Have you ever wondered why the Canadian venture capital (VC) industry is in not a so good shape? Maybe it is simply because that some of these professed professionals cannot even distinguish a VC investment from a VC exit.
A crash course for those VCs who had no clue on what a VC investment should be.
I. Secondary transaction is not a VC investment, it is an exit event for founders and existing investors
Secondary transaction, if any, generally forms part of late-stage overall funding round with new or existing investors buying shares held by founders or other existing investors. The company received nothing from the secondary transaction.
Example 1. Wealthsimple closed a $750 million Series E funding round in May 2021, with $500 million, as a secondary, going to Power Corporation of Canada and affiliated funds and entities. Wealthsimple only raised $250 million.
Example 2. 1Password closed US $620 million Series C round in January 2022, but US $300 million part of the total round went to the founders and officers of 1Password. 1Password only raised US $320 million.
When you were to include all the exits as investments, what do you get for total Canadian VC investments?
II. Mortgage funding and senior debt PE funding are not (risk) VC investments
Example 1. Fraction Holdings raised CDN $289 million in a combination of equity and debt financing in October 2020. Bulk of the funding was working capital for mortgage lending and only $19 million should be included as VC investments.
Example 2. In September 2019, Verafin closed $515 million equity and debt recapitalization. The transaction involved founders, backed by mostly bank senior debt, buying shares held by existing investors, and the PE and VC investors’ newly formed funds buying shares from their winding-down funds. This was a PE financing should never have been classified as then the largest VC financing.
If you were to include all the mortgage funding and all the senior debt funding by the banks and all the PE funding, what do you get for Canadian VC investments (a $200-500 billion or bigger industry)?
VC investments must be company centric and be measured on how much risk equity/quasi-equity capital the companies received from their investors.
An Apple is NOT an Orange.
photo credit: mohamed Hassan