WATERLOO REGION — A private equity firm is hoping to raise $60 million to invest in a dozen promising Waterloo-based tech companies.
Red Jacket Private Equity is creating the Waterloo Tech Fund because it believes there is a shortage of venture capital funding to help promising tech companies in this area move beyond the startup phase to the rapid-growth stage.
“We believe the technology hub in Waterloo is one of Canada’s bright spots in terms of innovation, leadership and technology and it deserves this kind of funding,” Ken McCord, general partner of Red Jacket, said in an interview.
“The Waterloo Tech Fund will address the serious deficiency of growth capital in Canada’s most fertile tech cluster and exploit this opportunity,” says a background report by Red Jacket.
The fund will target companies based or incubated in Waterloo Region that already have finished products, customer traction, revenue and angel investments of up to $2 million.
The goal will be to help firms that have moved past the technology-validation stage to the commercialization stage. Money will be allocated for commercialization rather than innovation, says the report.
“We want startups that have proved their widget works,” said McCord.
Other criteria for funding include world-class technology, pending or issued patent protection and a credible board of directors.
Waterloo Region has given birth to large tech companies such as Research In Motion and OpenText, said McCord. “We think the next big one is coming from that region. It’s only a matter of time. We’d like to bring the next RIM to investors.”
Red Jacket, based in London, Ont., is planning to raise the first $6 million to $9 million from investors in Waterloo Region, then go to investors in Toronto, Silicon Valley, Boston and elsewhere to raise the rest, McCord said. He’s hoping to raise the local money by the end of the year and the balance by the end of April.
He’s confident Red Jacket can raise the money locally and said it already has a commitment from one local investor.
Red Jacket has already identified local companies to invest in and has held discussions with them, he said. Investments would fall in the range of $2 million to $10 million for each company depending on the circumstances, McCord said.
The firm has also entered into an agreement with the Gowlings law firm to gain access to its client base of local tech firms, McCord said.
The Waterloo Tech Fund would take at least a 10-per-cent ownership in the firms it invests in. Investors would begin withdrawing funds by the third year and wind down their investments by the seventh year, Red Jacket says.
Based in Toronto, McCord has held executive roles in several asset management firms. Red Jacket has two other general partners — corporate lawyer Mark Woolgar and Dave Sanderson, a former managing director at Nesbitt Burns.
If the fund is able to inject $60 million in new cash into the local tech sector it will be good news for the region.
Organizations such as Golden Triangle Angelnet and Communitech, through its Hyperdrive program, have brought new seed financing to the sector, but their investments are smaller and aimed at helping startups get off the ground.
Meanwhile, Tech Capital Partners, a Waterloo-based venture capital firm with investments in local companies, is not taking on new clients.
Randall Howard, a local tech investor and member of Golden Triangle Angelnet, was not surprised when told of the Waterloo Tech Fund.
“Obviously this tech ecosystem is quite attractive. It’s got all the essentials and because it’s so underfunded it would seem that money would naturally gravitate here,” he said.
Other funds are also in the works locally, Howard said, which “augurs well for the ecosystem here and across the province.”
The local exclusivity of the Waterloo Tech Fund is unusual, he said, noting that even Golden Triangle takes deals from elsewhere. “We want to create a culture where investors see the best deals.”
U.S. venture capital firms are starting “to sniff around town too,” Howard said.
The Red Jacket report notes that Canada has one of the highest rates of research spending by governments in the world, “but among the lowest rates of commercialization.”
Venture capital funding in Canada rose only two per cent or $1 billion in 2011 compared to a year earlier, Red Jacket says. That compares to 32 per cent or $18 billion in the U.S. Investments by venture capital firms totaled only $550 million in Ontario last year, compared to $14.4 billion in California, the report notes.
The University of Waterloo’s policy of allowing inventors to own the intellectual property they create is rare in universities around the world, and “has given birth to the greatest rate of technology commercialization in Canada,” Red Jacket says.
The Waterloo sector has abundant university grads in technology, engineering and entrepreneurialism, supportive government programs, plenty of incubators, commercial success stories such as RIM and OpenText and more than 1,000 tech firms in total, the report says.
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