A Look at VCCI-2: Canada’s Venture Capital Catalyst Initiative Version 2

May 24, 2022 FinTech and Alternative Finance, Fundraising, Investing, Trading, Innovation and Resources, Leadership, Productivity, Competition, Human Capital, Health, Venture Funding and Building, Voices No comments

Private Capital Journal | Richard Rémillard | May 24, 2022

Venture capital program - A Look at VCCI-2: Canada’s Venture Capital Catalyst Initiative Version 2 The Canadian federal government released its Request for Proposals (RFP) for fund-of-funds and fund managers wishing to apply for its Venture Capital Catalyst Initiative-2 (VCCI-2) program in mid-May. This program follows upon the Venture Capital Action Plan (VCAP) of 2013 and the VCCI-1 of 2017. All three versions have had the express purpose of strengthening the Canadian venture capital (VC) industry by injections of public monies in partnership with private capital sources.

See: Improving the Regulatory Environment for Entrepreneurial Capital Formation: JOBS Act 4.0

VCCI-2

VCCI-2 sets out a more ambitious target for attracting private capital than did VCCI-1 in that VCCI-2 requires fund-of-funds applicants under the $350 mm.
Stream 1 to secure $3 of capital for every $1 from the federal government. The financial incentive does not appear as generous as that under VCCI-1 which was a $2.25 to $1 ratio.
Private capital remains the first to be paid with contributed capital returned plus 5% preferred return per annum (NB: VCCI-1 fixed the amount at plus 7% per annum.
Requires detailed, intrusive some might find, reporting requirements regarding Diversity, Equity and Inclusion (DEI) measures that are designed to address shortcomings of certain disadvantaged groups, such as women.
It is assumed by the government that its own commitment to DEI (i.e., $300 million Equality Fund which was established to invest in womens’ movements in the global South and whose partners with Ottawa include one Schedule 1 bank and one venture capital fund) will not have a negative impact on the private sector’s assessment of the attractiveness of the VCCI-2 from a financial returns perspective.
- This suite of DEI measures has been substantially expanded from the general call for greater gender parity under VCCI-1. Taken together, achieving the $3 to $1 target leverage ratio may prove difficult, if not unrealistic.

Stepping back and looking at the forest not the trees, VCCI-2 reveals the essential small ‘c’ conservative of federal venture capital support policy going back to Prime Minister Harper’s VCAP nine years ago. A prime example of the inflexibility of the program design has to do with the list of industries in which successful applicants are forbidden to invest. These include the usual cast of suspects, namely tobacco, alcohol, gambling, pornography and weapons.

See: Decentralizing Venture Capital: DAO

VCCI-2 is also a very big “L” Liberal entity that strongly reflects the ethos of the current federal government. Of course, it has long been criticized for neglecting National Defense and has been the subject of intense criticism on the procurement front and so the prohibition against investing in weapons firms under the VCCI-2 seems to provide further evidence of Ottawa’s reluctance in dealing with military hardware. That ethos extends to what it calls DEI which is a very important component of VCCI-2 and even includes a small $50 million amount for five to ten managers in this particular space. The political risk to the fund of funds, their LP’s and their investee companies and funds that choose to sign on to the VCCI-2 is that that very participation signals their concurrence with the political priorities of the current regime in Ottawa and in so doing makes less likely any future support program under a different government whose own priorities are likely to differ.

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