short. It took approximately two years from the start to our first close. It was challenging, and we weren't sure if we could complete it. You've got to have perseverance and some luck to get this done." Chris smiled, "and you have to have an understanding spouse."

Later, Chris and I walked from the event to a quiet corner at StartupFest to catch up over coffee. And I pointed out his answer to this specific question.

"So, you know,” I said, “that wasn't exactly the truth. I remember it being a bit more complicated back then."

Chris looked me in the eye.

"It wasn't a lie either," he said with that patented Chris Arsenault smile. "If I had told the whole story, I wouldn't have had my time for coffee with you. Plus, if you think it’s so interesting, I'll let you tell that story."

And then I realized I had a task in front of me.

The Aftermath of the Brunet Report

That is why I'm now on my third and final post about the Venture Capital market in Quebec.

In my last post, I discussed the lead-up to the Brunet report and how that report set up the Venture Capital structure of the Quebec tech Market as we know it today. Well-intended and ultimately correct in many ways, it led to the demise of locally based early-stage venture firms and the destruction of local institutional venture experience.

A TL;DR of that section of the report called for traditional limited partners (LPs) to exit the seed market, allowing private funds to flourish, and for the government, as an LP, to help fill the early-stage gap. The Government dithered, and as a result, seed funding collapsed.

A helpful English translation of the report’s key point.

"The government should withdraw from certain phases of funding directly, but it is unlikely that private venture capital firms will agree to cover the seed and startup phases, which are very risky."

Thus, the government program initiated to fill that early-stage LP spot in the market led to an unlikely alliance between BDC and the Quebec government, establishing BDC’s largest seed fund, Go Capital.

That fund intended to address the issue that no seed funds were available for the LPs to invest in after they had spent five years without investing in Seed funds. Effectively, they had waited too long, and many experienced early-stage VCs had left the market. One might say the government created a problem and solved it by doing what they had set out to avoid in the first place. 2002-2007 in Quebec—The Seed market in Quebec was effectively frozen.

How frozen, as per CVCA (2007):

Venture capital investment in emerging Canadian technology companies continued to decline in Q3 2006, to $331 million, a 32% drop from the $489 million invested in Q2 2006.

Investment patterns through 2006 continue to show a shift away from new companies, as more than 85% of all capital deployed in Q3 2006 went to follow-on investments in existing portfolios, and two-thirds of all investment was classified as later-stage.

Using back-of-the-envelope math, these numbers translated into less than $50 million of new VC investment in Canada during the Q3-2006 period, including Seed and Series A. What were the VCs saying?As a young(er), Rick Nathan said:

“There’s no shortage of opportunities; there’s no shortage of entrepreneurs with great ideas and strong early-stage technology companies,” he says. “What’s happening is that there is a lack of capital here. The U.S. venture funds are viewing it as a market with very little competition for them to come in and find good early-stage companies. Their overall market share has been growing significantly in the last year and a half.”

However, inside Quebec, the market withered and effectively died (as well as in the rest of Canada).

Except for in one spot...

Valorization or Valorisation?

One spot the Brunet report had called out specifically was to:

"Encourage universities to place greater importance on commercializing public research and developing spin-off companies."

You’ll notice that this is what governments and pundits call for during every tech downturn.

But why did the report call for this?

Quebec funded extensive research at universities and public institutions, and I mean extensive.

Let's talk about R&D spend. This is a chart of the provincial government’s R&D spending, Quebec vs. Ontario, 1990– 2003 ($ millions), which includes government labs, universities, research institutes, etc.

This chart doesn't include private sector R&D, which would have distorted the numbers. However, Quebec believed that it had invested significant money in R&D and hadn't seen many outcomes beyond successes in Biotech. Even there, it hadn't seen as many as it had hoped.

We referred to this type of work as 'tech transfer' back in the day, and if you're of a certain age, you likely have strong opinions on it. Here's a quick fake example for readers less familiar with this subculture.

A brilliant scientist and their Master’s students worked hard for years on an arcane point of technology; for example, let's say it was some digital voice compression technology, and once it was working, they needed to develop it into a product.

But they're scientists, so a person with a business background joins up. The university, which owns the IP/Patent and houses the team, spins it into a company.

The scientists go along for the ride and then raise venture capital dollars. Commercialization and sales occur, and success ensues.

If this had worked as intended in Quebec, political leaders believe the province would be awash in great deep tech companies—except it wasn't. To illustrate how poorly it was working, Quebec probably had the most significant 'miss' on the tech transfer front in history—or did they?

Remember that example of voice compression technology from before? Surprise! It's a true story...

Except (perhaps sadly) for the whole Venture Capital part...

In a story you have never heard of – because you don’t speak French or are young - The University of Sherbrooke (Canada’s most underrated University tech hub) made more licensing revenue in the 1990s/Early 2000s from a tech transfer success than any university in Canada (eat that Waterloo).

As Sherbrooke proudly boasts:

ACELP, which stands for “Algebraic Code-Excited Linear Prediction,” is used every day in more than 95% of the world’s cell phones, which accounts for more than 6 billion users.

Thanks to the partnerships the institution established with VoiceAge, Sipro Lab Telecom, and a number of telecommunications titans in Europe, Asia, and North America, ACELP technology has generated $225M in revenue for the Université de Sherbrooke and its researchers-inventors, in the form of research funding, royalties, and dividends

You can read about the 20th anniversary of this fantastic story in French at this link.

ACELP is the tech, but Voiceflow was the name of the spinout. This technology is present in every GSM phone and remains part of subsequent upgrades, such as VoLTE/5G. Every person in the world with a mobile phone uses this tech,

And to give some credit to a story that deserves a post of its own, here is a picture of all the founders. I'll point out Sylvain Desjardins, who was the president and is third from the right (and the only person I've met and discussed this with).

It’s a critical Canadian story about the potential of university tech commercialization, particularly in Quebec, that the University of Sherbrooke has named its Innovation Park “Parc Innovation-ACELP.” This would be a horrible name in any other circumstance, but why not? ACLEP paid for it!

It is Canada's most successful university tech transfer program, outside of biotech. It was listed among the world's top ten when I attended a government hearing on tech transfer. (as one does)

So that's a success, right?

Well no. Not if you're doing that whole Quebec nationalist economic thing we discussed in Part One...

In 1999, the Quebec government believed that a truly homegrown company in Quebec should have been built using the ACELP technology, creating the knock-on technologies, rather than an international group outside of Quebec, such as Nokia, Ericsson, or Motorola, which licensed it to build GSM phones. With its R&D labs in Ontario, Nortel got access with little to no local benefits in their minds.1

Why this did not happen was, in their minds, easy to see. True or not, the government of Quebec believed that a lack of local innovation capital hamstrung ACELP's technology. But what about all those seed funds from the 1990s I discussed in my previous posts? In their minds, they weren't focused correctly; they wanted tech already on the market, and now was the time to change that.

Today, these are deep-tech technologies, as they are deep in technology and less so in aspects like product-market fit or customer acquisition. Back then, marketing was not as prevalent in Venture as it is today.

There was a local Quebec (and to some extent, national) belief that other technology gems, such as ACELP, were hidden away in Quebec research institutes and doing nothing for anyone. This was true not just for "tech " but also for Biotech, materials science, etc. So in 1999, at the height of the first Quebec VC Boom, the province announced an investment in a “non-profit initiative”: Valorisztion-Recherche Québec.

Let's translate the words for my non-French-speaking friends. Recherche would be Research. Quebec is self-explanatory, but Valorisation has a particular meaning in French and differs in English.

If you are a native English speaker, you'll only bump into the word Valorization (with a Z) from Marxian economics. And if you spent some time studying Marx like me, it has 'connotations.' However, in the decades since, in Europe, particularly in France, the word "Valorisation" (with an S) has come to mean something entirely different.

For example, the EU describes it as:

The European Union's (EU) valorisation policy aims to increase the societal impact of research and innovation (R&I) investments. The policy's goals include creating social and economic value from knowledge, addressing societal challenges, driving green and digital transitions, accelerating the uptake of research and innovation (R&I) results, and realizing the full potential of R&I investments.

Which is a lot...

However, you could loosely describe valorization as an attempt to increase value through governmental action, utilizing government capital and/or resources, and leveraging influence.

There isn’t a clear word in English that means the same thing. We might use 'subsidize,' but that would not be the same. It means utilizing government funds and resources (such as legislation, subsidies, or cash) to capture or extract the existing value in something that has not or cannot be crystallized without the involvement of a government actor. (Probably the best examples we've seen of this are in clean tech and the influence of Carbon taxation.)

In other words, instead of Adam Smith's invisible hand, this is the visible hand of government, subsidizing or incentivizing all firms to act in specific ways.

It is a (perhaps subtle or not) difference, but I’ve always thought that this subtlety explains how our Quebec-based colleagues view the role of government in tech—and in economic involvement in general—differently from those of us in English-speaking Canada.

When you hear a direct translation of the word in Parliament, it's almost always subbed in for government subsidy or incentivization, which is not quite the same thing and is misleading (as to intent, if not action). (At least) That's not what they're thinking, even if that's what we in the rest of Canada think it looks like.

Regardless, the Quebec Valorisation fund had an expansive mandate. But in the interest of time, I can translate and truncate it for you.

The government thought $100M ought to be enough to find the next one to ten phenomenal technologies like ACELP, which was the thesis for a valorisation fund. It would let them build the next generation of Tech successes.

They created several initiatives and companies to help spin out technologies from universities. Most importantly, they created four companies to spin out technology from universities: Univalor, Sovar, and Gestion Valeo.

These offices and teams helped spin out and grow companies by utilizing IP developed through university research. They would interact with the existing external Seed funds and secure funding for them. Each group had different University backers and focuses.

McGill, Sherbrooke and Bishops...

But three particular schools wanted something different. They already had strong technology transfer offices and teams to help spin out companies and had successfully spun out biotech companies. What they needed was a magic power called Capital.

“There's a tremendous pool of researchers who are starving for the necessary funding to bring their intellectual property into the marketplace.” …” a catalyst that will give academic ideas a fiscal shot at commercialization”

Said, Jan Peeters, CEO of Olameter Inc., was also a member of McGill's Board of Governors.

McGill, Sherbrooke, and Bishop’s University's MSB (along with their associated hospital research institutes) wanted a venture fund. The government obliged—MSBi Capital ("i" for Innovations) was born with contributions of $11M from the universities and $15M from the aforementioned Valorisation fund.

The fund’s backers hired Mark de Groot, a Canadian physicist and businessman, as CEO of MSBi. He joined the fund after developing his expertise in research-based companies, having cofounded University Medical Discoveries in Toronto. (Subsequently, the firm became MDS Capital.) At the outset, he said precisely what he thought his job was, to create the next ACELP:

"As president of MSBi, I look forward to helping translate innovative research into successful companies," says De Groot. "MSBi will provide another opportunity for its partners to demonstrate that investing in research is advantageous to society and that research spin-offs can be an engine for economic growth."

• Fun fact: If you are of a particular vintage, MDS Capital is the first truly huge biotech fund to come out of Canada. Today, the fund is one of a handful of Canadian Venture funds that have survived for over 35 years—they're called Lumira. You can follow their other cofounder and Managing Partner, Peter van der Velden. He posts about pension plans like I did. I think I inspired him.

Mark's first task was to build a team, and his first hire was a name that, today, most venture capitalists from Quebec and possibly Canada now know: Chris Arsenault. But he was not unknown in 2002. As Mark said in the announcement of hiring Chris -

“That someone with Chris’ experience in establishing, operating and investing in successful technology companies over the course of more than 10 years is joining MSBI, is a testament to MSBI’s intention to provide both financing and real management support to our investee companies.”

Some of the Montreal lore I hear today is that Chris didn't have a strong tech or venture background before he joined MSBi. This is hilarious (and wrong) because he arguably had one of the best backgrounds. Maybe people would say this now, in 2025, because they don't recognize the names on his resume, and he doesn't advertise them. However, in 2002, Chris was very experienced and well-connected.

Chris had been, before joining MSBi, a partner at a corporate venture capital firm and an entrepreneur in residence with the Telesystem group. He managed their public and private direct investments, including Popcast Communications Corp, Look Communications, and Airborne Entertainment. Airborne was the deal that gave Chris his Canadian VC Street Cred; he led the seed, followed up with A, and exited for $100M - and won the 2005 CVCA Deal of the Year award for that work. As an EIR, he was involved in launching up2 Technologies – a subsidiary of Teleglobe Inc., which was later acquired by Bell Canada - and created a subsidiary for Microcell Telecommunications, i5 Corp, which was acquired by Rogers Wireless in 2005. Along with all this, he also helped launch a $30 Million Seed Fund out of Teleglobe during this period. ](https://enablis.org/our-background)

He was a founding team member of Wanted Technologies, a business intelligence information and technology provider. He was an early employee in the launch of Copernic Technologies, one of the Quebec Dot-Com darlings of the mid-90s, but it continued to thrive in the dot-com bust. He was also an ex-founder of SIT Inc., an international Internet integrator, and the first Netscape Communications software developer, which was eventually sold to Ubizen in Belgium in 1999 for €42 million, by then, as Chris had left.

Mark, along with Chris, was a team builder. Together, they filled out the gaps in the MSBI team's backgrounds and experience. They had an expansive investment thesis, backing startups from McGill, Sherbrooke, and Bishop’s, encompassing biotech and medtech, Semiconductors, web, and materials sciences. They need people with experience in those.

Cedric Bisson, the former head of McKinsey’s Canadian Healthcare and Innovation practice, joined to round out the leadership. He was a pioneer in healthcare IT innovation in Canada. They hired Joško Bobanović and Bernie Li as associates to cover clean tech and software, respectively. Today, all three are still in the industry, with Cedric at Teralys, Josko in Paris at Soffinova, and Bernie running Antlers Canadian Operations from Toronto.

Initially, the portfolio plan was to invest in approximately 50 startups in software, semiconductor, biotech, and materials science technologies. However, in VC, with a dying market by 2002, it was clear that a volume investment strategy would not provide enough backing to companies. So, the team developed a thesis of being more selective, focusing on just a few firms and ultimately investing in only a little over a dozen spinouts.

This selectivity led to a stronger thesis for each investment, which bred a level of focus. How was success measured? By 3rd party co-investment and follow-on capital. Essentially, the problem of Quebec not finding out-of-province follow-on or co-investors was being solved by these tech transfer investors.

However, MSBi was the ugly stepchild in the Quebec Venture market during this period.

I specifically remember mentioning that I would be visiting their Montreal office and being informed by a seasoned Montreal venture capitalist that they weren't "real VCS"—and having been established and started by the at the time (2004) out-of-power PQ government, and being "pre-" the Brunet report, they were often dismissed. People believed that future follow-up funding was highly unlikely for the team.

However, that VC was not reading the right tea leaves. In the year following the release of the Brunet Report in 2004/5, MSBi raised an additional $20 million for the fund, with $10 million contributed by Solidarity Fund QFL (FTQ) and $10 million by Desjardins.

This was perhaps because of three reasons.

First, both Desjardin and FTQ must invest in Quebec regularly each year. As part of their mandates, they’ve been granted certain tax advantages in return for their promise to support Quebec's economic development within the province. As I mentioned, this was a nuclear winter for funds being raised; MSBi had funding and was continuing to deploy. They weren’t going anywhere.

Secondly, because of this, FTQ & Desjardin couldn’t invest in Funds domiciled outside the province, which other traditional Quebec LPs were doing during this timeframe.

Lastly, when I asked some people who ran these investment groups what they were thinking at the time, with the benefit of hindsight, they gave me a name. Chris Arsenault. As mentioned, he was highly regarded within the ecosystem. Chris had credibility from his time at Telesystems, whose CEO, Charles Sirois, was a huge supporter. Today, when you ask a retired FTQ LP why they invested, the exact comment I got (in my badly mangled French translation, “Chris made it an easy decision, Charles made it an easy discussion with my bosses (at the investment committee.)”

Bringing in their first true institutional investors allowed MSBi to invest beyond traditional University spinouts if they wanted to. They now had a small fund to work with.

Tough times in the early stage

As I discussed, 2005/7 was a 'nuclear winter' for seed investors in Quebec. While the Quebec government delayed its announcement of a large fund of funds, it also postponed meeting its Brunet recommendations to support the Seed market separately. The complaint was that they wanted the Funds to be very close to their closing before their institutional capital would jump in, and a chicken-or-egg problem began to become apparent. MSBi was experiencing the same issue. I love this quote from a team member. And if you remember, I used it at the beginning of Part One:

“In 2007, I took a leap of faith and joined a small venture capital fund called MSBi Management, which, back then, invested in life sciences and semiconductors. And when I say a leap of faith, I’m not kidding. The team was preparing to raise a second fund, and if it didn’t work out, they would not be able to afford to keep me on the payroll. It was that simple."

That quote is from a now-retired Francois Gauvin. He was alluding to how he was convinced to join MSBi , a small fund that was struggling to close a new one.

Francois did take a leap of faith. He left one of those jobs you don't quit: he was at Quebec's FSTQ. A fund manager with billions under management…

So why the leap of faith?

Why would he join any Quebec venture fund at such a crappy time? As I just mentioned, no seed funds were getting funded.

What made MSBi different?

Magic. Or that they had an anchor cheque for their next fund.

What is an anchor cheque?

An anchor cheque is a financial commitment, usually (but not exclusively) from an institution, that provides more than 20-25% or more of a fund's total dollar commitment. Anchor cheques are rare and often come with strings attached. Today, in Canada, they are virtually unheard of.

When I was a Partner at ScaleUP Ventures, we had one from the Ontario Government. However, that was in 2016, ten years earlier, in 2006, when MSBi was raising money; it was the worst period ever for Canadian venture capital fundraising.

But MSBi had a gateway commitment—an anchor with no other obligations except matching commitments.

Where did this cheque come from? Well, in 2005...

A blockbuster announcement came down from the Business Development Bank of Canada (BDC) that it would implement a whopping $100-million fund to seed early-stage companies.

...

BDC's Elder, whose phone is already "ringing off the hook," is clearly excited by the prospect of his organization leading the charge into what could be a billion-dollar renaissance of early-stage funding in Canada. While policy analysts have estimated the "funding gap" to be as high as $5-billion, the BDC's move is definitely a leap in the right direction.

"In the past, with smaller funds, it has taken up to 18 months, or even longer, to attract matching funds, creating a huge opportunity cost for the earmarked funds," points out Mr. Elder.2

This was a key change from Canada’s Development Bank (BDC).

The article misunderstood what Brian was discussing. But if you know our (VC) lingo, it stated BDC would anchor 3-5 early-stage, regionally focused funds to get them started, as long as they found matching leverage. The "Mr. Eder" in the article is Brian Elder, who managed the fund of funds group at BDC during the 2000s, a thankless task then as it is now. Brian, who has long since retired from BDC, was iNovia's first and only signed commitment throughout 2006.

I had to call Chris and ask him about this. Didn't the term sheet have an expiration date?

"If it did, I didn't mention it to anyone," he recalled.

Fundraising Moneyball

Loosely speaking, the book Moneyball describes how the Oakland Athletics built a competitive team on a limited budget by identifying the statistical attributes of players to create a winning team. What is a winning team? On base percentages, the more on base a player is, the more 'in the game' they are - i.e., they are likely to win.

In Venture Capital, you need a fund to be in the game, and you require two key elements to achieve this: a team with the right attributes, your potential LPs' prioritize, and the inevitability of fundraising momentum.

Chris used that BDC anchor cheque to play what I call Canadian Fundraising Moneyball, and in fairness, I think Chris Arsenault hates the term - but hear me out.

Chris would describe himself as "a smart GP team builder" or GM - but that’s him looking back. He built the winning team for fundraising and deployment, and he used his anchor cheque to build momentum and win the fundraising game gradually and then quickly. At the time, and with hindsight, it was a masterful lesson in VC leadership.

As I mentioned, Chris convinced Francois Gauvin to come aboard as CFO of MSBi from Quebec's FSTQ. As we've seen in the previous discussions on the Quebec ecosystem, institutional trust came from knowing that it had strong linkages back into the local financial ecosystem. And François was easily that, but not only was he a financially experienced individual; he was also the Investment Director at the Fonds de solidarité FTQ, where he was responsible for many investments in venture capital funds. Having someone with deep experience as a leader or professional from an LP join your team is never a bad move.

Chris wanted MSBi to bring in people with US networks and experience. At hand, he found John Elton, who had also been working with the McGill tech transfer office. He joined from Turnstone Capital and had been at Gulf International Bank (UK), 24/7 Real Media, and VSS (Veronis Suhler Stevenson).

While Alberta-based, Shawn Abbott joined the company later that same year, in 2007.

Shawn was (and still is) well known for inventing the standard for plugging in USB keys into your PC, and it works as if by magic (his name is on one of the patents). However, he was better positioned in this context as one of the presidents at Rainbow Software, which grew through acquisitions during the dot-com collapse in the security software space. I first met him just after he acquired Chrysalis Software, a company based in Ottawa. Shawn’s presence in Alberta was a plus on multiple fronts: his proximity and connections to the Valley, his technical background, and his corporate development background. He had also already gotten a commitment from BDC for $20M to raise a Seed fund in Alberta (in what was SpringBank TechVentures)… as Shawn said (and shared with me at a VC event a few years ago). BDC’s Brian Elder, who happened to be based in Alberta, told him to go meet Chris, and that was how he ended up joining that team.

And Chris was open to this as he was playing Moneyball for VC team building. He was bringing in partners that LPs in Quebec and all of Canada would love to back.

Francois provided MSBi with solid back-office relationships for their Quebec LPs, while John brought U.S.-based venture capital experience, a New York/U.S. co-investment network, and America Family office connections. Shawn had a keen technical background and a Corporate Development background, and because he was in Alberta, that made them eligible for some regionally focused LP funding. 1+1 made 3 with each addition.

Chris retained the team that had joined MSBi up to this point, but these key additions brought MSBi to the next level. So, remember that quote from Francois at the beginning of this section and in my First post? Again, I 'creatively' edited it for effect. Here is his full quote.

In 2007, I took a leap of faith and joined a small venture capital fund called MSBi Management, which, back then, invested in life sciences and semiconductors. And when I say a leap of faith, I’m not kidding. The team was preparing to raise a second fund, and if it didn’t work out, they would not be able to afford to keep me on the payroll. It was that simple...

Well, that year turned out to be great; we changed our name to iNovia and ended up raising a $112M fund…”

So, how did Chris and that team reach $112 million? From a $20M BDC anchor cheque?

That fund was raised in late 2007, almost two years after the BDC commitment. Chris slowly cajoled and convinced his previous and new backers to join the fund. And each of those partners was given a good reason to do so. From AVAC (as the precursor to Albert Enterprise), Caisse de dépôt et placement du Québec (CDPQ), (previously discussed) FIER Partners and of course BDC. A dozen othe investors were also in there who chose to remain out of the present release.

This is the process Chris alludes to when he talks to everyone at StartupFest about the genesis of iNovia. When you discuss the process, he is very generous, praising all those backers who helped him get it over the line. Without any one player contributing, the fund probably would not have come together.

However, the fund was oddly (or perhaps not) called iNovia II, and all of the Partners there at that moment in time are today referred to as 'founders' of iNovia, because, without any of them, I'm not sure Chris (and Mark) could have pulled this off.

Why was it called iNovia II, rather than iNovia I? Because Fund 1 in everyone’s mind was the 2004 $20M tranche of institutional money that came in after MSBi's initial round, it was where Chris could showcase their investment capabilities, which had great early promise —that was the track record.

But iNovia II was a coup.

To put the coup in the context of how amazing it was, in 2008, iNovia raised $107M ($5M showed up a few months later), when all VC funds in Canada raised only $1.08B—no other first-time fund focused on seed or Series A raised that much again until 2018.

OR In 2008, approximately 10% of all LP investments in Canada went to iNovia, which was, I’ll argue, a brand-new fund at the time. You might say it was not, but iNovia, the company, was founded in 2007, and most of the senior team was brand new.

Today, iNovia has several billion under management and is the anchor tenant in the Quebec venture ecosystem and, to the same extent, in Canada. At the same time, Chris Arsenault, Shawn and other several of the cofounders, still run the place. No other fund in Canada plays at almost all levels of Venture Capital like they do.

They made a video on their 15th anniversary that is fun to watch. I do recommend it.

Many other Seed and Series A funds emerged following the iNovia raise.

However, this team led the new generation of Canadian Venture funds, giving rise to names across Canada that we all know today. Real Ventures, Whitestar, Golden Ventures, VersionOne, Build, Garage, and others can thank iNovia for demonstrating the veracity of the story that backing new managers in the early stages in Canada can be a winning formula. An argument that is increasingly less popular today.

However, when Chris shared his own story and stated that it took about two and a half years to raise what we call iNovia, he didn't mention MSBi or the Brunet report once.

Legacy and Impact on Canadian Venture Capital

However, the Brunet Report served as a catalyst that led to the establishment of many of the local and national venture institutions that Canada has today. You may think this is a Quebec story, but each ecosystem released reports after Brunet and took learnings from Quebec.

Nova Scotia, New Brunswick, Alberta, British Columbia, and to some extent Ontario all took the Brunet report in hand, using it to develop and release local versions in the following decade. The Federal government used it as an outline for the Jenkins report, which catalyzed a more national innovation and venture capital strategy. Twenty years later, it is a document whose influence is still being felt.

However, like all historical events, particularly in Canadian tech, it is rarely read or reviewed.

Ask people in Quebec, and they’ll tell you the Brunet report is the reason why Quebec emerged from the financial crisis with a robust venture market. And in the case of Teralys and other pillars of the community, I’d agree.

However, an often-forgotten lesson is important because the lynchpin of the iNovia journey was a commitment from the BDC to anchor the fund. Not the programs Quebecers today point at.

Quebec’s implementation of the Brunet report failed its early-stage market. It required the BDC to try first through the Go Capital initiative and then through direct LP cheques to help. Quebec often forgets about that key point. Going forward, they should try to fill that gap themselves.

Some thoughts on the BDC’s role today

That program that BDC announced in 2006—which catalyzed iNovia—had not progressed significantly by 2008, when a financial crisis impacted both BDC and the rest of the world and led to its quiet shelving3. Unsurprisingly, BDC was dealing with a mess (and that is a story for another day).

However, following a 2009/10 internal review of their venture capital efforts, BDC looked back and realized that this initiative to fund the early stage through LP cheques rather than a direct fund (Go Capital) made a lot of sense. iNovia was often discussed internally and externally as a clear example of an apparent, unencumbered success.

So, in early 2011, BDC established a new group to double down on the iNovia lessons. It was initially known as Strategic Initiatives and Investments and later renamed several times. Regardless of the name, its stated goal and intention were to support and help build the early-stage market in Canada through direct and indirect methods.

Some of those efforts were LP cheques to emerging or small fund managers whose names you might recognize. VersionOne, Real Ventures, Golden Ventures, Garage, Mistral, Rhino, Brandproject, Gibraltar, Tandem Launch, Build Ventures and McRock. There were others. All of these were focused in line with the goals of this program, which was to build an independent ecosystem in the early stage.,

Not all names were successful, but all contributed to the ecosystems they focused on and leveraged the support of the BDC to raise larger funds.

However, this program was quietly merged with the Fund of Funds group in 2015/16, and the focus shifted. Today, you won’t find the Fund of Funds group seriously considering any funds with targets under $50-80M, something they were happy to consider in the early 2010s.

That Strategic group also cut cheques to early-stage companies at select accelerators. Here is the team’s VP, Senia Rapisarda (who never ages, it seems, and now runs Harbourvest Canada), talking about the group back in 2013:

In the video, Senia discusses 40 (pre) seed deals at $150,000 a pop, which amounts to $6 million, not a massive amount of money, but impactful for those companies. This program was also shelved in 2016/17.

So Canada’s BDC has seemingly refocused on what the ‘D’ stands for. And what does the D stand for? BDC—in English—is the BDBC—the Business Development Bank of Canada. It's got a long and interesting legacy, but for this discussion, the “D” in its name is essential because it is now the topic of discussion by my industry peers and others.

Like many crown corporations, it is a creature of a Parliamentary Act. Thus, it undergoes a periodic legislative review every ten years. The most recent one was done in 2023, covering the period from 2010 to 2022. It’s an interesting read. However, there are two issues: the expansive timescale in the review, which is pretty huge at 12 years and this:

Further, the BDC launched its Strategic Initiatives and Investments group during the review period, and mandated it to stimulate the venture capital and innovation ecosystems. Specifically, the BDC's objectives were to highlight the success of underlying technology business in Canada; enable and attract future investment and value-added support for these businesses; and, demonstrate the viability of the Canadian venture capital industry and attract further capital into this asset class.^{Footnote 43}

As the VC industry gained momentum in Canada, the BDC adjusted its VC strategy to reinforce the Government of Canada's priorities, including a greater emphasis on supporting diversity and emerging sectors. In addition to increasing investments in the ICE Fund, the BDC launched the Women in Technology Venture Fund in 2017, which represented the largest VC fund at the time focusing on women entrepreneurs in Canada.

These two paragraphs are essential, as the first paragraph directly covers the conservative government's mandate of 2010-2015, and the liberal government’s 2015 onwards is covered in the second one. The adjustment between those paragraphs turned off BDC’s focus on investing in early-stage companies and first-time GPs as a strategic consideration.

Frustratingly, the Legislative Review uses footnotes in its Review that reference a government report that you and I can’t read. (footnote43) It was written by a firm that was asked to write it for only this use case, and it is the only report not publicly available. Why, your guess is as good as mine. But why should a public legislative review about the BDC's role in VC hang on a report you and I can’t read? That’s a question for another day. (or an access to information request)

The BDC legislative review (and if you’d like to, it's worth reading) acknowledges declines in market conditions (as it went to press in early 2023), and BDC’s response to the review was to introduce a “legislative review action plan”, in which they also announced their $50M Seed Fund.

Again, they did not discuss or review anything for the first time or small emerging managers outside their diversity commitments. The Review effectively said the BDC didn’t need to address this. However, an emerging manager in 2010 was significantly different from what it is today, and only someone with market experience might catch this. And I don’t think the average VC observer understands that difference.

If you, like me, believe iNovia Fund 2 (was Fund 1), then by the BDC’s definition of an emerging manager, iNovia continued to be an “emerging manager” until their fourth fund or the fund that they raised in 2017—nine years after the events I’ve catalogued here. In 2018, I once congratulated (jokingly) Chris Arsenault on a VC panel on no longer being an “emerging manager. " No one else got the joke.

But if Chris were approaching the BDC today, I doubt he’d get the reception he got in 2006. The BDC has decided they are not needed as a catalyst cheque for the first time or GP’s addressing the seed fund market segment.

But the iNovia team sees an opportunity in the problem I’m discussing, as:

Inovia partner Karamdeep Nijjar put it. “We also understand that investing at those really, really, really early stages is an art on its own, and there are people that are as well suited—if not better suited—to do that,” Nijjar told BetaKit in an interview. “For Inovia to thrive long term, it has to work within an ecosystem that is well-supported and has a lot of interesting folks doing interesting investing at stages earlier than us.”

I don’t think Karam could have better presented the case for stronger (BDC) involvement at the early stage. But subsequently in the same article, he did:

Nijjar argued that while there are some institutional VC funds in Canada doing a good job of backing pre-seed startups at scale, the country could use more of them. From his perspective, more diversity in terms of funding sources will ultimately lead to better outcomes.

“This is a pretty unique asymmetrical bet we can take,” said Nijjar, pointing to its low-risk, high-reward potential. While he said the Discovery Fund is unlikely to generate strong short-term results, over the longer term, it could have “a dramatic impact” on both Inovia and the ecosystem at large.

This should be a polite wake-up call to my friends and former colleagues at the BDC. I used to work there and often wonder why only iNovia is looking to support the ecosystem with a small but impactful fund program for early-stage focused GPs?

It's incredible how the world turns here.

iNovia, the Fund, which was anchored by a forward-thinking Fund of Funds leader back in 2008, is now doing the job the BDC did for them by mentoring and catalyzing the next generation of managers. Keeping the ecosystem moving. I’m sure they would love some company.

Here's a quick recap of why I’m spending so much time on this: This is the second (of what looks like three parts) of a critical moment in the history of the Quebec Tech/Venture ecosystem. A few reasons I think this is pertinent: Quebec’s Tech ecosystem today was created during this period, and it is relatively forgotten—most of today’s decision-makers are unaware of the details. You can trace almost a direct line from this time and work to what eventually would be the VCAP (Venture Capital Action Plan) in 2012/13. If anyone plans to discuss our industry's future and the wider ecosystem, this history is meant to set a broad idea of what happened, when and why - with some interpretation. It’s also just plain interesting.

So, as discussed last time (in Part 1), Quebec burned through billions in venture capital with little to show for it. The market was almost performative with lots of investment, but a few companies were with venture money from outside the province. Meanwhile, with billions of less venture capital from the government, Ontario outperformed and dominated the market in Canada. This all lead to a reckoning for Quebec in the post-dot-com crash:

By 2003, there was no escaping that reality.:

Over the period from 1993 to 2002, the Quebec government injected $ 4.6 billion in risk capital to finance businesses. Almost 80 percent of that amount was injected between 1998 and 2002 at the height of the PQ's interventionist policies. "The heavy losses they [government-owned venture capital corporations] have recorded have placed additional strain on Quebec public finances.

Why the sudden recognition that this might be a bad idea? New ideas are usually from new people…  there has been a change of government. The above quote pokes at the previous (PQ) government’s administration. 

Any new government will find that the previous administration was subpar, and the incoming Liberals were no different. But like all elections, the Provincial election of 2003 was about many things, but two things concern this story. One of the main complaints by the Liberals during the elections was that PQ had been “too interventionist,” while the provincial government was also running too many fiscal deficits—both issues—and the subsequent Liberal win would impact the Venture Ecosystem. 

The Charest Liberals entered office, and one of the first things (within a month) they did was remove the leaders of Quebec’s central investment funds, whose work was the main subject of my last post. The new premier Charest:

fired the top executives of two significant government investment funds, saying he was determined to make government intervention "the exception to the rule, not the rule."

He argued that Quebec should join the Canadian mainstream and abandon the policy of economic nationalism that has characterized provincial governments since the 1960s.

"We are going to do here what has been done everywhere else in Canada. We are coming very late . . . to this exercise," Mr. Charest said after a cabinet meeting.

Previously, I pointed out that everyone in Quebec seems to have amnesia about how much venture capital was available locally in the pre-2004 period... In particular, I used this quote:

“Twenty years ago, there needed to be more venture capital in Quebec, recalls Mr. Leroux.  "There was no structured ecosystem. Apart from angel investors, companies that needed capital to innovate had no one to turn to.”

That quote came from Investissement Quebec (IQ)’s website. But, with some license, I didn’t use the full quote (en anglais). Here it is:

 "There was no structured ecosystem. Apart from angel investors, companies that needed capital to innovate had no one to turn to. It was only in 2003, following the publication of the Brunet report, which aimed to examine the role of the Quebec government in venture capital, that things began to evolve."1 

Publishing a report sounds innocuous. People publish reports every day, so why was this one so important? And why is it being discussed decades later?

The Brunet report would signal a pivot point around Quebec's Tech ecosystem. There is a before and after, which is why the amnesia from the time before the report is so interesting. It is as if there was no ecosystem before, and if there was, it is tainted as being from “before”. 2

So,  if you were in the Quebec VC ecosystem in that ‘before’ time, you know about and lived through a massive change; if you arrived sometime after, say, post-2012, you probably had no idea there was a report that brought about important changes; you see the ecosystem it built as having grown somewhat organically. As we will see, this was all part of the plan. 

So, in all fairness to Benoit (whose quote I used) over at IQ, he's 100% correct that the Brunet report was where things began to evolve in Quebec.  

But while everyone (including me) talks about a “Brunet” report as a famous (forgotten) pivot point- it was/is part of a series of reports, "The Brunet report"3 along with a follow-up report named "Government Interventions in Venture Capital: The Case of Quebec"(2004) written by the Council of Science and Technology4 recommending a series of reforms and changes to Quebec's involvement in Venture.5 Other meetings, letters, hearings, data releases, blog posts, and discussion papers also all took place in the same period…  

This work and the main ‘Brunet’ report are the most essential documents for the Quebec tech ecosystem in a generation. Twenty years later, they are still being discussed. (like in this post)

But as no one reads reports (then or now) - let me TLDR the most critical recommendations and points (for this discussion). Numerous other tangential recommendations were discussed, but these were the most important when looking from this vantage point of hindsight (IMHO).  As it is (unsurprisingly) all in French, I have translated the essential takeaways (and not in the same order as in the report)6:

1. "One approach would be to convince local informal investors (angels) to invest in the new enterprise. These angels exist in diverse regions and would be able to advise and mentor the new entrepreneur by sitting on the board of directors."7[5]

2. "The second recommendation concerns the establishment of a government fund of funds to support technological enterprises in the startup, expansion, and development phases. The government would allocate $200 million to this fund over three years."8

3. "The government should withdraw from certain phases of funding directly, but it is unlikely that private venture capital firms will agree to cover the seed and startup phases, which are very risky."9

4. "Encourage universities to emphasize commercializing public research spin-off companies." 

They also had a few warnings and many learnings, such as: 

“Heavy government involvement in the Quebec market has led many investors to pursue goals in addition to profitability, mainly job creation and economic development. This approach flies in the face of normal market rules. It makes private and foreign investors more hesitant and tight-fisted, which is natural because they prefer experienced fund managers whose goal is to achieve returns.”

And that: 

"the venture capital market in Quebec is dominated by government-supported players. These players often have objectives other than pure profitability, making them less selective than private venture capital firms. This dominance can crowd out private Canadian and Quebec venture capital firms because government-supported players offer more favourable financing conditions to entrepreneurs." 

You might think these quotes would be applicable today... You might think that, but I’ll refrain from commenting.

But let me list some of the key goals the report recommends in easier-to-understand words; they recommended:

1. Angel networks

1. A profit-driven fund of funds (i.e., a big LP) for venture capital funds to focus on in Quebec.

2. An arms-length early-stage fund system anchored by government money because they are very risky. 

3. Commercialize the Quebec University’s R&D Or, as we might say, en Anglais - tech transfer. 

This report was released in late November 2003 (it was discussed and accepted by a government committee in early 2004). So, let’s examine how they handled the issues they identified. 

Angels

The report called for more angels in the early stage. But how do you “find angels”? By giving them Tax credits (or subsidizing their investment). However, to coordinate this with the broader goals of the Brunet report, the government centralized the angel organizations. 

To encourage Angels, Reseau Capital (Quebec's more forceful answer to the CVCA) incubated and ultimately spun out Anges Quebec. They announced the organization in 2006 and held its first conference in 2007.  Its first Chairperson, Richard Bruno, gave this quote:

"The most difficult problem during the first 18 to 24 months of a business is to obtain not only the necessary financing but also the experience of business people who have gone through this successfully.” 

Which sounds as though he was responding to the Brunet Report. Because, in some ways, this was a direct response. From the report: 

One approach would be to convince local informal investors (angels) to invest in the new enterprise. These angels exist in diverse regions and would be able to advise and mentor the new entrepreneur by sitting on the board of directors.

And 

Angel investors are much rarer in Canada than in the United States to support the seed stage of technological products.

The Anges Quebec Website gives a nuanced, history of how they came to be - with no mention of the report or Reseau Capital - but a mention of those who took up the goal on this: 

"In 2007, Quebec businessman Richard Bruno returned to Montreal after several years in Chicago, where he discovered the concept of “angel groups,” networks of high-net-worth individuals who invest capital in promising startups with high growth potential. While the concept was very popular in the U.S., Richard Bruno was surprised to learn that it did not yet exist in Quebec. So he said to himself, why not here? He then took it upon himself to recruit three former business partners whom he knew were passionate about entrepreneurship and investment: Louis Saint-Jacques, Nathalie Beauregard and Martin Duchaîne. Together, they set to work creating an organization that, one year later, would become Anges Québec."

All of this is true, but the impetus for this initiative was a Brunet report goal several years earlier. As you can see from the screenshot from their original website, this was initiated within Reseau Capital and discussed there a year earlier.  

As an economic history of this period characterized it: <quote>

Anges Québec received millions in public subsidies between 2008 and 2015 but, in contrast with Ontario where more than a dozen regional angel groups operate in parallel, it was set up as a peak organization, centralizing and coordinating angel investment in Quebec. Government support thus had a clear economic purpose: unlike most VCs, angels typically invest in high-risk, seed or start-up stage ventures, adopting a “hands-on” approach and providing mentoring services to investees.

This centralized mission isn’t necessarily a bad thing.  Anges Quebec has been uniquely successful in its 18-year existence. In 2012, the government augmented it with a sidecar fund that leverages the angels’ work to supply more capital directly to their early pre-seed and seed funding projects.

A Fund of Funds

The Brunet report called for creating a Fund of Funds centred around a $200M commitment from the government, which is a lot in aggregate but only a little if you consider it over the period it is meant to be deployed.  

Here is some quick math for the non-VC readers. Most VC funds have a lifespan of between 10 and 12 years, so if we take that 200M and spread it out evenly over the 10 years, that's 20M a year— so it’s not a substantial yearly commitment. If you think of that going into actual venture funds and you plan on doing, perhaps, ten or so, the average commitment would be $2M a year per fund. Not a lot. So you look to make that contribution and encourage others to join up. But before you do that, you must get that $200M out the front door. 

The government slowly rolled this out, as $200M is still a lot of money, hoping to ensure it would arrive with other commitments. It committed to the Fund of Funds plan four times without seemingly doing anything with it: after the report in 2004, in the 2005 budget discussion (without the number), again in 2007, and at a provincial financial committee in 2008. It was also discussed yearly at the Quebec Venture Conference but seemingly stalled. 

One primary reason was the small thing of 'politics'; without going into crazy details, the Brunet report was released under a Liberal government, who then lost their majority in 2007 and 2008 re-won their majority.10

Unsurprisingly, the Quebec tech and VC market leaders wondered where this money was. The government wanted co-investors and kept gaining or losing them over the period in question. Supposedly, CPP was verbally committed pre-2005, but ultimately, this died when the foreign investment rules changed in late 2005. (You can read all about that here.) 

So what can make a Quebec government move fast?

Watching the Ontario Government get something done.  In April 2008, the Ontario government decided to launch the Ontario Venture Capital Fund, a $200M fund, as they looked to solve the lack of pension support in their province. This reminded Quebec that they had also committed to a fund, but not to be outdone; they went much, much bigger - as they announced in the winter of 2009:

The Caisse de depot et placement du Quebec, the Quebec Federation of Labour's Solidarity Fund and the provincial government have joined forces to create Teralys Capital, which will invest in more than a dozen private funds that support companies in the life sciences, information technology, energy and clean technology sectors, starting next month. 

The Caisse and the Solidarity Fund are supplying $250 million apiece; Investissement Quebec is providing $200 million. Teralys will also be looking to attract private investors, like pension funds, to pump another $125 million into its "fund of funds," among North America's largest of its kind.

That $825M(!), using the math I explained earlier, it is about $82.5M a year in VC dollars or around $10M into each fund...  2009 was, of course, right in the middle of what kids today call "the Great Recession" or those of us who lived through it called, Hell. 

And Teralys was born in the middle of this mess, so raising that last $125M was almost impossible. 

But it was run by Jacques Bernier, who, until Teralys was launched, was a strategic advisor to the FTQ Solidarity Fund, which he joined in 2004 as Senior Vice President of ICT Venture Investments. So Bernier was a VC with an in-depth knowledge of the Quebec venture capital sector.  

His co-founder at Teralys was a guy named Eric Legault. Who was Eric? Éric was responsible for the venture capital Fund of funds program at the Caisse de dépôt et placement du Québec. He was an experienced funds manager and, before CDPQ got out of direct investments, was also a direct tech investor in their direct team—i.e., another VC and LP. 

So, together, the two major non-government LPs of Teralys sent the two trusted stars of their VC units to run the largest fund-of-funds group in Canada, which was also using Quebec government money. They were a safe pair of hands for the vast commitments from Quebec. This signalled that Quebec would give their money to those they could trust, who had track records, and people they knew. 

Quick sidetrack: One afternoon, as I sat at a cafe with another Quebec VC friend, Jacques Bernier, crossed in rush hour traffic to join us for a 5 à 7. At the last second, he was nearly hit by a motorcycle cutting through traffic. My Quebec VC friend said, "That motorcyclist could have ended the Quebec Venture ecosystem in under a second.” 

How very true. 

Importing Excellence

I mentioned earlier that CDPQ stopped directly investing in tech in 2004—right after the Brunet report came out. The report called for them (and the other significant investment funds) to leave the sector, and they did so happily…

That doesn’t seem happy, but here is a quote from a newspaper interview a few years later, in late 200511:

The chief executive officer of the Caisse de depot et placement du Quebec said yesterday that a strategic shift he made two years ago has started to pay dividends. More venture capital is available for Quebec companies seeking to get off the ground.

In 2003, the Caisse announced it would get out of the business of directly providing venture capital(seed money or early financing) to start-ups.

Instead, the giant pension investment fund would act as a catalyst, placing its money with venturecapital specialists and co- investing with them. It dismantled its own venture-capital operation, raising more than a few eyebrows.

"I had three good reasons to do so," Rousseau said in an interview yesterday.

"Our costs were too high, we weren't making money in that business, and we were competing against Quebec firms already in the venture-capital market."

Two years later, he sees tangible results. He told the North American Venture Capital Summit in Quebec City yesterday that a number of U.S. and Canadian partners have come into Montreal to invest with the Caisse.

"We wanted to ensure that big international investors put Quebec back on their radar screens. They've done that."

The numbers from the time show that he was wrong. There was less venture capital available, and the article started with this telling setup:

Bright, young entrepreneurs in the Montreal area are usually starved for the same thing: investor capital.

But Henri-Paul Rousseau believes the outlook will be much brighter for them down the road.

Of course, this (2005) was two years after CDPQ left (2003) the local market. It is hard to square how the head of CDPQ see’s more venture capital in a market, and how the numbers and entreprenurs show different. But as this post (and the next) show it’s always a long road for founders (and sometimes funders) before people notice an issue..

It was becoming increasingly clear that Quebec needed specialized fund managers for different stages and sectors of the tech ecosystem. The large Labour-Sponsored, Government (IQ), or pension-led (CDPQ) funds were not staffed for those early start-up entrepreneurial risk profiles. As I showed in part one, they could not integrate the ecosystem into the broader North American Venture flows. 

 This was a crucial issue.  

There were very few fund managers locally in Quebec that could point to a consistent ability to promote their deals outside of the province. In 2004/05, few had experience building seed funds that raised a second fund and rarely a third fund.. we call this "franchising," meaning building more substantial funds in series (i.e. Fund 1 and Fund 2, etc... ) as funds grow and build, they create network effects for their portfolio companies (deal flow), and their track record helps them to get better at promoting the portfolio for follow-on rounds to other venture colleagues in different geographies (like California) outside the province. 

These are table stakes today, but if we’re talking about the problems in Quebec during this period, only three independent funds focused on seed, or Series A in Quebec were on a Fund 2 or 3.

So, how do you build an experienced local VC industry that is plugged into international funds relatively quickly? 

Quebec Inc. decided to graft experience into the local Quebec market. CDPQ and some others began investing in funds outside of Quebec and 'encouraging' them to set up shop in Montreal.  

Or, as CDPQ said in the 2007 Annual report (screenshot):

When they said 'active in Quebec,' they meant willing to open a 'local office.' From the same report:

In addition, the Caisse has encouraged two major U.S. funds to set up shop in Montréal: Proquest Investments and Vantage Point Venture Partners. 

But there were many others, like Celtic House, Rho Canada, Garage Ventures Canada, Emerald Technology Ventures, and Propulsion Ventures, which all opened offices in Montreal or created local funds but were predominantly NY, Valley, European, Toronto, or Ottawa-based.  

JLA Ventures, which became Blackberry Venture Partners (now Relay Ventures), also opened a Montreal office with this in mind, where my current business Partner, David Dufresne, worked as an associate during this period.  

This joint venture-type VC system was an expensive but solid way to build local expertise and network effects outside Montreal. 

As CDPQ (and others) shut down their direct investments during this period, the people with experience went elsewhere. The best example is Sophie Forest, who joined Brightspark and opened their Quebec office the job on her first day? Raising their Fund 2. She'd been a direct investor for years at CDPQ, and fortuitously, they were also an LP in the 1st fund. 

This skill transfer into the local ecosystem paid dividends but was a long-term game.

Rebuilding the Seed Industry

So what about homegrown Venture firms?

As pointed out in the last post, there was a robust and active seed market—led by many local GPs. But by 2006, only $51.4M went to all Seed investments in ALL of Canada, while the broader early stage sector of sub-$5M (which in this period would have been Series A) investments only accounted for just under $200M Canada-wide. The great Canadian Venture Nuclear Winter was underway.  

This is what happens after every boom and bust cycle in Venture Capital, particularly in Canada. Seed investments are usually disproportionately affected. The Brunet report was not unaware of this truth. It called for the government to support the seed stage, contrary to its advice to exit all the other stages. As it said: 

"The government should withdraw from certain phases of funding directly, but it is unlikely that private venture capital firms will agree to cover the seed and startup phases, which are very risky."

Remember that the government change occurred in March of 2003, and the first of the reports came out in late 2003. During this period, the Quebec Fundraising market for GP’s effectively froze. As everyone knew, the government was about to implement a massive change. After the Brunet report, all the quasi-government actors, who ordinarily invested in the Seed funds, exited the market – thinking the government would step in. Because that’s what the report had recommended they do, and the government “accepted the report”…  meanwhile, seed funds suddenly found no LPs.

Let’s pause here and admire the problem the report created... 

I urge you to think of this as if you’re a bureaucrat in the Quebec Provincial Government… because the report said the Government should invest in the riskiest part of the venture market. But if you’ve been paying attention:

• The new government just fired many of the LP leaders who invested in seed because they had lost a lot of money by, you know … investing in seed—as they’d been told to by the previous government. 

• Your new government leaders commissioned a report that you (i.e., the government and/or bureaucrats) should directly invest in the seed stage, as it is the riskiest sector. 

• You (Mr or Mme bureaucrat) did not take this job in government to take risks. That’s mostly what you try to avoid—because you don’t want to be blamed for losing any of that money.

• Now you have to invest in the Seed stage, but how can you invest in Seed - but not take too much risk… 

Based on the above, the government found itself in a predicament.

In the end, the solution to the problem was solved by (broadly speaking) a firm named FIER Partner. As they described themselves (on their now-defunct website):

FIER Partners is thus an active contributor to the mission of FIER (Fonds d'intervention économique régional or regional economic intervention funds) program, which is designed to increase the amount of venture capital available in every region of Quebec as quickly as possible. FIER Partners is one of three components of the Regional Economic Intervention Fund (FIER) set up by the Québec government. It is a limited partnership with initial capitalization of $180 million is provided by IQ FIER, a subsidiary of Investissement Québec, for an amount of $90 million, and by three tax-advantaged funds: the Fonds de solidarité FTQ ($50 million), Capital régional et coopératif Desjardins ($25 million) and Fondaction, the Fonds de développement de la CSN pour la coopération et l'emploi ($15 million).

The government didn’t disguise it; this was a mission for economic development (of the Seed ecosystem). But to reduce government exposure, the government goal was:

Quote:

FIER Partners is to invest one dollar for every two dollars invested by the private sector. 

If you think this was convoluted, I’d agree. You had a report saying the private sector wouldn’t invest in this stage, and then, as a government, you turned off funding in that stage for almost three years. (2003-2006)

When you return to market, you require that all funds raise private funds of two dollars for every one of the government dollars you invest. The chicken or egg problem then arrives; should the government commit to these funds first and be a catalyst or last?

We know the answer if you don’t want to look bad.

Last. 

How last? By investing in funds that had already been closed. Throughout 2006, they announced investments into local funds that had closed months and sometimes even years earlier. 

For example, remember Brightspark, which Sophie joined after she left CDPQ? Sophie began raising money for Brightspark Fund 2 in early 2004 and had its first close in January 2005. Then Brightspark got a cheque from FIER in mid-2006, nearly 18 months later… 

FIER started investing in 2006, nearly 3 years after the Liberal government paused its involvement in the seed industry. This means there was an almost two-and-a-half-year gap in local LP investing in seed funds after telling all the usual local LP partners that they should exit the market in 2003. (!) The Provincial Government thought they could get away with this as several venture firms funded previously were still investing out of funds that had been closed. But in reality, as the quarters and then years dragged on, it became increasingly challenging to syndicate a deal with local partners, and as future posts will show, the rest of Canada had no VC funding either. Quebec’s ecosystem started to wither, and numerous locally based GPs exited the market after failing to raise funds. Meanwhile, funds from out of the province were getting funding… it was a pretty big turnabout for the ecosystem.

But this led to a new problem for FIER. 

By the time they started investing, so many GPs had exited the market or failed to raise as they’d lost their traditional LPs that FIER found themselves with fewer funds to invest in. As a former CDPQ LP in Quebec who retired shared with me: 

The government kept thinking the problem in Quebec was, as you pointed out in that post, in the linkages and follow-on - in what we’d call the growth stage. However, they viewed Seed as risky and didn’t want to invest there. They hoped angels could handle it themselves. It created a massive gap in the seed market, with all these funds at A and B that couldn’t find the deals as no one was in the earlier stage. It became critical for the market in 2007 or 8…

With Quebec's leaders now very gun-shy about Seed, between 2001 and 2006, no new or first-time Seed funds were successfully closed and established for software investments in the province (that I can find). The seed funds that got funding from outside the province were corporate funds (ID capital) or local funds from U.S.-based partners (Garage Tech Ventures, Rho Canada, etc.). 

So what do you do when everyone knows there is a problem with the local Seed market and you don’t want to invest in a brand new Seed Fund?  You create your own…

And also helpfully tossed out the “$2 of private for every $1 of government money” rule. 

You can’t make this stuff up…

From BDC and FIER, there was a brand-new local seed fund: $100M for Quebec. 

“Wait,” you might say, “isn’t BDC a government fund?”

Well, don’t ask that question.

Today, my friends at BDC are still managing the Go Capital fund (18 years later). 

So, as the government delayed, numerous GPs gave up and closed down in Quebec.

The FIER solution to the lack of early-stage funds was to create a fund with BDC…  almost as if pretending the Brunet report never existed—they’d made a new government fund for Seed.

Outside of Software, FIER did back funds that got their start, thanks to their backing. CTI Life Sciences comes to mind, but it was a slim market in the post-dot-com car crash. 

Quebec lost a generation of its emerging venture managers as they waited for a “safe bet” to get them to return to the seed category. 

It took Quebec’s tech leadership until 2009 to correct this mess. In 2009, the Quebec Government announced in its budget a new $100M seed allocation; it re-upped that commitment in 2016. Quebec learned another lesson from this period: If they wanted a robust seed market, they needed to be an anchor and commit to it consistently. 

So, where was the next generation of Quebec’s seed managers being built? 

It is in an unlikely place, which we will explore in Part 3... 

Over the next few posts, I plan to tell an entertaining story about the twists and turns in the Quebec ecosystem over the past 30 years. Quebec is an interesting study for the rest of Canada. Many of the stories are not widely known, and I think they need to be shared somewhere to reach a whole new generation of emerging managers who are entering the Canadian Venture ecosystem.

I’m not alone; take, for example, this (edited) email from a Quebec-based VC Analyst who asked a question about my last post.

Hey Matt,

You said that –

"By 2007, only $1.19 billion had been raised by Canadian V.C. funds, and 70% of that new capital for V.C. funds had gone to only Quebec-based organizations."

Was this because CDPQ jumped into the market to save Quebec after they all left? It doesn’t look like there was a lot of Venture Capital in the market before then… 

What's fun was as this email came in, I was watching a video of a Quebec V.C. reminiscing about the same year - here is what he said:

In 2007, I took a leap of faith and joined a small venture capital fund called MSBi Management. Back then, the fund invested in life sciences and semiconductors. And when I say a leap of faith, I'm not kidding.

The team was preparing to raise a second fund, and if it didn't work out, they could not afford to keep me on the payroll. It was that simple. 

2007 was a pivotal year for Venture Capital in Quebec and Canada. If you want to understand the makeup of our Canadian Venture Capital ecosystem today, for better or worse, you should start in 1990s Quebec. This was the crucible moment where significant lessons were learned in Quebec and shared with the rest of Canada. Were they the right lessons? I’ll let you decide.

 So let's dive into the history. Like all things historical, it's surprisingly timely and more pertinent today - as I'll show. 

Maître Chez Nous 

In my mid-20s, I sat at a table with the (now late) former Prime Minister, Brian Mulroney. He confided to us (paraphrasing) that when the President makes an address to his nation, everyone in Canada listens. But in English Canada, we're listening to the American President, while in Quebec, they’re listening to the French President.

 This insight pays dividends when understanding the differences between how Quebec approaches economic solutions and how the rest of Canada does. 

That unique way of solving problems leads to knee-jerk responses to any 'Quebec solution.' 

Quebec is different, but I'd like you to consider that difference from a slightly nuanced angle. The main problems you're trying to solve if you're a political leader in Quebec are roughly two things:

• Your people are culturally (and importantly linguistically) a minority within the country of Canada. 

• You are not a nation, well, not legally. And many of your citizens are Nationalistic and want to be a nation or treated like one, whatever that means...

Of course, if you're a Quebec political leader, you have other things to solve, like healthcare, building bridges, etc. But you have these two things I mentioned that differ from anywhere else in Canada.

So Quebec, after its 'quiet' revolution, decided to solve its first problem by promoting the Quebec language and culture.

But how do you act like a ‘Nation’? Let's examine the second point using a clear policy decision example. When Canada started the Canada Pension Plan (CPP), what did Quebec do? 

It can be summed up by that excellent picture I stole from Wikipedia, Maîtres Chez Nous. It means quite literally "Masters of our House." 

They wanted Quebecers (ideally the French-speaking kind) to be in charge of Quebec, in politics, culturally, and economically. So, they also started to build parallel institutions for Quebec that looked much like Ottawa had built for all of Canada, but were different.

Quebec opted out of CPP and created CDPQ. But it wasn't trying to be a Quebecois CPP. It was modelled on the Caisse des dépôts et consignations, France's state Pension Plan. This statement on its goals at inception spells it out... (French first, then English below):

Les intérêts des Québécois ne s'arrêtent pas, après tout, à la sécurité des sommes qu'ils mettront de côté pour assurer leur retraite. Des fonds aussi considérables doivent être canalisés dans le sens du développement accéléré des secteurs public et privé, de façon à ce que les objectifs économiques et sociaux du Quebec puis- sent être atteints rapidement et avec la plus grande efficacité possible. En somme, la Caisse ne doit pas seulement être envisagée comme un fonds de placement au même titre que tous les autres, mais comme un instrument de croissance, un levier plus puissant que tous ceux qu'on a eus dans cette province jusqu'à maintenant

Or in English (my emphasis)

The interests of Quebecers do not stop, after all, at the safeguarding of the amounts they will put aside to ensure their retirement. Such considerable funds must be channelled toward the accelerated development of the public and private sectors so that Quebec's economic and social objectives can be achieved quickly and with the greatest possible efficiency. In short, the Caisse must not only be considered as an investment fund like all the others but also as an instrument of growth, a more powerful lever than all those we have had in this province until now.

You might call this socialism, and most of us in English Canada do. But if you're nodding and thinking, 'This is socialism,' and you're sitting in Alberta, I'd be careful about that glass house you're sitting in.

"We've never faced a more hostile situation coming from the central government."

"This is a new moment in our history."

The quotes above are not from a Quebec separatist leader but from former Alberta Premier Jason Kenney, who, in 2019, let the rest of his province (and Canada) know why they should take back control of their portion of the CPP. 

The report explaining why, which was released at the time, is pretty straightforward, (my emphasis):

"Create an Alberta Pension Plan offering the same benefits at lower cost while giving Alberta control over the investment fund." "Legislation setting up the Canada Pension Plan permits a province to run its own plan, as Quebec has done from the beginning. If Quebec can do it, why not Alberta?"

It seems Alberta is taking a cue from Quebec—it wants to be the master of its own house.

So, while Alberta is changing its stripes, from the beginning, Quebec has believed this to be economic nationalism—not socialism (though that line is sometimes very fine). They're taking their own money and investing it in themselves, with professional managers who look at the holistic approach for both the actual returns and the economic development of the home province of the investors themselves. 

What is the name of this? Quebec Inc.

For example, the City of Montreal gave Bombardier its initial push into mass transit markets in the early 1970s by awarding it a contract to build subway cars. Had they done this before? Nope. So, who funded that? - the provincial government.  

Desjardins, a local credit union, was instrumental in saving food giant Culinar Inc. of Montreal from a U.S. takeover during the same era. 

The Caisse (CDPQ) was crucial in financing dozens of now gigantic provincial companies, from Le Groupe Videotron to Alimentation CouchTard (Circle K).

Why does Quebec Inc. do this? In their view, being dependent on the rest of Canada or Ottawa to invest in Quebec is the antithesis of being a Nation.

So, after failing to become a separate nation in a referendum in 1980, Quebec political leaders did and continued to promote Quebec's economic policy: to build and germinate ‘strong local champions' that can compete internationally. 

But how better to build those champions than with the magical fairy dust of Venture Capital?

The 90's

Have a coffee with a Quebec fund manager or a L.P. and ask them about the local ecosystem in the 1990s; most will say Quebec's V.C. industry was smaller than the rest of Canada. If they're under 40, they might even tell you there wasn't a Venture Capital industry in Quebec before 2010 or so. 

Even Investment Quebec has this quote on its website for the period (from 2022):1

“Il y a 20 ans, il existait bien peu de chose en capital investissement au Quebec, rappelle M. Leroux. «Il n’y avait pas d’écosystème structuré. À part les anges investisseurs, les entreprises qui avaient besoin de capitaux pour innover n’avaient personne vers qui se tourner.”

In English:

Twenty years ago, there was very little venture capital in Quebec, recalls Mr. Leroux. 

"There was no structured ecosystem. Apart from angel investors, companies that needed capital to innovate had no one to turn to."

That would be a unique way to look at it because of the numbers in the Quebec ecosystem posted during this period. Those numbers show that in the 1990s, Quebec was actually Canada's centre of venture capital. 

As this chart shows, Quebec consistently outperformed Ontario in the amount of Venture Capital investments—the chart also explains why. The Venture Capital industry was government-made, and the Quebec Government and Quebec Inc. directed tons of money into the market.

Canada was wracked by a massive recession in the early 1990s, and you can see what that did to Venture Capital in the Province of Ontario (the darker gray boxes).2 Meanwhile, in Quebec during the same period, Venture Capital thrived. Intuitively, it should not have been the case… 

After that recession, Quebec's separatist provincial government held a second referendum to leave Canada (in 1995). This led to a flight of Canadian domestic and international investment, which hit Ontario's numbers. Then we had the now forgotten, massive (but short-lived) Asian Financial Crisis. However, none of these things were particularly noticeable in the Quebec Venture Ecosystem stats, but they were for Ontario (go back and look at that chart). 

Why was Quebec so immune? 

The quick answer is that there was a flood of cash into Quebec in the 1990s – most of it venture capital, and when I say flood, it's on a biblical level, as one academic put it:

V.C. showed a 450% increase between 1994 and 2003. Such drastic growth would not have occurred without an even greater increase in the provision of government-backed V.C. Between 1995 and 2002, while total public resources (including tax expenditures) dedicated to business support grew by 283%, including an impressive 1511% increase in the value of equity shares acquired by Quebec's state corporations in the province. 

So Quebec's total investment in "Venture Capital" grew 4.5x in just over ten years. 

But let's look at what was happening on the ground during these years… I don't think stats describe it. 

From the article above:

When the idea of the Solidarity Fund came up during the recession in the early 1980s, Mr. Blanchet was an enthusiastic backer.

Tired of waiting for politicians and businesses to ease high unemployment, the Quebec Federation of Labour decided to launch its own worker-financed scheme to keep businesses from going under.

"We're looking for small businesses which are just getting started or have been around for a few years and need a capital push," said Blanchet. "It's the ordinary guy we want to help, not the fancy high-tech company which can find funding from many other sources."

This is from the article with Claude Blanchet (above), whom I'd love to have a beer with one day. When the article was written in the early '90s, he had over $330M in venture capital investments in Quebec. However, the article also defines the V.C. goal in the minds of the capital allocators at that time. The title mostly nails it—Venture Capital wasn't to grow fast-growing businesses but to "keep firms alive." 

In effect, they were interested in solving fundamental business issues using equity investment—the discussion on returns is noticeably absent or undefined – the investment was the goal – the divestment was not considered. As one L.P. from these years said to this intrepid author, "Venture Capital in those years was, in some ways, Venture Socialism" (or Nationalism).

This fund is of course still around today. You'll know it as FSTQ (Fonds de Solidarite - FTQ). And if you read that article, you'll see why it was able to raise all that money - tax breaks. If you invest, have a certain income level, and hold for a period, you can get up to 80% of the investment back on your tax return. You then also have this investment in "venture capital." So even if those deals lose half their net value, you are, in the end, still up on the investment because of that generous tax break... 

This is the (basic) math of the "Labour Sponsored" Funds. In some future posts, I'll dive into their history (probably when I write about the history of Ontario). However, a fair chunk of venture capital in Canada from 1985 to 2010 was from investments of this type. Did they perform? A better question might be, did they need to? 

In the article shared earlier you can see that tension. When Venture Capital is being used to do something other than drive growth, what is it? This is the first major lesson from this period.

There were other lessons to be learned, and Quebec had other mechanisms to drive V.C. money. Separately, they started dozens of what we would recognize as seed funds, which made up the bulk of venture capital in the province. 

This always seems to surprise people… I sat down with the Partner of a seed fund at Place Ville-Marie this past summer, and she told me that pre-2010 or so, there were no early-stage fund managers in Quebec. But in 1999, there were over 20 firms with AUM under $50M; all focused on initial Cheques below $2M, which we'd all call seed today. 

Let's look at a few of them. I’ll have more data on this later. 

I love this quote; it captures the spirit of the time - and just who was running these funds, from the Toronto Star in 19943:

In Canada, most venture-capital funds are either run by governments or large financial institutions. The idea of Prytula tooling around Quebec in his 1986 Toyota Cressida - clutching his car phone and looking for companies to invest in - doesn't fit the stereotype. But venture-capital funds have become a grass-roots industry in Quebec. Many such operations are run out of store-front offices in small towns where business people can just walk in and make their pitches.

Richard Prytula ran a $40-million venture capital fund called Technocap from his car (he also eventually had an office). Today, you can visit Technocap's website (it's still online, and it was last updated in 2009). Richard raised his funds from CDPQ, Bombardier Trust, Solidarity Fund QFL, Desjardins Pension Funds, National Bank of Canada, and TechnoAnge Inc. – All deep Quebec Inc. names. 

Or this other Seed fund from the Montreal Gazette (1999)4:

"Many of these young companies, even with a great plan well spelled-out in front of them (by a consultant), lack the ability to execute the plan, so it's not only the conception of the proper business model that we offer, but the execution of that plan, as well. We help them grow and we carry the bag for them at the same time, and we do it collectively with them and their team. When our mandate is exhausted or when they're well on their way, then we can step out and the company can then attract talent to fill the key management positions."

Forbes Alexander plans to invest between $100,000 and $500,000 in seed money in three to eight companies per year, primarily in the Internet, electronic-commerce, enterprise software and Internet-telephony fields.

There are at least a couple dozen examples of firms that sound very much like seed funds today. Like this one:

So by the year of the Dotcom Boom peak, in 2000, Quebec accounted for nearly half (49%) of all venture capital deals in Canada (Ontario was at 31%). This represented about 1.3% of Quebec's GDP.5

To give you a mind-blowing way of looking at this, the United States's V.C. industry represented 1.045%6 of GDP in the same year, meaning there was 25% more Venture as a % of GDP in the province than there was in the U.S. (in the year 2000 and at the height of the dotcom bubble).

Comparing how much Venture cash was available in Quebec vs. the rest of Canada, they had almost three times the amount invested per person that year.  

So wait, you must be thinking... 

"Quebec was a bigger V.C. market than America in the year 2000 on a per cent of GDP?!"

Yes.  

And "In 2000, for every person in Quebec, there was three times more V.C. invested than for every person outside of Quebec?!"

Yes. 

But in Quebec today, the entire Province suffers from collective amnesia of this period; remember that translated section from (French) Investissement Quebec (I.Q.) website talking about this period (it was posted in 2022):

Twenty years ago, there was very little venture capital in Quebec, recalls Mr. Leroux. 

"There was no structured ecosystem. Apart from angel investors, companies that needed capital to innovate had no one to turn to."

Obviously, this isn’t true… 

Bad Memories… 

Or is it?

In some ways, Mr. Leroux may be right. In some ways, Quebec did not have very much venture capital. So how can I spend a whole post writing this history explaining that there was a vast V.C. industry and then turn on a dime and say there was not… 

Let me share some more numbers. I'll be bouncing around with different graphs to tell this part of the story, so bear with me. The charts look a bit different in each iteration, but they tell a fantastic story.

Let's start with that earlier chart that shows Quebec's dominance of Canadian Venture:

As I've explained, Quebec was dominated by early-stage funds in the 1990s. You can see it in this graph, which, unhelpfully, I had to colour for you: The orange line is Quebec. Quebec dominates in the sub-500 K deals. The second smaller bar graph is Ontario; the rest is rounded out by B.C., the prairies, etc.7 

As the round sizes grow, look what happens. Same order... for $1-5 M, the Quebec lead narrows.

Here is the money shot. It's in the same order. For some reason, I found this one in colour for you. 

See the problem? 

During these years, Quebec dominated the rest of Canada in the smaller investment categories under $5M. But in rounds over $5M, Quebec is fighting for distant second place and almost being beaten by British Columbia (!). You might wonder how this can be—notably after I showed that so much venture capital was available in Quebec in 2000. 

So what is going on? The 2003 report,8 where I got some of these charts from scratches its head:

Until 1998, Quebec dominated the Canadian VC scene, as measured by number of deals, deal size and capital invested. Since 1999, Quebec has continued to exceed the other provinces in terms of number of deals, but has fallen behind in terms of deal size and capital invested. 

The same report later thinks it could be a life sciences problem:

Given Quebec’s strong focus on life sciences firms, it is hard to explain this lower average deal size, since normally the emergence of life sciences firms’ higher capital requirements should lead to larger deals. VC in Quebec tends to involve many small transactions, which lowers the average deal size. More information on the capital needs of life sciences firms would help to determine whether there is a size gap for this sector in Canada, particularly given that the average VC deal for U.S. life sciences firms was much higher (C$16 million in the U.S. compared to C$2.7 million in Canada in 2002). 

Two things are happening, and reports at the time allude to but does not directly engage with the data. 

Those seed investments generally did not graduate at the same pace or went nowhere. Quebec had a robust Seed market, and the government primarily focused on company creation as a measure of success in entrepreneurship in the province. (this is a lesson that Quebec and others have never seemed to learn from). 

The province had few funds for them to graduate and get further investment—in what we would call today Series A or B (round above $3-5M-ish). As you can see in this helpful chart, follow-on investments for Quebec-based companies just never showed up. (again, the first bar graph in each is Quebec, followed by Ontario, etc.)

You would have thought that with such a robust seed market, there would be a compensating large influx of capital from later-stage investors into those seed companies, but that wasn't happening. 

Meanwhile, Ontario, with a much smaller seed market, had a much more follow-on investment dollars than Quebec. 

Secondly, companies in Ontario raised more capital at an earlier stage, and crucially, they raised from local VCs AND U.S.-based funds. This is best shown and described in one of the most off-topic and funny episodes of 'Who Gets a Direct Flight to the Valley in 2000?'

Nothing Direct

This was front-page news in the business press in Ottawa and Montreal. 

Air Canada, which was headquartered in Montreal, chose, as a surprise, Ottawa - a city with a population that was a third of the size of Montreal but that could justify more business travellers and reasons to fly to the Valley than Quebec's entire tech ecosystem and home to almost half of the V.C. investment in Canada. If all those seed fund managers in Quebec wanted to fly directly to Silicon Valley, they had to drive or fly out of the province to Ottawa to get their closest connection to Silicon Valley. 

Nothing shows how disconnected Quebec was from the North American capital flows during this period than this.

So, you could say Quebec had little "real" Venture Capital.

The vast majority of it came from Quebec government players making Quebec investments into Quebec companies, and if that wasn't happening, it was being done by Quebec-based fund managers who got their funding from Quebec Inc. No one outside of the province was coming to join them in their Venture Ecosystem.… 

 By 2003, there was no escaping that reality.  

over the period from 1993 to 2002, the Quebec government injected $4.6-billion in risk capital to finance businesses. Almost 80 per cent of that amount was injected between 1998 and 2002 at the height of the PQ's interventionist policies. "The heavy losses they [government-owned venture capital corporations] have recorded have placed additional strain on Quebec public finances. 

And 

Earlier this week, Finance Minister Yves Séguin projected that the government-owned venture capital corporation, Société générale de financement, will incur a minimum loss of $644-million from 2003 to 2005 due to bad investments. "Our examination of the losses is not over because there are others on the way," Mr. Séguin said in the National Assembly yesterday in response to PQ Opposition attacks.

The dot-com crash led to a moment of stark reality. Venture capital had become, to borrow a quote - “a costly endeavour”. Over the next few years, Quebec institutions would write off over $3.5B of their venture investments.9  How much of that was what you would call venture?

And that is lesson we could all use today, in Canada there are dozens of what are now being quietly described as ‘Venture Capital Plus One’ Funds or as one senior federal bureaucrat described it to me recently:

“They’re venture funds, they’re returns driven - but they’ll also meet another mandate that is not about those returns.”

There is a tension there, and the lesson from Quebec in the 1990’s was that, that it rarely works.

But for those in the early 2000’s, the lessons from all those charts were a stark reminder that Quebec needed to get serious about its Venture ecosystem because no one else was taking them seriously. 

In the next post, I’ll discuss how Quebec decided to get serious.

One of the unique things about getting older is seeing how some things can have second-and third-order effects over time. As an amateur historian, I find these effects much easier to see. However, seeing them within one’s lifetime or career is fascinating because sometimes you wonder why no one else talks about them. What is often surprising is how you notice that people in your industry don’t know, remember, or perhaps care all that much.

Take, for example, my previous post on the ‘Missing Canadian Dotcom Crash.’ It was not news to my VC friends of my vintage or those who preceded me in the Canadian VC field. However, it was news to many newcomers, including people working in Government or at the BDC and CVCA; in both cases, members of their board of directors and committees reached out and, notably, throughout the VC field of people who joined us in the business post-2013 or so. It wasn’t an age thing, but the vintage of when you joined Venture as a vocation created this knowledge gap.

The question from those who didn’t know its history or live through it was, primarily, why? What killed Venture off during those years… 

Was it bad returns? Bad VCs? or a terrible local market for investments? 

You can, and people did, place blame on those attributes—but one central pillar of a healthy PE or VC ecosystem disappeared. It was when our traditional LPs abandoned Canada.

Let’s set the stage and dive into what happened because it’s surprisingly timely. There is something of a policy debate going on.

Alberta Premier Danielle Smith wants to leave Canada’s Pensions Plan (CPP). And not without something on the way out:

One highly controversial aspect of Alberta’s pension initiative is that on leaving the national pension plan, the province claims it will be owed 53 percent (or $334 billion) of the estimated total assets of $575 billion held by the Canada Pension Plan Investment Board (CPPIB). Alberta represents about 15 percent of the people who contribute to CPP.

This is a unique proposition.

Secondly, in the 2023 November Fiscal update:

Finance Minister Chrystia Freeland’s fall economic statement was more interesting than she indicated it would be. She is considering a rethink of Canada’s approach to retirement by working “collaboratively” with Canadian pension funds to encourage them to invest more in Canada.

Then, a week or two back in March of 2024, we had this:

Almost 100 top Canadian business leaders have signed an open letter to Finance Minister Chrystia Freeland and her provincial counterparts, urging them to change investment rules for pension funds to “encourage them to invest in Canada.”

The letter, published as an advertisement in major Canadian newspapers on Wednesday, included signatures from Rogers Communications Inc. CEO Tony Staffieri and Canaccord Genuity Group Inc. CEO Dan Daviau. Of the current CEOs of the country’s six largest banks, National Bank of Canada’s Laurent Ferreira was the only one to add his name to the letter.

The Pensions and their supporters got organized and responded with what was initially:

Many pension-fund leaders are quietly worried that adding more exposure to Canada would increase concentration risks, as the future solvency of plans is already correlated to the country’s demographics, economic growth and immigration policies, among other factors.

To a more forceful:

The CEO of Ontario Municipal Employees Retirement System, Blake Hutcheson, said the fund manager – which invests $129-billion on behalf of 600,000 Ontario public-service workers – is “dedicated to growing and fiercely defending their retirement savings,” in an e-mailed statement. “We must put members’ interests first and foremost, above those of any self-interested parties with competing agendas.”

and

“You’ve got to create the opportunities,” said Jim Leech, former CEO of Ontario Teachers’ Pension Plan, which now manages $250-billion. “It isn’t forcing or enticing people into Canadian investments, it’s providing sufficient good investments in Canada.”

There was one contrasting statement I’d like to highlight.

Healthcare of Ontario Pension Plan (HOOPP) chief investment officer Michael Wissell said in a statement that, “all else being equal, we prefer to invest in Canada when the risk and reward are appropriate.”

These are all unique views, and I’ll come back to them.

Welcome to policy sausage making. It is rare in Canada, but you’re seeing almost in real time that the Wellington and Bay Street discussions on Canada’s Pension Plans, which used to be held behind closed doors or over the occasional lunch meeting, are now more of a public debate.

No one agrees precisely, and the disagreement among our Political and Financial leaders is now public. Get some popcorn.

This is not new; I’ve heard about it for most of my career, but it is entering more of the public realm.

But how did we get here?

An abridged history of the Canada Pension Plan

Let me set the scene for those who don’t follow the Canadian pension plans and their histories. The Diefenbaker government initiated the work leading up to the 1966 introduction of the CPP and using it as a fundamental part of Canada's social safety net.

For three decades, the CPP has been a “pay-as-you-go” plan. Premiums only provided a fund equal to two years of benefits. So, the cash went in, and within a few years, the cash went out. By 1992, that system had begun to fall apart, and the pay-in and pay-out mechanisms were on the verge of no longer functioning. The CPP had been investing in Government bonds and other less-than-stellar investments; the CPP had assets but was in danger of becoming insolvent. This all culminated in 1995 with a damning report by Canada’s Chief Actuary (yeah, we have one). Don’t click that link; here’s the TLDR:

In a lot of actuarial jargon, the report says that CPP can only be counted on if premiums rise dramatically and that the pension people expected would be gone by 2010. It could be even worse with the expected demographics (fewer kids, etc). We needed to fix it.

So by 1996/1997, there was only $40 billion in that Fund, while the cost of promised future benefits totalled $600 billion. Without changes to the overall plan, premiums on individuals would rise to 14.2% of pensionable earnings by 2030.

This was an impetus for a significant overhaul.

In 1997, Ottawa and the provinces agreed to two significant changes to the CPP.

The first was to increase premiums from about 6% more rapidly than planned but to cap them at 9.9% by 2003, which would be 4.95% for employees and 4.95% for employers. This equalled an $11 billion increase in annual premium revenues. At the expected inflation growth rate (Inflation +3% or so), this would make the plan short-term solvent and sustainable over the long run.

Second, benefits were calculated differently, slightly reducing the pensions of new beneficiaries, the death benefit, and the ability to get disability benefits.

So, if, like me, you were an 18-year-old that year working full-time. The Government asked you to pay a lot more, and you’d get less than others had received in the past. If millennials or GenZ reading this feel hard done by previous generations - remember it started with those of us in GenX getting a bit screwed by the boomers.

A significant change alongside this new CPP fee increase was the attempt to depoliticize CPP’s investment decisions. They added two new letters to the acronym, IB, and subtly implied they were one and the same. CPPIB was born. That IB was essential to the Canada Pension Plan and Investment Board. The Board would consist of quasi-independent directors who all had to have backgrounds in Finance or economics or business… this was important stuff. Before, ex-politicians and political donors were sometimes on the board, and their interests were more aligned with increasing their personal standing, not the results of the CPP. No longer would this be the case.

Not allowing them to go completely off with our money without public scrutiny of the CPPIB, the legislation required the ten provincial finance ministers and their federal colleagues to review the CPPIB's mandate and regulations every three years. The CPPIB is also subject to a special examination every six years by an auditor appointed by the Federal Minister of Finance.

The CPPIB is trying to remind Canadians of this part of their history and has a friendly (to them) discussion of all this on the CPP website. When was it written? Just after Minister Freeland began discussing getting CPP to invest more in Canada, it was back in November.

That history has a small aside that, if you miss it, may not seem important:

“In 2006, CPP Investments decided to adopt an active management strategy to help improve overall returns for the CPP Fund. This decision enabled our investors to seek out opportunities for above-market returns over the long term in an effort to manage the Fund in the best interests of contributors and beneficiaries.”

What isn’t mentioned in the CPPIB’s history or most CPP discussions is that there was a Canadian content rule when the 1997 legislation was enacted. 80% of all investments had to be made in Canada, and 20% could be made internationally.

CPPIB and their pension colleagues begged, cajoled, and ultimately lobbied for a change to the 80-20 rule, which was eventually adjusted to a 70-30 rule in 2003. Not long after that, they asked for more.

But how do you get the Government to make a change? They do it like my VC industry does it… getting our industry associations to do it for us…

Two Canadian pension associations are asking the federal government to scrap the 30% foreign content limit on registered pension plans. A study commissioned by the Association of Canadian Pension Management and the Pension Investment Association of Canada concludes that eliminating the foreign content rule could be worth as much as $3 billion a year for Canadians with company pensions or RRSPs.

And they got it, as the CPP 2005 year-end report states.

..we comply with the foreign property rule in a similar manner to many other public pension funds in Canada. In its recent budget, the federal government announced plans to eliminate the foreign property rule…

The CPP Investment Board welcomes this policy change because we believe that the broadening of available investment opportunities will benefit CPP stakeholders.

So, remember the history that I quoted earlier? It is a bit misleading and missing some context.

In 2006, CPP Investments decided to adopt an active management strategy to help improve overall returns for the CPP Fund.

The CPPIB didn’t decide to go into active management. They lobbied hard to be able to do it, culminating in the change in 2005.

You haven’t heard of this but have been a beneficiary of it. Before this, an RRSP or Pension plan was required to be 70% Canadian. Only 30% of the investments could be used for ‘foreign’ investments. Why? Well, you aren’t paying capital gain taxes, are you? Tax-exempt investments (like those investments within an RRSP) and pension plans (i.e. accounts that did not pay taxes on capital gains) don’t pay tax... if you wanted to invest more outside of Canada, you could - just not tax-free. So, Canadians welcomed the change.

The CPPIB and all Canadian Pension Plans were also beneficiaries of this change. To be clear, there were some clever ways around this (using derivatives and such), but by and large, most people accepted the 70/30 rule.

My friends at the Canso fund have a great primer on this episode.

Where did this Foreign Property Rule come from?

The foreign property rules were introduced in 1971 by TRUDEAU the 1st to ostensibly secure a domestic source of investment funding for Canadian businesses, lower the cost of capital for Canadian enterprises, and stimulate the domestic economy. The percentage was set at 90% Canadian for tax-exempt investments. As the budget said:

The legislation limits foreign inveàtments of employee pension plans, registered retirement savings plans and deferred profit-sharing plans to 10 percent of the cost of their assets. Past foreign investment limits have been based on foreign income rather than cost of foreign assets, and the limits have not applied to registered retirement savings plans. A special tax will be imposed on excess foreign investments held at the end of each month. This will be one percent of the cost of the excess investments held.

So the thinking was that Canada lost out on Taxes of these exempt entities but gained on lower Capital costs for Canadian businesses. Everyone would win, including retirees with a product outside their pensions that was incentivized for retirement.

By the 1980s, people realized the Foreign component needed to be higher. It rose to 20% in the early 1990s, 25% in 1999, and settled at 30% by 2001. This stringent component was a bone of contention: did it or did not help Canada?

The belief and the whole reason for its existence was that it would lower the cost of capital for Canadian businesses. Economists are still out on that question—what it did was increase the investment in Canadian public equities, so, by some measure, it made it cheaper to get capital on the public markets.

However, Canadian equities were widely given a “premium” relative to their foreign peers, which was detrimental to returns. There are some excellent Graduate Economics dissertations on all this if you like. But the range of that cost to Canadians was roughly between 0.2% and 1.1% annually on returns—so, in any measure, it seems it was minimally detrimental. So good for public companies and somewhat bad for the average investor.

Then, Boom, it was removed. The 2005 change was interesting in what CPPIB and their other Canadian Pension counterparts said to the Senate and House committees when they asked for a change. 

Because they never asked for it. At least not publicly.

As a surprised senator inquired after its repeal:

Senator Plamondon: As a member of the Standing Senate Committee on Banking, Trade and Commerce, I can tell you that, a few years ago, the decision was made to increase the foreign investment limit from 20 percent to 30 percent, whereas now it is going from 30 percent to 100 percent.

Are there documents justifying such a change? Were any studies conducted? Will this matter be referred to the Standing Senate Committee on Banking, Trade and Commerce for its consideration? Could you table the documents justifying such a decision?

The answer was no.

Beyond some brief discussions at the House Finance Committee, there were often discussions of further reducing the Foreign Investment Limit threshold, including a private members’ bill to eliminate it outright. But it was never the main event—it was usually an aside or comment made by Pension leaders when discussing other matters at committees.

However, the legislation to eliminate it was put in the omnibus 2005 Budget. It was not an individual bill. Thus, it didn’t go through the usual channels of the parliamentary and senate banking committees to discuss the short, medium and long-term ramifications.

Surprisingly, this radical change had not been discussed, researched, or debated, except for that one private member bill.

As now retired Pension CEO who was there at the time said to this intrepid VC on a Zoom call earlier this year:

“We wanted it for sure; it never occurred to us that we would get it. At least not for a decade or so, and in fact, only a few Funds knew it was coming - we were pretty surprised until we were told before the budget planning process had been completed; until that - we had no idea. The Martin government had said they’d review it, but the change was fast. We knew this represented a huge win. But at the same time, we hadn’t really planned for it. If we had, you would have seen us holding back on other investments we’d committed to before the change.”

Reporters at the time were asking questions about impacts, and the Government hastily tried to find out what those would be after they had already announced the change (!) It is worth sharing here the highlights of the report - they are essential to why this change was allowed:

The Finance Department report, obtained under the Access to Information Act, tries to predict the impact of the Feb. 23 budget announcement that removed a 30-per-cent cap on the foreign content of pension funds. The heavily censored March 8 study says pension funds and RRSP holders are again likely to add only moderately to their foreign content, even though there's no longer any legislated ceiling.

That's partly because of an international phenomenon known as "home-country asset preference." Investors show a strong bias for stocks and bonds in their own backyard because it's often more difficult to get information about investments in a foreign country.

"The gains from a completely diversified portfolio do not compensate for the higher information costs of investing in foreign countries," says the report.

Drawing on published studies, the authors assume that Canadian pension funds will, on average, raise their foreign content to about 33 per cent from the current average of about 26 per cent.

That would mean about $67-billion will leave the country over two years as a direct result of the new policy, the study concludes.

Mr. Friesen agreed that "home-country asset preference" is likely to moderate foreign-content levels, perhaps to about 40 per cent -- as is the case in Australia, whose economy is similar to Canada's.

A spokesman for the Finance Department said domestic capital markets have matured, and the rule change won't make it more difficult for Canadian companies to raise capital.

"We don't see the removal of the FPR [foreign property rule] significantly affecting either the exchange rate or the ability of Canadian companies to access capital," David Gamble said in an interview.

An earlier report from the Pension Industry said it would be nothing but good for pensions and net-even for Canada:

“We believe that the current short, medium and long-term economic environments are supportive for eliminating the foreign property rule,” says ACPM president Keith Ambachtsheer. “We do not think there would be any material effects on the Canadian dollar, the balance of payments, job creation, the ability of Canadian governments and corporations to raise capital or the cost of capital in Canada,” he adds”

In the same article, the authors also pointed out that Norway had done this with their funds. Helpfully forgetting, the Norweigan Pension Plan is a predominantly Nordic and domestic-only investment fund. The Fund they were referring to is the Norway Petroleum fund, which is not a pension plan. This example is often used in multiple arguments within Canada, but it isn’t not a fair comparison.

Regardless, the economist's salesmanship of the benefits was focused on a no net negative for Canada thesis, but notice the important point being made: ‘no net change to the ability of “Corporations to raise capital or the cost of capital.’

The Federal government had more promising ideas outlined in its policy briefing. The CBC has kindly parsed the government Budget brief:

Eliminating the FPR has the potential to also increase the supply of venture capital (VC) from pension funds to Canadian small businesses. Since the FPR defines most limited partnerships (through which VC investments are typically made) as foreign property, some pension funds claim it acts as an impediment to VC investing. This is despite the fact that "qualified limited partnerships," the rules for which have been developed and refined over time in consultation with the pension industry specifically to facilitate VC investing, are not classified as foreign property. This budget clearly ends any remaining ambiguity.

The proposed elimination of the Foreign Property Rule (FPR) in Budget 2005 has the potential to increase pension fund investment in VC. Going forward, the Government of Canada will continue to work with the investment, venture, and angel capital communities to ensure an efficient venture capital market for early-stage small businesses in Canada.

This did not happen; as time would show, the opposite occurred.

Lies, Damned Lies & Statistics

Most of the things the government and Pension Leaders believed would happen when they eliminated the FPR were false, as time would show.

Almost immediately after the changes, in late 2005, CPP transferred all their Canadian Venture and PE Fund investments to a small fund of funds you may not have heard of. They’re well known in my industry, and they’re called Northleaf.

Northleaf Capital Partners was selected in 2005 to manage a previous $400 million commitment by CPPIB to smaller Canadian private equity firms and Canadian venture capital firms.

The mandate of this additional investment is to focus on Canadian small/mid-market buyout, venture capital and growth equity funds that are seeking to raise $750 million or less in capital commitments.

CPPIB was out of the direct investment game in Canadian Venture or PE, all within months of the change.

They weren’t alone.

OTPP (colloquially known as Teachers), who also benefited from the legislation changes, joined CPP in massively changing their Canadian Venture exposure. In the year 2000, Teachers were proudly sharing information with Pensioners on their Venture investments in Canada:

Our merchant banking portfolio includes a venture capital fund launched three years ago that ranks among the top sources of early-stage capital in Canada. Investing in start-up enterprises carries higher risks in the expectation of higher rewards. Our size, long-term investment perspective and diverse asset base allow us to take risks in the most promising opportunities on the assumption that the successes will exceed the costs of failures.

At the end of 2000, we had $329 million invested in 24 companies and 12 venture capital funds, principally in life sciences and information technology. These investments typically involve multiple rounds of financing of $3 million to $20 million each. Approximately 54 percent of our venture capital investments are in Canada and 46 percent in the United States.

What happened to those investments after 2005?

Teachers stopped reporting on their Canadian VC fund or Domestic Venture LP investments—they’d shuttered the Canadian direct investment group. But they continued to invest in their International Venture LP commitments (i.e. they invested in American Venture funds), which grew on their balance sheet without comment and continue to do so to this day.

OMERS was also an LP in Canadian VCs as late as 2004... By 2006, there was no mention of Venture investments in Canada (until 2010 and a 2021 investment in Graphite Ventures—both of which are stories for another day).

Other pension plans across Canada followed suit. This departure from the Canadian VC and PE market was widely noticed in the industry stats.

By 2007, only $1.19 billion had been raised by Canadian VC funds, and 70% of that new capital for VC funds had gone to only Quebec-based organizations. 

But why was Quebec doing so well? 

Because of their version of CPP, CDPQ had to invest - the plan was given a dual mandate of growing the Quebec economy and maximizing returns. But outside Quebec, the Canadian VC ecosystem was dying.

So in Quebec with CDPQ Venture Capital fundraising went up, while in all the provinces with CPP - VC fundraising collapsed. If you want to understand my previous article on the death of Canadian Venture in the 2000 to 2010 period. Here is the main suspect if we’d done a post-mortem.

How bad was it?

In 2008, Foreign VC firms represented 64% of all the Dollars in Canadian VC deals. Only 4% of Canadian Venture deals were led by independent domestic funds. Corporate or Government funds took the balance. So it wasn’t for a lack of deals. Or even good deals - Americans were coming up here all the time. There was no money from anyone outside of corporate, government, or American funds to give them cash.

To put it mildly, that constitutes a divergence from what the government said would happen for the VC industry post the regulatory changes. Remember this quote:

Eliminating the FPR has the potential to also increase the supply of venture capital (VC) from pension funds to Canadian small businesses.

Well, not so much...

The Feds believed we could see more venture investment, but we saw less. I’ll return to the venture world in a moment, but let’s look at the effects outside my world. The VC industry is not Canada’s economy, so what happened elsewhere?

In particular, what about the public markets?

As we heard in the federal policy documents, displacement was expected. But not too much. Because:

Investors show a strong bias for stocks and bonds in their own backyard because it's often more difficult to get information about investments in a foreign country.

Well, we’re still waiting for a bias toward Canada:

I guess, with hindsight, the question is, when should we expect this displacement to end? It’s been 19 years, and we’re still experiencing it.

According to the Pension Investment Association of Canada, 23 percent of pension portfolios were invested in Canadian equities in 1990, but by 2022, that figure had fallen to slightly more than 4 percent

Biased Against Your Home

In the 1990s and early 2000s, there was a thing we called the Canadian Stock Premium. There was so much domestic investment that Canadian stocks traded higher than their U.S. and International peers.

That is now long gone, and a IPO’s in Canada are rare.

One of the most entertaining and perhaps insightful discussions was before the September 21st, 2023, Standing Committee on Finance.

Daniel Brosseau and Peter Letko led the testimony. If you don’t know them, you’re missing out. They are both powerhouse minority shareholder rights advocates and phenomenal public market investors.

They made an impassioned and direct case for the committee to review the minimum level of pension investment in Canada.

“In the old days we had appeared before the same parliamentary committee,” he said. “Forty years later we were back at it but now we are arguing the opposite.”

Peter and Daniel have solutions; notably, they’ve written them up. If you want a broad discussion of their plan, you can take a look.

However, let’s parse out some points of the data they use. Most economists claim that there is bias to domestic investment-"home-country asset preference," as I mentioned earlier. This was the original case for the government not setting a minimum threshold for investment—the domestic minimum would come out in the wash of the home bias, so there is no need to set it. 

Here’s a nice chart that shows it to some relative peers.

Canada continues to be at the bottom of Domestic Investment in every category. 

One argument from economists working for the Pension industry is that we still have a home bias, even though it seems to shrink yearly. As they see it:

Even though Canada makes up approximately 3 per cent of the global stock market index, large Canadian pension funds invest about 20 per cent of their listed equity portfolio in domestic firms.

First, they haven’t invested “in” the Canadian Stock market; the Pensions have been ‘divesting from’ our stock markets. They’re net sellers. 

Secondly, this 3% argument is bogus, and let me head it off at the pass. The number includes places you know we won’t invest in, like Russia or Iran; dozens of other countries are on that list. 

Also, other places are, you know, less great for investments because they don’t enforce their laws the same way as we do here:

There are also places where the CPP and other pensions' forget' their ESG and DEI goals, which is strange. Should China, whose human rights abuses were condemned by our government, be excluded? How about when they take two CPP contributors hostage?

Canadians would love to know about all those prisons we invest in within the U.S., which have never been discussed.

Also, we should talk about foreign private equity, which again makes for some strange bedfellows for the CPP and their pension colleagues regarding their ESG goals.

I like this chart, so let me use it again. It shows that Pensions have slowly, and sometimes quickly, exited the Canadian stock market for over 20 years. They started selling back when the industry first announced the policy of removing the foreign minimum investment number; back then, the number was 75%-ish, and they said:

Mr. Friesen agreed that "home-country asset preference" is likely to moderate foreign-content levels, perhaps to about 40 per cent -- as is the case in Australia, whose economy is similar to Canada's.

That's not 40% for just Canada - that is 40% for the world… So they thought we could see the Canadian number at around 60%. Now they claim that while we're at the current level of 20%, it could be lower, maybe closer to 3%. We're just lucky it isn't. 

The pension industry's "home bias" argument keeps changing - downwards - it is a declining number. We should discuss where that number is going before we hit that 3%, which, as I showed, isn't a reasonable number anyway.

So, our domestic home country asset preference doesn't exist for Canadian pension leaders, or at least, it's getting lower yearly. Our unique case shows economists that their long-held (at least 50 years) theory might not really be true.

The other promise we were told was that reducing the limit would not negatively impact the cost of raising capital in Canada. For reference:

"We don't see the removal of the FPR [foreign property rule] significantly affecting either the exchange rate or the ability of Canadian companies to access capital," David Gamble said in an interview.

It did, which is self-serving because no venture capital is, of course, costly to future businesses trying to raise capital, but are there any other examples?

Well, we're now seeing that every time Canadians pay more towards their pension - they save less - because why should they.. they've got someone else putting that money to work for them, and taxpayers have less to save as they're poorer (remember, taxes are theft). That money is gone in a tax - yes, it gives them pensions, but it’s not widely thought of that way until you get the pension. So, as this Fraser report points out, thanks to a new CPP contribution we started this year, less money is likely to be invested in Canada because of it; how much less? Well…

2030 Canadian household assets invested in the domestic market would be approximately $11.8 billion lower.

In short, CPP pension contributions make it harder to find investment in Canada, which is common sense, but that was not what we expected. At least, that’s not what we were told or believed would happen back in 2005.

Getting Back to Venture

When in 2013, I attended the Canadian Venture Capital Association annual get-together. The CPP CEO was on stage talking about their strong support for Canadian VCs. I sat in a back row with some very surly GPs, one commented on the presentation:

“What fucking support? And who invited him?”

CPP's CEO at the time, Mark Wiseman, claimed on stage that $2.4B was invested in Canadian Venture and Private Equity through their Northleaf relationship. The number was probably an actual, but that included over 15 prior years of investments.

Today, eleven years later, with CPP having 2.5 times the amount of assets under management, how much has CPP invested in Canada through that relationship? (as of November 2023)

CPP Investments has committed C$200 million to the Canadian private equity market through an evergreen Canadian mid-market mandate managed by Northleaf. Since the partnership was established in 2006, and with this allocation, Northleaf now manages a total of C$2.4 billion in Canadian private equity investments on behalf of CPP Investments.

It’s the same number!

Or less if you take inflation into account.

You might think that this is because Canada is a horrible venture market to invest in, but that's unless you no longer work for CPP, in which case Canada is the place to be!

Like that time, the former head of CPP resigned and then started a Venture fund focusing on Canada!

 CPP's former CEO, Mark Manchin, started an AI Growth venture fund. Announcing it with this quote (my emphasis):

“You have this extraordinary ecosystem” in Canada, said Mr. Machin, Intrepid’s managing partner. “The thing that I heard many, many times when I was in Canada, and it’s also to some extent the case in Europe, is the lack of growth capital, lack of scale-up capital. And so that’s where we think there continues to be a really interesting opportunity to help Canadian companies grow and thrive.”

Sometimes, you can’t make this stuff up.

In fairness, CPP has made one Canadian LP investment backing Radical Ventures and one direct investment in Deepgenomics. Both are stellar from this seat, and that's the first time we've seen them as a direct LP or venture-like investor in nearly 20 years. (There may be other VC-ish investments or LP commits, but I have nothing.) But FYI, this was all coincidentally done under the aforementioned former CEO, who left in 2021.

However, the recent tepid support for their crucial local fund of funds partner, their massive selloff of equities within Canada, and their complete lack of any team members focused on domestic investment leads me to believe these were one-offs. Ask a Canadian GP Fund manager who they would call at CPP to share their investment pipeline, and you’ll often get a shrugged shoulder. At best, Canadian VCs get access through their Northleaf relationship.

So, how does CPP find their Canadian deals (or that 1 deal)?

Through their American GP's. That's how they found Deepgenomics, from True Ventures, a seed-round Deepgenomics investor with CPP as an LP.

So, if you want the Canadian Pension Plan to invest directly in a Canadian tech startup, you will need to do so through a venture fund it has previously invested in. Today, that means a US-based fund because they don't invest directly in VC funds here.

But back in 2005, you'd find CPP backing Canadian GPs with $50M cheques while talking about building the VC Fund Management community. I was a young Analyst whose firm co-invested with them in that fund. Today, CPP politely asks you to call the fund of funds to which they've outsourced the job, Northleaf, with whom they've given an inflation-adjusted smaller amount of money to do that job over the past 19 years.

As I've shown, this was not the deal we were told to expect when the Foreign restrictions were removed from our pension plans. Since its removal, the entire tech ecosystem in Canada has become more government-dependent. VCAP/VCCI was an attempt to turn around this lack of LP investment created by the absence of our pension funds, but more is needed. And it still doesn't solve the private/public dilemma.

If you look at the list of most active funds for FY2023, it's a who's who of government funds.

Or most active at the early stage

But honestly - nobody cares, it seems. This has been the case for over 15 years. It is not news.

So why now?

So, why is everyone talking about Pensions now?

Two reasons.

First, take a look at your Pay stub. There is now a new CPP contribution if you're in a particular tax bracket. This enhanced CPP, of course, means larger contributions from businesses.

Those businesses have leaders who are beginning to wonder why they shoulder a new tax (for them, that is all it is) considering how little it benefits their companies or Canada. 

That letter released earlier this month was a virtual who's who of our business leaders. They all see more payments and know explicitly that the pension plans are not helping with their cost of capital. So, in that context, they also view CPP contributions as an unfair business tax. 

And now you might have some sympathy for Premiere Smith in Alberta. Because CPP is committed to not investing there, CPP's:

Commitment is a continuation of the organization’s long and successful track record of integrating ESG considerations, including climate change, into investment activities.

It's not explicit, but the undertone for a resource economy certainly feels that way. You might agree with the CPP's view. Still, wherever you stand politically, you can understand why local Albertans might question the CPP benefit for local businesses that employ them - beyond a pension plan. And this is, of course, the heartland of Conservative voters.

When the Martin government eliminated the foreign investment rule in 2005, it came less than a year after a Conservative MP sponsored a private members bill to eliminate it. So, the opposition conservatives broadly supported the change in the 2005 budget. Today, Pension CEOs cannot expect unfettered support from them. They view much of the DEI and ESG rhetoric coming out of Canada's pensions as both detrimental to Canada's economic interests and a signal that leadership isn't focused on 'best' returns but on the culture wars, of which they're on the wrong side and only playing them in Canada.

The current leaders of the Red (liberal) team are learning that the pensions leaders are not sticking to the bargain as they understood it 20 years ago. Particularly on a key plank of their economic agenda, The Canada Infrastructure Bank is seemingly flailing:

The Canada Infrastructure Bank (CIB), a federal government financial institution, opened its doors five years ago with great promise, vowing to deploy $35 billion of investments towards “the next generation of infrastructure Canadians need.”

But rather than investing public money in public services, the CIB has instead privatized our water, transportation and electricity. For every dollar invested by the CIB, the hope was that $4 to $5 would be invested by the private sector.

Five years later, the CIB has not been able to deliver on its promise. Of the $19.4 billion invested to date, only about one-third has come from private and institutional investors ($7.2 billion).

So, strong support in Ottawa is not guaranteed.

Also, support is also mixed within provincial capitals outside of Alberta.

Mr. Bethlenfalvy, Ontario’s Finance Minister, said “we agree that Canadian pension funds should invest more at home,” in an e-mailed statement

This is important because provincial governments matter as much as their federal leaders when it comes to changing the CPP—so while the legislation for those tax-exempt entities comes from Ottawa, the provinces and feds are equal partners. If Alberta gets a decent ruling on leaving the CPP in the fall, they might be offered some serious changes to the CPP's rules to keep them in the program.

Second, you might think, '"This is all self-serving for Matt and other Canada-based investors; they want that pension money."

That’s what Pundits are saying. Chastising business leaders who are seemingly asking for a handout. Businesses,

think it’s the government’s job to keep their revenue streams flowing like the spring ice melt. Some 90 of them —  bankers, auto executives, airline bosses, telecom chiefs — fired off a letter to Finance Minister Chrystia Freeland this month pressing her to “amend the rules governing pension funds to encourage them to invest in Canada.”

Business Leaders asking the government to use their tax contributions to reinvest in their industry is hardly a subsidy… Remember, business contributions pay for half the CPP. So, by extension, Canadian Businesses subsidize the CPP, which takes those dollars and then invests in their competition abroad.

Regardless, I would undoubtedly like lots of that sweet, sweet Pension money to flow my way. There is more of a fundamental reason we should revisit our pension’s geography focus.

You may have heard that ‘Canada is broken’ recently, But why?

You can see the cause with this nifty chart.

Canada’s productivity has been a disaster for most of my adult life. It predates Facebook and Twitter (X), so we can’t blame social media for this. It’s not just horrible in comparison to our southern cousins but comparable to everyone in the OECD. People online harp on per-capita productivity but thats’s not where economists see the problem. The divergence is dramatic starting in 2001. So why is it happening?

The problem is not that we have too much labour, but too little capital – machinery and equipment – for labour to work with. As a recent study for the C.D. Howe Institute has shown, the alarming deterioration in our already poor productivity performance closely tracks the extraordinary collapse in business investment in Canada in recent years – to levels that are not only lower than in other countries (the study estimates new capital per worker in Canada at less than $15,000 in 2022, compared to $20,000 in other OECD countries and almost $28,000 in the United States), but lower than the amount required to replace existing capital as it wears out or grows obsolete.

A country with one of the world's largest and best-funded pensions has businesses starved of capital to drive productivity growth. And this seems to have occurred simultaneously as premiums increased and those pensions stopped investing in the country. You can see that more clearly in this nifty chart. Remember, in the early 2000s and the late 1990s, the ratio changed from 80/20 to 70/30 and ultimately to no limit in 2005.

The chart above is a subsector of our economy but is usually where you would see productivity growth.

From 1987 to 2001, the information sector’s output price grew slower in Canada (0.79% annually) than in the United States (1.75%). However, from 2001 to 2019, Canada’s output price accelerated to 1.18% annually, while the U.S. price declined by 0.07% annually, contrasting with trends in the broader business sector.

In Canada, TFP growth improved, but by one-sixth the rate of the United States. By contrast to the United States, capital intensity growth fell in the information and cultural services industry in Canada, resulting in a weakening of labour productivity growth.

The authors look around and blame trade and regulatory restrictions for this dramatic difference. However, what they forgot was that the cost of the CPP contribution increased. The CPP premium changed—they essentially doubled from 1997 to 1998—while access to capital declined as the investment focus of our pension funds changed. It was a double whammy.

Don't get me wrong—we have a mediocre regulatory environment, oligopolies, and protected sectors of our economy. I'd say that increased competition in Canada, which would force a sea change in productivity, is not on the agenda in our political discussions.

However, we had many of those same structural issues in the past. Productivity growth was not great, but better in the 1980s and 90s. We also had pension plans that invested in Canada, while CPP contributions from businesses were lower.

Productivity Growth makes us all richer. And it is driven by investment. New companies (i.e. VC-backed ones ) are one component of that, but so is making it easier for existing and established companies to get investment—and if you can't raise money on the public markets or easily get private equity money in Canada, your only recourse is our Banks.

Let me repeat: CPP is 50% driven by business contributions. For every $1 from a contributor like me or you, a business matches it. You can't help but notice that the missing money from Canadian businesses’ investment in productivity correlates nicely with the money they pay into CPP.

So every time someone says that businesses are asking for a subsidy when they want the CPP to invest here, remember that the CPP's money comes from those same businesses. They're the contributors who have no voice—now they're asking for the government to review a decision that has proven detrimental to both them and Canada. I might add that this decision had numerous effects our political leaders did not expect.

How do we get that money focused on helping with productivity?

“You’ve got to create the opportunities,” said Jim Leech, former CEO of Ontario Teachers’ Pension Plan, which now manages $250-billion. “It isn’t forcing or enticing people into Canadian investments, it’s providing sufficient good investments in Canada.”

We have a chicken and egg problem with our pension leaders and domestic businesses.

Businesses are asking for investment to improve productivity, which is good for Canada. They also contribute to a large local pool of capital, but that fund is seemingly exiting the domestic market. So businesses are asking why they're funding a pool of capital that never invests here but often in their foreign competitors. The world turns… 

That has been the life of Canadian Venture for the past 15 years. Now our other businesses are feeling it.

But this is not going to be solved by someone in any of those groups. 

It requires Political leadership. 

On average, Canadians are experiencing a decline in their wealth today, particularly compared to five years ago, and this is primarily due to our businesses' lack of investment in productivity.

The difficulty in accessing capital in Canada exacerbates this issue. Meanwhile, these same Canadians have a significant investment in pensions funded by the government, taxpayers, and these low-productivity businesses. 

You’ll hear CPP leaders and their supporters claim they are simply following their mandate to 'maximize returns, without undue loss.' This is true, and that language has been in their mandate since CPPIB was created in 1997. It was there when they were forced to invest in Canada to the tune of 80% and 70%. And when the rate was eliminated, their returns did improve. But at the expense of Canada’s productivity growth and capital availability for businesses. So, it’s time for CPPIB, as well as other pensions and those they answer to, to find a way to invest in the best of what Canada offers and build the next generation of Canada’s businesses.

Why?

I’ve started a new fund with my old friend David Dufresne and my (ex-Fasken Montreal) lawyer Gabrielle Paris. Our fund aims to raise over $50M to fill a gap for lead cheques in the seed stage. In other words, the goal is to lead or co-lead and, importantly, price every deal we do, working with our founders and co-investors to prepare our portfolio to raise their next round and execute their business.

The current venture market is weird, so I looked at how others have done it.

So, I’ve started looking at the backgrounds and history of venture funds in the more recent past. iNovia, Mantella, Golden, and VersionOne; all funds started in 2008-12, after the financial crisis. I then started looking at the (all be it thin) cohort from the post-dot-com period dating back to 2000, eight years before - Brightspark, Relay (where my colleague David worked), and others…

This led me down the rabbit hole of the similarities and differences between today's market and the previous downturns in our industry.

I’m not alone.

Recently, my former colleagues at BDC released a report entitled “Canada Venture Landscape” to seek “to understand how our ecosystem might respond to the current environment.”

Essentially reading my mind, the team at BDC:

looked at VC activity following past economic downturns, specifically after 2000 (dot-com era) and after 2008 (the Great Financial Crisis or GFC). We noted that after the dot-com bust, VC activity slumped from 2000 to 2004, at which point it had declined 51% from the 2000 high, recovering slightly in 2005.

Their commentary came with this helpful chart.

I’d like you to focus on the first part of the chart, the 2000-2010 period. Which is the period I’ve been looking at. I was surprised- by the numbers because they don’t correlate with what I’ve seen looking at the historical numbers. I think the chart is wrong because of one company.

Pitchbook.

Pitchbook was founded in 2007. It initially focused on Private Equity data in the United States, while its Canadian coverage focused on PE deal flow. It only started tracking Canadian VC data with any regularity in 2015, and its data locally only got acceptable to any degree in 2017 or so.

Pitchbook gets its data in Canada by scrapping Betakit, TheLogic, Globe & Mail, etc. It sometimes finds other less credible areas and inserts that into its Database. Sonder (which I led the seed round for in 2014) was my test case for how good their data was. It inevitably got the U.S. investors mostly correct but left out or ignored the Canadian participants. Pitchbook has been slowly adding data from the pre-2015 time, Mechanical Turk style, but that data pre-2015 is again only what it’s been able to find through Google searches.

And this is a problem.

Why? Well, newspapers and trade journals covered most of Canadian tech deals pre-2012. Today, those details are behind paywalls or at your local library… so they are essentially nonexistent if you are trying to find them today. Did it happen if it’s not online?

But since my pastime is Canadian tech history, I know where to look and it is online. Just not where Pitchbook looks; here in this is a government report on Venture Capital in Western Canada. It gives historical data for all Canadian Venture Capital going back to 1996 but using a different data set.

Notice any differences?

The dot-com (Year 2000) number for total VC invested in Canada here is listed as $6.4 Billion vs the $1.8 Billion in the Pitchbook-derived chart. If we use this data, Venture Capital collapsed in Canada from $6.4B in 2000 to $1.6B in 2003 or a decline of 75%; it recovered slightly after, until in 2009, it cratered again to less than $1 Billion.

To give a sense of how bad Picthbook’s data is, let’s look at my hometown when I started my career as an angel investor. Here is the Data for Ottawa in just Q4-2000.1

• Innovance $115 M

• Catena $90 M

• Lantern Comm $89 M

• Silicon Access $84 M

• SS8 $38 M

• Spacebridge $25 M

• Quake Tech $18 M

• Adherex Tech $10 M

• Analog Design $8 M

• Zucotto $53 M

• Watchfire $38 M

• Solidum Syst $25 M

• Dragonwave $12 M

• Internetivity $10 M

I got those deals from newspaper articles printed on paper. Those deals total $476M in one quarter (Q4) of 2000 in Ottawa alone, not including any other market. Using pitchbook data would mean that well over 35% of the total year 2000 Venture Capital in Canada was done in one city in just one quarter. And while Ottawa was the biggest market in Canada. This is just not believable. (for those asking, (all 2 of you) Ottawa received $1.23B in 2000.)

The second (older) chart uses data gathered on the ground and at the time. Thomson Reuters currently owns this data, but they don’t advertise it much anymore. They may own it, but it was put together by a firm named Macdonald and Associates, which was run by Mary Macdonald, who founded the firm in 1985 and ran it for 20 years. Thomson bought them in 2005.

Data methodology could account for some discrepancies - they often do. But it’s way too large, and I don’t think it does. Also, the CVCA used Macdonald & Associates data as recently as 2012 for its total market research2. If they had issues with their methodology, I think it would have been brought up then.

So, let us have some fun with Excel. These numbers I have from Macdonald & Associates, and where that ends (in 2016), I have the CVCA data going forward.

Then, I’ve added the data from the Picthbook numbers charted for comparison. I think the 2020-22 numbers are proprietary to BDC and not Pitchbook-derived. BDC would have much better data internally for what’s going on.

If you look closely, the Data of both charts started to merge in 2012 as Pitchbook improved and almost matches from 2015 onwards.

Accepting that the Pitchbook’s numbers are primarily correct from 2015 onwards and the second Thomson chart is correct before that date. We can say that Canadian Venture Capital peaked in 2000 and did not beat that number again until 2019. more importantly, we might also say that the Canadian Venture crash took over three years.

As an old guy, I find it hard to explain to today’s cohort of VCs what that period felt like to those on the ground in Canada. One way to start the conversation is to adjust the numbers for inflation, which gives a flavour of the fall from grace of Canadian Venture Capital. Here is the chart with each year adjusted to the 2023 equivalent dollar value.

This gives a better sense of how VCs of my vintage look at Candian Venture. When I first started in seed investments in 1996. We were running up to a peak. It has taken twenty years to get back to those numbers.

VC data, particularly the source of that VC data, is critical for us here in Canada.

Looking at the first pitchbook-generated chart could lead you to believe that while there was a decline, the domestic venture market was relatively small in the ’00s and only began to grow in the post-2010 period. This just isn’t the case. But not knowing that could lead you to draw very different conclusions as to how the venture market in Canada will react in this new reality post-2022, where we find ourselves now.

But all to say, don’t trust Pitchbook for your historical Canada Tech data.

In my next email, I’ll dive into what exactly drove that massive decline.

If I have an excuse, it is an adorable 1-year-old boy who my wife and I welcomed into the world. He’s now walking and getting into all sorts of trouble, which makes the ‘I have a new baby excuse’ a bit thin. So that said, I have a post coming up on the history of Quebec’s more recent past in tech.

On a slightly personal note, having a child has given me a perspective and empathy I didn’t know I lacked. While I always wanted the world to be a better place, I now believe I have to engage more to make that happen. To that end, I spent the past year making myself more available on multiple initiatives.

So I’ll be getting a bit political here.

I think we would all agree that Canada faces an unprecedented moment in today's changing world, with the global economy in flux and technological advancements transforming our lives. Many of our current elected government ministers lack real-world experience and are reacting to events instead of anticipating them.

It has led me to believe that Canada, and by extension, all of us in the tech space, need what could be best described as an experienced knowledgeable leader, someone with the vision and background to navigate these turbulent times and help guide our government toward a prosperous and resilient future.

As you read this, Conservatives are choosing their local candidates in numerous ridings throughout Canada. Now is a chance for them to pick someone offering a fresh and innovative perspective to tackle the challenges in front of us.

What would my ideal candidate resume look like?

They would have to:

1. Have an acute awareness and experience within the overall Canadian economy;

2. Understand the Venture community and what that means to the future growth of the Canadian economy;

3. Understand the tech / knowledge economy and what it means to Canada's future economic growth;

4. A strong track record helping small and medium-sized businesses – the companies that will employ many future workers and who can relate to aspiring entrepreneurs. Preferably they can relate to them because they were one;

5. Someone who did not come from generational wealth, so they understand what the middle-class needs;

6. Spent time doing business with our biggest trading partner and who understands how to really "talk to the Americans" in a way that will help us grow as a nation;

7. Understand how the public and private sectors can collaborate and even partner. Have a proven track record of overseeing such initiatives;

8. They have made a meaningful contribution, preferably by giving back to their community. Maybe by serving on one but preferably two Crown agency/Corporation Boards;

9. Lastly, they have a proven, demonstratable success in their work and career but are grounded despite it.

Fortunately, I know of such a person and want to be the catalyst to draft him.

His name is Mark McQueen.

Let me tell you why Mark is my ideal candidate. People like him are rare.

But it's those rare people that we should be encouraging to be more than leaders in our ecosystem - they should be leaders in our government.

Canada needs an entrepreneur of the highest integrity to represent us. A voice with that experience has been missing in Parliament for too long. So I'm asking Mark McQueen, and those who know Mark, to encourage him to run for office.

Let me share his best-known accomplishments for those who don't know him.

Mark founded Wellington Financial after the events I described earlier with just a tiny $7M book. By the time CIBC acquired his firm, he was managing over $500M. Wellington was well-known for supporting Canadian entrepreneurs and startups through some of the most challenging times in Canadian Tech.

To give some context, in 2000, venture investment in Canadian tech companies hit an all-time high of CAD 5.8B. By 2009, it was just $1 billion. In US dollars, our industry was a rounding error (the CAD/USD exchange was, on average, just 0.87). It took 19 years to beat that high-water mark of the year 2000 number. (6.2B in 2019).

At this low ebb, one Canadian VC declared in the Wall Street Journal that Venture Capital and Tech were dead in Canada. Mark was one of the leaders who disagreed and publicly defended the industry and Canada's place in the tech world. It was because of him and other leaders that we have the Canadian Tech industry today.

During '08, when the financial crisis threatened to slaughter what was left of our tech businesses, people like Mark and his team at Wellington stood ready to help.

I distinctly remember a portfolio company that had to make payroll and owed a portion of its loan to Wellington. The company discussed it on a phone line with its investors and creditors.

"What should we do?" they asked after a long preamble. The VCs couldn't call capital, and the angels were watching their wealth collapse.

There was a silent pause, and the voice on the other end of the conference call was Mark's.

"I think that choice is obvious."

The team made payroll, and the company survived and eventually thrived.

Throughout his time at Wellington and then CIBC, Mark built a strong team and a book of business. They were widely viewed as Canada's answer to a merchant banking market that had abandoned the tech industry. But it was the companies they supported that would have a lasting impact on our economy. That impact continues to this day.

But Mark is more than just a successful entrepreneur and operator. Mark has shown a gift for taking difficult situations in the public interest and making them work.

Take, for example, his time at the Toronto Port Authority.

When he joined the board, Mark was appointed chairman of an organization that had been losing money for years. The TPA is not an easy organization, and the chairmanship is not fun. It intersects with and has representation on its board from all three levels of government. And those members are often of different political views with conflicting priorities. It is a microcosm of the challenges of the Canadian Confederation in one boardroom. And so, for decades, that difficulty of multiple levels of government holding sway marred the TPA's ability to get things done for all of us, the citizens. Under Mark's stewardship, it balanced its budget and provided much-needed upgraded services for the Toronto waterfront and the Billy Bishop Airport.

An example is the $80M Tunnel at the island airport we all use. It was paid for from revenues the Toronto Port Authority made as it grew the airport's usage. The government paid nothing and enabled the city of Toronto to save money. Multiple times, people declared in the press that the tunnel would not happen. It was a good bet the tunnel was on the drawing board for decades, but it got started and completed under Mark's leadership.

The federal government of the time was so impressed that they upped the ante and appointed Mark as the inaugural Chair of the Windsor Detroit Bridge Authority, whose job it would be to oversee the construction of a bridge - the Gordie Howe Bridge, at Canada's most critical trade crossing. Not content with Mark's ability to navigate the challenges of three levels of government, they decided to add US federal and state government into the mix.

But that we need from our elected leaders. Someone who not only acknowledges the challenges but relishes solving them and can do so.

When I heard of an opening for a conservative riding to run in, I couldn't think of anyone else who would better represent Canadians.

I've been a conservative for many years now. I grew up in Ottawa surrounded by politicians and their staffers - I have many friends of all stripes on the hill. But if the Conservative party is going to form a new government, it should look at its bench strength on what talent is at hand and what is lacking. I do that regularly for my startups, and I can also do it for the conservative caucus.

In all fairness to the current team, I do not see anyone with Mark's senior background in finance, success in entrepreneurship, or deep insights on innovation on the conservative team today. We have a strong opposition, but we need to recruit for taking the reins of government with people who will know the files and get things done. It's a huge missing piece that is also missing from the Liberal government, and the results show.

No non-partisan observers would call the current government's innovation policies for the past eight years a success. What has been implemented has been confusing, unfocused, and unsuccessful. I've sat on multiple calls with bureaucrats and political staffers to discuss innovation policy papers and initiatives that never see the light of day, nor should they. They don't make sense, and when ministers drop hints of the proposals at news conferences, you can hear industry experts scratching their heads.

Meanwhile, I watch other tech industry leaders get told to watch for a pertinent announcement in a budget, only for nothing to be there. From open banking to semiconductors, from university research grants to R&D incentives, there has been a lacklustre and confused response to each issue, as if it can be solved with a new agency or 'review.' I just do not believe our current government is serious about solving the problems I see in front of them, even when we agree that there is a problem. From where I sit, there is a constant lack of leadership at the federal level.

And this is in my small corner of the economy. When I hear the same concerns on multiple other fronts in our economy, I worry that this lack of leadership or initiative is not confined to our sector.

And here we have available Mark McQueen, an exceptional leader who has demonstrated a high level of character, honesty, and maturity throughout his career and public service work.

Mark has been a successful entrepreneur and operator, and he has shown a gift for taking difficult situations that are in the public interest and making them work. He gets things done and is deeply knowledgeable about finance, entrepreneurship, and innovation. I believe Mark would make an excellent representative for us in Canada's Parliament, and I'd like to encourage him to run for office.

• How RIM got its financing & Canadian VCs in Shopify

• Celtic House and Terry Matthews

• GaN Systems Exiting and How it got started

• Adam Chowaniec and the Story of Amiga

• Scientific Research Tax Credits, the precursor to SR&ED

• A Quick Story of My Dad

After the History of Microsystems newsletter, you might be thinking I’d be writing about something other then semiconductors this time. But there’s been movement on the Canadian semiconductor front and I’d like to share some thoughts.

First, GaN Systems, a company that I worked at and that my Dad co-founded (he was CTO) raised $150M USD ($189ish CAD) from Fidelity. Congrats to the team and investors (and hopefully eventually me). This is a huge win, but keep in mind, it’s been over ten years since I was involved in raising the Series A with Rockport Capital and Chrysalix Ventures. A lesson here for everyone: semiconductor companies take a long time, even for the number one developer of Gallium Nitride semiconductors in the world.

Speaking of taking a long time…

I just saw the most recent Bond film, which was great. My favourite Bond film, though, is A View to a Kill, which features the greatest Bond villain, Maximilian Zorin

In the movie, Maximilian Zorin, plans on taking control of the world. His company, Zorin Industries, has plans on cornering the semiconductor market; all the chips manufactured are in his (or in his cronies’) plants throughout the world - the only place he doesn't control are the semiconductor plants in Silicon Valley. But he has an evil plan

To solve that problem, Zorin plans to buy oil wells all over the west coast of the U.S. and plant bombs in them, causing an earthquake and thus flooding Silicon Valley - cornering the Semiconductor market.

Cue evil laugh.

But James Bond foils the plan and throws Zorin out of his Zeppelin (yes, Zorin has a Zeppelin - this is before billionaires started space companies).

Totally outlandish, right? Not the Zeppelin part, but the cornering semiconductor market.

No one could do that, right?

35 years later, a Taiwanese company has almost done what Zorin set out to do. They control half of all the semiconductor business in the world today.

But they did it legally and without having to flood Silicon Valley. How?

If you are Apple, Broadcom, Qualcomm, you don't actually make the chips that you sell. It's not worth the cost of building a semiconductor fab, mastering the dark arts of making sure the chips work, or building better processing technology to keep your chips cutting edge. You outsource that manufacturing to volume players. There are a few companies that do this manufacturing: International Corporation, Silterra, United Microelectronics Corporation, Global Foundries, Samsung, and most importantly, TSMC.

Before we get there, Intel (the semiconductor company most think of) is a rare bird; today, they are one of the only`firms that both manufacture and design their own chips. And they're losing to AMD, who makes their chips with TSMC and Global Foundries.

When looking at market share, TSMC is the world-wide winner.

Remember GaN Systems that I mentioned earlier? Those chips are made predominantly in a fab that TSMC owns. GaN Systems has designed the chips for different applications, but TSMC (for the most part) is their primary manufacturing partner. And GaN Systems’ biggest competitor, Navitas Semiconductors? Well, they make their chips there, too.

TSMC out-competes everyone, by offering better products, prices, support, and services. Because they are so good at it, the entire world is their customers, and they work well with everyone. Heck, two major competitors have their chips manufactured at TSMC Fabs. You'd think they would care, but they don't.

Well, that was until 2021...

Why?

2021 will go down in history as the year of the "Great Semiconductor Shortage."

Manufacturing companies are all stating that they can't get their chips.

Now, people are wondering if this was such a good idea to mostly work with foundries located on the other side of the world.

You can read all the articles on why this took place, but here are three easy to understand causes.

1. China has been building a three year inventory of chips after Trump made it difficult and near impossible for them to get those chips. They've been keeping a solid inventory in case it ever happens again (and building domestic production).

2. Manufacturers (and/or their suppliers) canceled their purchases of chips when they believed COVID would lead to a recession. By the time they realized it would not cause a recession, their supplies and just-in-time inventory systems ran out of time. Their backlog of orders has also added to problems, as suppliers auction chips to the highest bidder, creating inflation. You can see this in finished goods (TV's, microwaves etc.) and in automobiles.

3. Climate Change... the monsoons in Asia didn't arrive this year. A win for people who usually find their homes flooded, but semiconductors is a water-intensive process and Taiwan and South Korea, where the majority of manufacturing takes place, are in a drought. They're trucking in water, because the water pipes are empty. Couple this with fires at other foundries destroying clean rooms, alongside with work-from-home orders, and you get manufacturing volume slowing.

It’s been a rough 18 months in the semiconductor business.

Last week, the Canadian Semiconductor Council released an expansive report setting out what Canada should do on the semiconductor front.

I'll discuss the council and the report shortly, but the question to start with is why did they release the report last week?

Because it was throne speech time.

After a surprisingly long gap following the recent election, the speech set out the government's priorities. But in the tech community, everyone was looking to the ministerial letters, which have yet to be released, but many expect to endorse a national semiconductor strategy.

What's going to be in it for Canadian tech folk? Well, let's look at what everyone else in the world is doing. Our policy is not set in a vacuum.

In America, Biden has passed an Infrastructure Bill. Except for cleantech initiatives or social programs, semiconductors are the big winner in his plan. With a headline announcement of $50 billion, the bill passed a few weeks back.

Couple that with the $250 billion committed under the US Innovation and & Competition Act for Semiconductors, of which, $52 billion will be just for building semiconductor manufacturing capacity. That's a ton of money for the semi industry.

That said, the God of Semiconductors (TSMC Founder and Chair Mark Liu) says it is not enough. Biden agrees it seems and, like Max Zorin, he has a plan.

The major aspect that the media hasn't really pointed out is that Biden is not thinking he lives in a vacuum either. His policy document "BUILDING RESILIENT SUPPLY CHAINS, REVITALIZING AMERICAN MANUFACTURING, AND FOSTERING BROAD-BASED GROWTH” (excuse the horrible title), outlines his intentions.

It states that America doesn't think it can win alone, and wants to work with 'techno-democracies' to build a decentralized semiconductor fabrication supply system, with less concentration risk in any one geography. This is the great pivot away from the traditional semi supply chain, i.e., less Taiwan and less China risk.

What we need to ask: where does Canada sit in this document? We're mentioned throughout, but not as a major player.  

But we want to be, it seems.

Three weeks back, Minister Champagne (as a reminder, he's the federal innovation, science, and industry minister) was in Washington.

"We understand there's a generational opportunity now to do more together, we will be better if we work together," he told reporters, adding that climate change, technological innovation, and supply chain issues were top of mind.

The joint circular of the meeting stated they would:

"Explore opportunities for collaboration on emerging technologies such as artificial intelligence, quantum information science and technology, next-generation telecommunications, and genome measurement."

Essentially, Canada wants to be part of any US initiatives on this front. To be left out is to be left behind.

The Liberals have a chequered history regarding supporting the Canadian semiconductor space.

Remember superclusters? When Canada spent $950 million and was going to double down on our winning tech ecosystems? A chance to own the podium. Well, there was an attempt at creating a Microelectronic (Semiconductor) Supercluster that did not get into the finals. Essentially, the government thought they weren’t important to Canada’s innovative future. Oceans and protein superclusters are… but not semiconductors. 

To emphasize the point, starting in 2017, the government decided to change the NSERC funding formula (as they also put more money directly into superclusters). This had the added benefit of forcing NSERC to focus on only funding individuals.

Doing this nearly killed one of the Canadian semiconductors industries major resources: CMC Microsystems.

But I’m guessing you have not heard of CMC Microsystems.

But in Canadian semi circles, it is the central repository of our semi and photonics brain trusts. They're a nonprofit, industry and university-led organization, and would be the first stop for any government push on the semiconductor front.

They've also partnered with startups that you've heard of like Xanadu, Spark Microsystems, among numerous others. CMC claims that about 150 companies have credited their beginning to CMC over the past 30 years0. I think that number is underselling it.

While at GaN Systems, I was so impressed with the relationship we had with CMC Microsystems. Guess who we made the Chairperson of GaN Systems’ board? Former CMC CEO, Ian McWalter.

After an outcry, phone calls, and much head scratching, the government relented in early 2019 and found new funding for CMC. But just remember that while superclusters were all the rage, a group that had been doing the work in the semiconductor space for over 30 years was almost ignored to death. 

And that is a concern; the government leviathan often looks for ‘activity’ rather than actual, you know, impact. We need to keep that in mind.

By late 2019, the government had decided to step up their involvement in semiconductors. Particularly as the Trump administration began to turn the screws on Huawei.

One step was to put $5 million into the VentureLab HardwareCatalyst Initiative, which states it is the only Canadian Semiconductor Incubator. And CMC started to get new funding initiatives.

But who could the government turn to for advice on Semiconductors? Well, in May - you might have blinked and missed the press release, and accompanying coverage, that Industry Minister Mary Ng (as a reminder, Minister of International Trade, Export Promotion, Small Business, and Economic Development) launched a Canada Semiconductor Council.

"With a mandate to build and lead Canada's national semiconductor strategy and action plan, the coalition will work towards advancing Canadian competitiveness, strengthening trade partnerships, bolstering supply chain resilience, and propelling Canada to the forefront of the US$7 trillion global semiconductor industry," the release reads.

That's a huge mandate to advise on the semiconductor industry to the federal government, perhaps a good sign that they were taking the space seriously. 

What was particularly surprising was one missing piece of representation in the group's leadership: anyone who was or is a semiconductor engineer, developer, or a founder of a semiconductor company. Not hard to find, but very surprising it is not there.

The question might be, why would the Minister set up a council that has no one on it who has built or designed a chip?

Prior to the announcement of the Council, Melissa Chee (head of both VentureLab and the Council) wrote an op-ed for the Globe and Mail:

"The barriers to entry for chip manufacturing are steep, but the return on investment speaks for itself. Growing a critical mass of anchor companies that are built up to scale in Canada – rather than starting here and then exiting at low valuations – is the key to attracting billions of dollars in global investment.

“A thriving semiconductor sector also means countless patents being filed and intellectual property created. But growing Canada into an industry leader isn't just about owning the patents; it's about owning the podium.”

Remember that rejected supercluster for semiconductors that I mentioned earlier?

It was named the Advanced Microelectronics Supercluster, which was led by the team at VentureLab, which Melissa Chee runs. When I asked why the Semi/Microelectronics Supercluster didn't even make it to the finals, the primary reason they shared was that no one in government wanted to build a fab.

Well, the government-appointed council leader does, as she made clear in her op-ed and now with a report from the council last week.

The report the Canadian Semiconductor Council released is long, but in multiple places makes clear its view that Canada should build a fab. The report mentions Microsystems International, which I wrote about last issue. It seems that my previous article would be a very clear warning on the results of governments trying to finance huge capital heavy tech projects, like a fab.

But they didn't know that story. Its clear from reading their document that Microsystems was a success, we should aim to repeat.

The Semiconductor Councils proposal calls for more venture funding of companies, more funding for research, a proposed buying alliance for fab time, it a bit of a catch all of industry wishes. All good proposals perhaps, some of these services are actually offered by CMC - maybe this is a call to expand those?

But on the point of a building semiconductor fab (euphemistically described as ”Onshore manufacturing”), I want to make clear I don't think the timing could be worse for this.

This idea is being floated at a time when more Semiconductor fabrication capacity is being built than at any time in the past 20 years. Let's just go through the few I was able to find in a few minutes of Googling (saved you a click):

• in South Korea, Samsung is spending over $205 billion

• Intel is investing $20 billion in new fab output 

• Japan is hoping to triple output

• Samsung is building another in Texas 

• Bosch is refurbishing its fab in Germany 

The council's own report does mention some of these initiatives. But they do it with the sense that we should be building one, too. Instead, I think we should be watching in disbelief as more countries saddle themselves with the expensive initial cost and maintenance of fabs.

The semiconductor industry has been historically a ‘Boom and Bust’ business. Meaning, demand outstrips capacity, capacity takes time to be created (fabs takes 3-7 years to build), capacity comes online and outstrips demand, this lowers prices and lower volume/higher costs players collapse. Rinse and repeat.

The reason this hasn't happened in the past 20 years or so is because of a company known as TSMC, who killed off oom and bust cycles. 

And while 2021 is the boom, the bust is when all that capacity comes online in the next 3-10 years.

What about the fabs we have? Should we refurbish one? Maybe.

To my knowledge, most are U.S. owned at this point.

There's a bunch of small fabs in Canada. In the private sector, the most important one is the Bromont, Quebec facility, located next to the IBM Semiconductor fab (which only does work for them). The area has a fun little ski hill. 

Today it is owned by Teledyne (a U.S.-owned company), who bought it from DALSA, who bought it from Zarlink in 2001.

Here is your Canadian history fix: 

Zarlink was better known as Mitel Semiconductor in the 1970’s and 1980’s.

As you might remember from Microsystems International Ltd history, Mitel was started by two former Microsystems employees…

Why did they build a semiconductor fab after the mess they saw at Microsystems? Well, they didn't.

While the Canadian federal government was losing $90 million on Microsystem Int’l ($670 million in 2021 dollars), in 1972, the Quebec provincial government (upset the MIL Lab was in Ottawa and not Quebec) decided to ‘invest’ In a semiconductor fab through the Societe Developpement Industriel (the Quebec government investment fund) and poured in over $10 million (or $63 million in 2021 dollars). The company, Siltek International Ltd (SIL), failed, and was sold to Mitel in 1976 for about $600K. Mitel successfully operated the fab for the next 25 years, for their own use, upgrading it with government incentives. 

The success of that fab in Bromont along with the lesser success of the Microsystems fab (whose fab eventually ended up at Nortel) should be a lesson: they both were successful after the government lost millions subsidizing their creations. They look successful with hindsight because Canadians did what they are good at: designing products to be used inside of them. But they were never able to justify the cost of the initial CAPEX outlay.

The Canadian Semiconductors Councils’ own report hints at this contradiction between building ‘on-shore manufacturing’ and focusing on semiconductor design, by selectively referencing a report from BCG. The better selection from that same report would be to point out the hypothetical cost of fully domestic "on-shoring" in semiconductors in the States:

“A hypothetical alternative with parallel, fully “self-sufficient” local supply chains in each region to meet its current levels of semiconductor consumption would have required at least about $1 trillion in incremental upfront investment, resulting in a 35% to 65% overall increase in semiconductor prices and ultimately higher costs of electronic devices for end users.”

That's not a great idea for America, or for us.

The same report from BCG points out that semiconductor design accounts for 53% of all industry R&D spending but only accounts for 13% of the CAPEX and 50% of end product value. While semiconductor manufacturing accounts for only 13% of R&D but accounts for 64% of CAPEX, & 24% of the end product value.

Or in other words: if we build manufacturing, we get very little of the R&D or value add but huge capital expenditure costs. If we focus on just design in the semiconductor business we get more benefits for less cost.

The best quote of the report is this:

“A state-of-the-art semiconductor fab of standard capacity requires roughly $4-5 billion USD (for advanced analog fabs) to $20 billion (for advanced logic and memory fabs) of capital expenditure, including land, building, and equipment. This is significantly higher than, for example, the estimated cost of a next-generation aircraft carrier ($13 billion) or a new nuclear power plant ($4 billion to $8 billion).”

I'll just leave that there.

But even if we did build a fab lets explore two things.

One is that even if we started ordering equipment today, that equipment would not arrive for 3 to 4 years. ASML one of the worlds larges manufacturers of equipment tfor semiconductors fabs has announced they are delayed until 2025/6 for new orders. Applied Materials, Lam Research, BESI - all claim delays in meeting the demand as well.

Second, as we have seen when the government starts a new program - other worthy programs suddenly find themselves starved of funding. When Superclusters were the rage CMC Microsystems found itself without cash. What funding would we have to turn off funding today to find the billion or two annually the government would need spend? A fab costs billions. Where is the cash coming from?

Instead, Canada should be preparing for a moment where we can use all those boat anchors of fabs that everyone else has built, to build Canadian-designed chips at a low cost to manufacture.

Are we prepared for that?

Well, CMC Microsystems recently started the "Fabrication of Integrated Components for the Internet's Edge – FABrIC" program. Beyond not having money for a marketing budget to fix the name, this is a pretty huge initiative, and it got zero press. The goal is to support the manufacturing capacity of microelectromechanical systems (MEMS), integrated photonics and specialty semiconductors and quantum devices. It's not small either - a $700 million program with $480 million from industry and $120 million from the government. It is looking for $100 million in other matching contributions from provincial governments.

The program should be fully funded and it requires no fab. 

Canada’s venture capital investment in semiconductors is probably at its lowest level in several decades. The last VC I know of with actual semiconductor development and entrepreneurial experience is retiring. A seed fund in this space would be a good idea. More investment is discussed in the report but not as directly as I (perhaps, self servingly) would have liked. 

Regardless, it is times like this where we should be concentrating our efforts on building and funding the next generation of Canadian semiconductor companies and making sure research institutions aren’t constantly begging for dollars.

I think I can say with some limited authority that the heyday of semiconductor companies in Canada was not built when there were semiconductor fabs exhausting government credit lines. The story of that Canadian semiconductor success was built on strong founders with funding, building great companies with the government listening to them. 

You might have forgotten you signed up for my newsletter, I didn’t, but things got strangely busy over the past 6 months. And the ScaleUP portfolio has been in the thick of it.

Just to do the VC thing and take credit for other peoples hard work. On my end:

• Sonder is in the final innings of a SPAC

• Rewind raised a Series B

• #paid raised a Series B

• Medstack raised a Seed Extension

While my colleagues worked with RoseRocket, Savvyy, Coconut, Nylas and Dooly to help get their funding rounds completed.

All since June.

Crazy busy times… and because of that, hard to find time to share thoughtful viewpoints outside of the daily noise.

But now that things on my end have seemingly slowed down, I feel like it’s time to dust off the idea of my newsletter.

Going forward I’ll be sharing links and thoughts primarily on the Canadian tech and venture landscape. But also when time permits some longer form Canadian tech history. I’ll still do the occasional tweet storm, but sometimes I’ll just need more space to share.

To start, I thought I would share the story that I believe pinpoints the start of Canada’s tech industry. If the history of Silicon Valley starts with the traitorous eight and the ‘fairchildren.’ Then I’d say that the story of Canada’s tech industry starts with a little known company named MicroSystems International Ltd (MIL).

I hope you enjoy this and thanks for subscribing!

matt

- Matt@ChapeauCapital.com

The birth of Canada’s tech industry

MicroSystems International Inc.

In the spring of 1975, a young and shy engineer from Hewlett Packard attended his first computer club meeting in California.

Writing years later he said:

I was scared and not feeling like I belonged, but one very lucky thing happened. A guy started passing out these data sheets - technical specifications - for a microprocessor … from a company in Canada… I took it home, figuring, ‘Well, at least I’ll learn something.’

That night, I checked out the microprocessor data sheet ... I realized that all I needed was this Canadian processor with some memory chips. Then I’d have the computer I’d always wanted! ... I could build my own computer, a computer I could own and design to do any neat things I wanted to do with it for the rest of my life.

That engineer was Steve Wozniak. He co-founded Apple. He designed the first widely accepted personal computer. He could have designed that computer with a Canadian Microprocessor. But it never happened.

Why it didn’t is the story of Microsystems International Ltd. (MIL), Canada’s plan to build a domestic semiconductor industry.

Missing the future

That plan started in the offices of the Canadian Government in Ottawa in 1966.

The Federal government released a report on tech that sounds eerily like it could have been written yesterday. It complained that the lack of investment in manufacturing and R&D for tech (specifically computers) was damaging Canada’s competitiveness.

Particularly, retention of students graduating with technical skills was low (brain drain), foreign interests were hiring Canadian talent thus leveraging their technical discoveries (loss of IP), and there was a large dependence on foreign companies for tech products.

The TLDR of the report is that Canada was missing the boat on computers but it had a chance to be out in front on semiconductors as computers switched from older technology. The action plan was that Canada should double down on this industry with capital investment. But the Ministry of Industry (today Industry Canada) had learned some lessons trying something like this before, when it tried to create a Canadian aerospace industry (today known as a small boondoggle called the Avro Arrow program).

The Arrow is not today’s story. They had learned that Canada was too small to entirely carry a domestically focused industry (as had been in the case of the Arrow initially).

With that learning, they aimed to find a partner that would setup manufacturing and design operations in Canada. The partner also had to have either a need for the semiconductors themselves or who knew who to sell them to outside of the country; the federal government would not be the end customer, it would be the investment partner. Canada was going to export its way to success.

It took two years to find that partner.

Just around the corner 

Several international candidates were discussed and approached, but in the end, the answer was seemingly just down the road in Montreal: Bell Canada and its subsidiary, Northern Electric Co, which was later known as Bell Northern Research, or Northern Telecom, and eventually rebranded to its last incarnation in the 90’s, Nortel. The government had tried other foreign partners, and been turned down - but with Northern and Bell, it felt they had met the right partners. Plus, they were Canadian!

Northern Telecom had been experimenting with designing its own semiconductors and small scale manufacturing but had not built any high-volume manufacturing systems. A Fab, or Semiconductor Fabrication Plant (essentially a factory), was an ingredient the government felt was key to a successful Canadian semiconductor industry. So in 1968 the government ‘incentivized’ Northern and Bell to spin out their ‘Advanced Devices Group’ into a separate company.

Management of the company would be in Montreal, while its technical operations were located in Ottawa. Importantly, this would create significant tensions and later outright hostility. This is also when the company got the name Microsystem International Ltd (MIL).

Unfortunately the company was already behind its competitors the day it was founded.

In 1968-9, semiconductor manufacturing underwent a huge revolution in how they were manufactured, and the technology MIL inherited from Northern Electric was of the older variety. If the company wished to compete, it needed to get the new semiconductor fabrication processes, but only two companies had them. One was Fairchild Semiconductor, which refused to work with the Canadians. The other was a small group of a few dozen or so engineers who had left Fairchild to start their own firm. You may have heard of them: that company was Intel.

A Match Made in Heaven

Although founded only a few months earlier, the company was a dream team of semiconductor pioneers. Beyond thinking about the next generation memory chips, Intel was also innovating on the microprocessors front.

MIL and Intel was a match made in heaven.

Under the terms of the agreement between MIL and Intel, the Canadian company was to get the rights to build their own version of Intel’s fabrication process (MOS silicon-gate technology), the right to produce Intel's existing chips on it and sell them (second-source rights to Intel’s semiconductor memories). Intel would set up the production line at MIL’s Ottawa facility and guarantee the quality performance of the fabrication process.

You heard this correctly: Intel’s second Fab ever was in Ottawa, owned by MIL but run with Intel’s help. If you were to read every Intel history book (I think I have)…. they never mention this.

With this deal, Intel licensed nearly all of its memory chip designs to MIL, allowing them to compete with the major players in the market. The federal government had what it wanted: Microsystems International had now leapfrogged to one of the top semiconductor firms in the world.

But how? How did MIL get this done?

With money of course, lots and lots of money.

$93,392,000 to be exact.

But that was in 1970.

Today that would be $670,639,035.18.

You read that right: MIL received $670 million to get started.

Let's break down where it all came from.

First the company IPO’d, raising $18.7 million from the public. How did they IPO? With the help of Bell, who promoted the opportunity: if you bought one Bell share you also got a MIL share for your trouble.

Northern Electric cosigned a loan for $10 million and provided a line of credit for $12 million. And the federal government provided grants and interest free loans for $35 million(!). 

The rest came in the form of guaranteed loans or “in kind loans’ from Northern Electric. 

What did the company spend this money on?

Getting Talent

At first, staff and lots of them. Manufacturing and designing semiconductors at this time was labour-intensive work. By 1970, the company employed 1200 people and was on track to hit 3000 by 1972.

Similar to today, talent was a problem, and MIL couldn’t find it all locally.

Mostly because, at this time, universities in Canada were graduating fewer than a few hundred people who focused on microelectronics. So MIL went on a world wide hiring spree. European universities were inundated by MIL recruitment teams. Of a 1970 graduating class of 27 from the University of Cardiff, 14 ended up at MIL in Ottawa. Students from the UK were highly-sought, graduates from tier-2 US technical schools were also hired - Rochester Institute of Technology (initially a Kodak preserve) saw 10 graduates arrive in Ottawa in 1971. 

European competitors were raided as well; Canada’s currency was pegged at a high value (i.e. the $ was artificially equal to the U.S. Dollar) at the time, and thus at a very high conversion to the European currencies. Experienced technical staff from Siemens, Marconi and others were all enticed to move to Canada for salaries much higher than they were getting at home. Employees also believed they were joining a cutting-edge future world player in semiconductors.

To the governments relief, the semiconductor brain drain began reversing.

Building a microprocessor

By 1971, the ingredients were all there. MIL had staff, they had a fab, they had customers - Northern and Bell said they would buy their stuff while the world market for memory semiconductors was growing. But they didn’t have a microprocessor. The second part of the Intel-MILpartnership was to build one.

At this time, Intel was designing not one, but two, and with MIL’s support, they would build a third.

In the early 70’s, most semiconductors were then primarily meant for calculators, which were shrinking from room-sized machines to desktop (and soon portable) sizes.

Intel had a customer (Busicom) paying it to design a newer chipset for a calculator. Usually this required 8-10 chips, but Intel gambled that it could make it all on one multipurpose chip (with most of the RAM And ROM built in). That way, the company could charge half as much and make way more as the manufacturing of the actual chip was pretty cheap. This one-chip potential solution was codenamed the 4004 (as it had 4 bits).

Intel was also working on another chip named the 8008 that was even more advanced, but that was at least two or three years away and was mostly a dream in 1971.

The 4004 design would be cutting edge - possibly to the point that Intel’s current manufacturing process might not be able to make it. So, worried it might fail, Intel did what any good startup would do: it hedged.

And when MIL came along wanting to build a microprocessor, that hedge was developed with MIL.

Codenamed the 4005, the chip was a meat-and-potato design. It would also be easier to manufacture, as the RAM and ROM would be separate from the chip.

MIL wanted to learn how to design and develop a microprocessor, which was great for Intel - the company was having trouble finding design staff. So MIL would design it and Intel would help manufacture it - which was great because MIL didn’t know how to do that. It was also pretty much guaranteed to work.

By 1971, however, Intel had solved every major technical challenge with the 4004. And on the wikipedia page for the 4004 is the listing of all the Intel 4004 support chips: 4001, 4002, 4003, 4008, and 4009.  Notice that jump in numbers? Where is the 4005?

Well, Intel didn’t need it anymore. The 4004 was a game-changer and Intel knew it.

A brief aside: these deals with MIL were huge for Intel, but not one Intel history book mentions it. Why was it such a big deal?l MIL paid Intel for the company’s help $2 million plus royalties going forward. In 1971, Intel had its first profit - all due to payments from MIL.

In 1972, MIL went ahead with its own 4005 Chip (named the MF7114, with Intel still helping on production), but now in a market with a massively innovative next-gen chip that was both better and cheaper. 

You might think this was stupid - but there is a logic behind the decision. MIL wanted to learn how to design and build a chip by itself, and with the MF7114, they had done both . The company also believed it had a customer in both of its parent companies (Bell and Northern Electric). The chip was meant mostly for their use. This was the first chip - not the one to bet the company on, but to build the experience and knowledge internally to design future chips.

 Bul MIL’s timing sucked. The MF7114 launched just as the semiconductor market imploded.

The start of a semiconductor boom-and-bust period began in 1970 and MIL walked right into it. It became known as  “the Calculator Wars.”

A ‘brutal industry’

By 1971, semiconductor manufacturing capacity in the industry was growing as dozens of international firms (almost all with government-backed loans to build Fabs) needed to keep those factories humming or lose money. So chip manufacturers licensed integrated circuits and memory chips and pumped them out. Just like MIL was doing.

Unsurprisingly, prices collapsed as the market demand was saturated. And remember how Intel’s 4004 needed less memory semiconductors? That just exacerbated the problem.

The price collapse coupled with governments incentivizing domestic systems integrators to use locally sourced chips instead of foreign ones meant that semiconductor manufacturers without large domestic markets found themselves with a problem: no one would buy their chips unless they were heavily discounted.

The best example of this was in Japan, where most calculators were built and manufactured. Nearly all of Japan’s semiconductors were foreign-made (over 50% by 1973), mostly due to international semiconductor companies pumping out chips at a loss and sending them overseas. Japan amalgamated most of its semiconductor manufacturing and started a campaign named (you can’t make this up) “*You can’t trust foreigners*” trying to convince SHARP and others to only use domestic components. This focus helped build Japan into a powerhouse of semiconductors: all the Quartz watches and technology from Japan in the 70's and 80’s started with a focus on making sure the domestic system integrator market used locally sourced chips. And if they didn’t, the government wouldn’t buy anything from them or lend them money. Germany did this to a lesser extent, as did Britain and France.

This hurt Northern Electric's relationship with MIL because Europe was the primary non-Canadian market for its equipment. Those countries were demanding locally sourced chips for their telecom equipment to the extent that companies opened factories to receive equipment without the semiconductors and then installed the local ones to meet the government demands.

The Canadian government tried initially to do the same. IBM is a clear example: just outside Toronto, IBM built ‘Canadian’ Computers with locally sourced semiconductors to get the government business. Where were those locally sourced semiconductors coming from? Bromont, Quebec, where there is still an IBM Fab (along multiple others). But much of the actual intellectual property was and remained American.

Northern’s betrayal

Worse still, MIL’s crowning achievement, the MF711chip was orphaned. Northern Electric introduced the first Computerized Telephone Exchange Switch - it was a game changer and would cement Northern as a global manufacturer. Named the SP-1, it was meant to use the MF711. What chips did it use? Why, of course, the Intel 4004.

How this happened, pardon the pun, is due to a game of telephone.

Northern spec’d a design that it told MIL would meet its needs, and MIL delivered it. But no one told the SP-1 team that it had to use the MIL chips. So when the SP-1 design team saw a chip that was cheaper to integrate, versus the MIL chips, they used that.

Why didn’t the federal government tell Northern to use MIL chips? Well, it did. Remember that licensing agreement with Intel? Intel licensed the 4004 to MIL to make in Canada. But Intel got a royalty off each one, erasing the profit for MIL.

MIL now had a chip with no customers. The company tried to pivot, branding the MF7114 as a calculator chip, but it didn’t work.

During this moment in time,one of the most famous stories of MIL occured, which is how I learned about the company.

Two young British engineers in their 20’s, fed up with the MIL bureaucracy and its inability to make decisions, decided to quit. They knew the chips for SP-1 inside and out and decided to leave MIL to build their own solutions they could sell to SP-1 clients. Their names were Terry Matthews and Michael Cowpland and they founded a company named Mitel.

The beginning of the end

In 1971, MIL announced $12 million in losses for the 21 months of its existence, on sales of about $12 million - what those losses did not include was another $10 million worth of direct R&D costs. Who paid that? The Federal Government. So really, it was $22 million in losses for $12 million in sales.

The Montréal head office, which was down the street from Northern Electrics, believed that MIL’s Ottawa Operations were a mess. In their mind MIL had built a chip no one wanted, and it was bleeding red ink. MIL’s technical leadership wanted to build a new microprocessor to compete with Intel and stop building semiconductors mostly spec’d for Northern.

This new focus made no sense to Northern. So it 'fired' MIL’s CEO, moved the head office into Northern’s building, and laid off significant portions of the original microprocessor team

From this point on, MIL was treated as a Northern subsidiary. (even the logo changed)

The company built chips predominantly for domestic Canadian consumption. Chips that Northern could get excellent pricing for because the Canadian government was providing a tax subsidy for each one made. The manufacturing Fabs and memory design teams were retained. But all talk of new microprocessor design was ended and when Intel released the first 8-bit chip in 1972, the 8008, MIL was the first company to license making it.

And that, in fact, was what MIL became famous for: making other versions of Intel chips. When Steve Wozniak was at the computer club in 1975, he was looking at a brochure for a MIL-branded Intel 8080 chip. Made in Canada, designed in California.

But the company couldn’t compete, at least not without government subsidies, which ran out in late 1974. By 1973, the company had used at least $24 million worth of subsidies and loans (the last number I could find).

Now that the government’s subsidy support had run out, Northern bought the whole company. Why?

Tax losses!

Which Bell and Northern could use. But in this period, tax loses expire within five years and getting them in 1974 was important (as the company was founded in 1969). These losses amounted to $43 million in 1970, about $350 million in today’s money. It was also more than Bell or Northern made in profit that year. So not only did the government lose money on loans and subsidies, the guys who ran it into the ground picked up the tax losses (and equipment) for pennies on the dollar.

Post-1975

The aftermath post-MIL for the semiconductor industry in Canada is actually a pretty good story - it just didn’t look like the industry that the government had set out to build in 1968.

Vernon Masquez (the Chairman of Northern) said later that Northern had gotten into the chip making business against “its better instincts.”

Which was probably true.

Mike Cowpland said it was “terrible Management. They were going from a monopoly to the world’s most ruthless industry” and that they weren’t prepared.

That’s probably true.

Terry Matthews once told me the biggest lesson he learned was that a customer isn’t a customer until he pays. And Northern was never really the customer it promised to be.

That is definitely true.

The federal government was urged by the opposition in 1975 to conduct an inquiry into the mess. This was the biggest investment in tech by the Pierre Elliott Trudeau government, and the opposition, led by the NDP, wanted to know what had happened to all the money. The Liberals said, “no inquiry was needed.”

I’m not so sure that was true.

But what lessons should we take from this? Should we call it the story of government waste and mismanagement, with Nortel in the mix?

If the story stopped after 1975, then yes, it was an unmitigated disaster.

Looking at the story 20 years later, in 1995, you might think differently.

By then, over 90 companies had been founded or co-founded by former MIL employees, many of them only in Canada because they were recruited from around the world to work there. Those companies were worth over an estimated $3 Billion in 1995 and would be worth several times that by 2000. Newbridge, Corel, Mosaid, Chipworks, JDS, Tundra, Mitel, Cadence Computers, Calian, Crosskeys, etc., all trace their founding teams or first employees to MIL. Canada’s first venture capital investments were into former MIL employees. And the tech industry was built on the back of that employee network. Canada’s first tech angel networks were founded by former MIL employees, who founded their companies in the 1980’s.

And Northern Electric? Well in 1979 they announced they would be making chips for themselves in Ottawa - because the talent was still there. They were back in the semiconductor business.

Today, Microsystems International Ltd. is completely forgotten, or a footnote at best - there is not one history book written on it. When Nortel’s history was written by Peter Newman (paid for by Nortel) he devoted 5 lines to it. But in reality, it was this company more than any other that began Canada’s push to the front of the line in tech. We should remember the hard-earned lessons from it and respect the work done. Otherwise, we’ll experience a mess like this again.

Some thanks is due:

I'd like to thank Douglas, David, Ami, Laith, Steve, Chris & Mike who all read this over a few times for clarity. Where it doesn't make sense it's my fault. Where it does, thank them.

I spoke to a half dozen former Nortel and Microsystems staff asking them for their memories. While no recollections are perfect they all had some insights on where and how the Northern & MIL relationship soured, which is very hard to discern as the leadership of both groups never wrote down their deep thoughts. I don't think we'll ever know for sure exactly what boardroom politics took place.

There is one historian who has covered some of this story - Zbigniew Stackniak - an Associate professor of Computer Science at York University he also runs the York University Computer Museum. His paper on MF7114 is treasure trove for chip nerds like myself.

Also Revue doesn't allow me to share citations - as former history student I'm gutted it doesn't - regardless if you anyone is looking for some of the rabbit holes for this feel free to reach out.