Startup accelerator MaRS to carve out venture fund with goal to raise $100-million

MaRS Discovery District is spinning out a new private-sector venture fund backed by pension giant Ontario Municipal Employees’ Retirement System – and some of the entrepreneurs MaRS has funded.

The new independent venture fund, known as Graphite IAF IV, will be seeded with a $25-million investment from OMERS and an equal amount funded by proceeds generated by the 14-year-old MaRS Investment Accelerator Fund, which is managed by MaRS, the Ontario government startup-support body.

While OMERS runs one of Canada’s most established pension-sponsored venture capital units, OMERS chief executive officer Blake Hutcheson said last year his organization’s 2020 returns lagged other pension funds’ because it was, as a whole, underweighted in technology. The Graphite investment is coming from its capital markets group, not its venture capital division.

“Canada’s tech ecosystem is booming now, but in order for us to continue to produce scaling companies that will grow our economy, we need to sustain the pipeline of seed-stage startups, ” Mr. Hutcheson said in a statement.

Graphite has raised another $27-million so far, mostly from 15 entrepreneurs the MaRS Investment Accelerator Fund (MaRS IAF) has backed. It has a year to hit its $100-million fundraising goal.

The Ontario government had to consent to the arrangement, which will see MaRS IAF fund its stake in Graphite from proceeds of investments it has sold. That leaves MaRS IAF with $25-million to $50-million cash, plus stakes in about 128 companies, collectively valued at $100-million-plus.

“I think we’ve seen an incredible story come out of MaRS. … I like the idea of reinvesting the return from one fund to help create another,” Vic Fedeli, Ontario’s Minister of Economic Development, Job Creation and Trade, said in an interview.

The two funds will be distinct entities but closely related. MaRS IAF’s investment team – managing director Lance Laking and senior investment directors Aaron Bast and Craig Leonard – are moving to Graphite. But they will continue to oversee MaRS IAF’s portfolio of investments and any new deals for their former employer under a services contract, said MaRS Discovery District CEO Yung Wu, who sits on the board of OMERs and was the driving force behind the spinout.

“The whole intention is to increase the amount of capital available” to invest in early-stage companies, Mr. Wu said in an interview.

MaRS IAF will continue to invest $500,000 per company at the “pre-seed” stage, doing about 10 to 15 deals in Ontario per year, and cap follow-on investments at $250,000 each. By contrast, Graphite’s mandate is pan-Canadian and it can invest in multiple, later rounds as companies mature, starting with an investment of up to $2-million at the seed stage.

Carol Leaman, CEO of Waterloo, Ont.-based training software provider Axonify Inc., who is also a MaRS IAF-backed entrepreneur, said she was investing in Graphite (individuals had to invest a minimum of $250,000) because “we just had a super positive experience” with the team. “I really liked the people and the Canadian focus. I personally I believe in it, I like the people and I like their mission.”

Graphite is the latest in a series of funds to spin out of MaRS; others include StandUp Ventures, a financier of women-led startups, clean technologies backer ArcTern Ventures, and social impact financier Amplify Capital.

MaRS IAF has been a low-profile success story, investing $80-million in 170 companies since the late 2000s and generating an average annual internal return of more than 20 per cent, Mr. Laking said. MaRS IAF was seeded with $43-million from the Ontario government and overseen for most of its existence by Barry Gekiere, a Canadian venture capital veteran who died in May, 2020.

The new fund comes as MaRS and other provincially-funded startup hubs Invest Ottawa and Communitech seek to re-establish their relevance as regional economic stimulators. Communitech is also looking at launching a venture fund, according to recent reports from tech news websites BetaKit and The Logic, which The Globe and Mail has confirmed.

Ontario’s Progressive Conservatives began scrutinizing the effectiveness of its startup hubs after taking office in 2018. A government panel in 2020 recommended that startup hubs receiving provincial funds focus more intently on commercializing intellectual property (IP).

Ontario said this month that it would launch a new agency called Intellectual Property Ontario to boost commercialization, though its description in a provincial statute was mostly focused on education and access to resources about IP. Mr. Fedeli declined to call this a shift in tone from the panel’s recommendations. “If there’s any change of tone or any shift, it’s more toward … commercialization within Ontario, and then protecting that IP we have,” he said.

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