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Policy & Advocacy

The Foundation of Innovation: The Role of VC Emerging Managers

A new wave of innovators are reshaping venture capital through forward-thinking, differentiated investments, and setting the foundation for the future of our ecosystem. Emerging managers in VC are not just challenging the status quo — they’re rewriting the playbook on how value is created and captured in our innovation and startup ecosystem.

As the investment industry rapidly evolves, understanding the impact, strategies, and potential of emerging managers reveals why they’re not just participants but essential to the future vibrancy of the innovation ecosystem. Their ability to spot untapped opportunities positions them as a crucial force in propelling the economy forward.

To support this transformative wave, CVCA has made a recommendation in our submission to the Minister of Finance for the 2024 federal budget, urging a strategic investment envelope to ensure impactful support for emerging managers and their vital work, foster innovation and drive economic growth within Canada’s startup ecosystem.

What is an Emerging Manager?

An emerging manager is a fund manager or management team, raising fewer than four funds or their first one, and managing smaller amounts of capital, typically less than $100M. Despite the challenges posed by the long lifespan of funds (8 to 12 years), which makes it difficult to showcase performance early on, these managers leverage their agility and deep insights to navigate the industry. They bring fresh perspectives, with their GPs sometimes having decades of experience in the industry managing other funds.

Emerging managers stand out due to their innovative strategies, willingness to embrace risk, and focus on niche or underserved sectors. They are crucial for nurturing the next wave of innovation, contributing to economic diversification, job creation, and the development of new Canadian companies.

These managers are driven by the desire to prove their investment strategies through solid returns. Their ambition is not just to participate in the market but to lead and differentiate themselves. They play a vital role in early-stage funding, making capital accessible in phases where it’s traditionally scarce, and broadening the investment landscape with alternative strategies and new areas for growth.

Fundraising for emerging managers can be a significant hurdle. Convincing potential backers to invest without a proven track record is understandably difficult. These managers must navigate operational challenges, establish credibility, and manage costs while building a solid reputation. However, their ability to offer unique investment opportunities and the promise of higher returns draws investors looking for direct engagement with new entrepreneurial talents. This attraction is enhanced in the context of smaller, more agile funds, where building close relationships and gaining early access to innovators is more achievable.

Crucially, emerging managers are a strong investment, with potential for superior returns on investment. There is a solid body of research showing that emerging managers often outshine their established counterparts. Data from Pitchbook demonstrates that nearly 18% of first-time funds achieve an internal rate of return (IRR) of at least 25%. This compares to later funds that exceed that number only 12% of the time.

A Unified Approach for Boosting Emerging Managers

Recognizing the vital role of emerging managers and the hurdles they encounter, CVCA has proposed a strategy to ensure the vitality and sustainability of Canada’s venture and innovation ecosystem.

Central to this strategy is a call for a concerted public-private effort to allocate $200M towards fund investment specifically targeted at Canada’s emerging managers. This investment, ideally facilitated by the Business Development Bank of Canada (BDC), would aim to empower these GPs to continue their growth trajectory, enabling them to invest locally in Canadian startups. By doing so, this initiative not only seeks to bolster the current generation of VCs but also to lay the groundwork for nurturing a pipeline of future Canadian funds.

By addressing the funding and operational challenges faced by emerging managers, it ensures a sustained capital and talent pipeline. This strategic investment represents more than just financial support; it’s a commitment to nurturing the very foundations of innovation, ensuring that the Canada remains fertile ground for the visionaries of tomorrow.

The Rise of Emerging Managers in Canada

Recognizing the unique value and potential within the emerging manager space, seasoned investors are keen on nurturing this vibrant segment of the market. Inovia Capital has demonstrated this strategic shift through the launch of its Discovery Fund I. This initiative not only underscores Inovia’s commitment but is also a strategic bet on the emerging manager space, signaling a broader industry trend towards supporting the architects of tomorrow’s innovation landscape. It also helps to address the current funding gap for emerging managers, who are key to maintaining a healthy environment of collaboration and competition in Canada. Among the VC firms backed by Inovia’s Discovery Fund I are Garage Capital, Front Row Ventures, and Two Small Fish Ventures, which showcases the fund’s wide-reaching impact on nurturing early-stage ventures.

Version One Ventures is also active in the emerging manager’s space. Their dedication to supporting emerging GPs is reflected in their broader investment philosophy, which prioritizes backing mission-driven founders and startups at the forefront of new sectors. Through strategic investments and mentorship, Version One seeks to empower these emerging GPs by providing them with the necessary tools, knowledge, and network to successfully raise and manage their funds. 

Recognizing the unique challenges faced by new managers in securing capital and establishing credibility in the competitive venture capital market, Version One has also shared guidance on differentiating oneself, focusing on a specific niche or industry, and leveraging personal networks to secure warm introductions and ultimately, investor commitment.

Over the past decade, Quebec has significantly bolstered its economy through strategic investments in financial innovation and emerging talent, creating a robust ecosystem for startups and venture capital firms. In 2011, the Quebec government seeded 3 new emerging managers: AmorChem, Cycle Capital, and Real Ventures, each contributing uniquely to the technological and economic landscape.

AmorChem focuses on turning academic research into next-generation biotech firms, dedicating itself to research with the potential for transformative therapies​. Cycle Capital empowers entrepreneurs with a focus on clean energy solutions across various sectors like sustainable mobility, agriculture, and smart cities, while Real Ventures has dedicated itself to supporting game-changing Canadian tech leaders. 

Teralys Capital is another prominent player in the emerging manager space. Also based in Quebec, Teralys leverages institutional backing to drive innovation across Canada. The Fonds québécois d’amorçage Teralys fund, which was launched in late 2019 with $50M from CDPQ, supports about ten Quebec funds that back companies at the startup phase. Teralys focuses on sectors such as ICT, life sciences, and clean or industrial innovations, underscoring a mission to bridge the funding gap for emerging managers and startups. At the end of 2022, CDPQ reaffirmed its support for the innovation ecosystem with an additional CAD $40M investment in the Fonds québécois d’amorçage Teralys. This enhanced commitment from CDPQ not only bolsters Teralys’s capacity to fuel innovation but also solidifies its role in the development of emerging managers, who are essential for injecting new ideas and energy into Canada’s vibrant startup landscape. 

Canadian VCs Breaking New Ground

While we highlight a few notable managers here, Canada is home to a growing roster of emerging managers. The Third Edition of The 50, A Guide to the Canadian Venture Capital Ecosystem, highlights many Canadian funds that stand out due to their unique investment theses and contributions to the VC landscape in Canada. These dynamic fund managers, recognized for their innovative strategies across technology, renewable energy, and healthcare, are making significant contributions to the evolving Canadian market. 

It’s important to note that the managers mentioned in this article and featured in The 50 are just a snapshot of the vibrant VC community in Canada. For a more comprehensive understanding and to explore a wide array of both emerging and established fund managers across the country, the CVCA’s member directory is an extensive resource. With a powerful search functionality, you can delve deeper into Canada’s diverse VC ecosystem by visiting the CVCA’s member directory.

As we gear up for the Invest Canada 24 conference, the spotlight will intensify on the wave of emerging managers reshaping Canada’s investment landscape. Notably, this year’s conference will feature specialized sessions designed to underscore the contributions of these emerging managers. Stay tuned for further information as we approach the event.

Emerging managers are essential players in our ecosystem helping us march towards groundbreaking advancements and economic prosperity. By championing innovation and strategic foresight, they not only pave new paths for startups but also for a resilient, diversified economy that’s prepared to make significant global impact.