New Toronto venture capital firm targeting later-stage technology companies

Rob Chaplinksy, the managing director of a California-based private equity firm that’s set to open a branch in Toronto this summer, says poor returns on early stage venture investments in Canada’s tech sector is due to lack of quality managers. “The money is there but it has not been going to great opportunity,” he says, noting that in the Silicon Valley, it’s an open secret that only 7% of quality managers are responsible for 90% of revenue growth in many of the region’s tech companies. Chaplinksky, a Toronto native who co-founded Bridgescale Partners in Menlo Park, CA, in 2006, says despite the presence of a strong talent pool in Canada, a healthy financial and banking system, and government incentives for the tech sector, early stage venture returns continue to be dismal. Money invested in early stage venture firms is not being channeled to the right opportunities, he says. “Why hasn’t it been going to great opportunities? And you could possibly say that they haven’t been going through experienced managers.” Chaplinsky, who has more than 10 years of investment experience and whose firm has raised $170 million and invested in 10 companies specializing in software and Internet companies, also says early stage venture investments in Canada suffer because of lack of diversity in investments, where the focus is mainly on statistical indicators. “If you invest in the index in venture capital, your actual returns are going to be poor too. You have to be very selective of the managers because you believe those managers are going to be very selective on the portfolios.” Canada’s venture capital market recorded a six-year low in the first quarter of 2009 and the industry has been shrinking, according to figures released in March by the Canadian Venture Capital and Private Equity Association (CVCA). About $275 million was invested in 102 firms this year (at the time the figures were released), compared to $367 million in 175 companies for 2008. This represents a 25% drop, and the CVCA says fundraising challenges are responsible for the shortfall. The recession also contributed significantly to eroding confidence in the venture market as venture capitalists restricted lending to young start ups in the digital sector. And Chaplinsky says while the recession is not entirely negative, because it helps in cheap asset acquisition, he doesn’t see the situation improving for early stage venture capital investments soon. The venture market in Canada is going to shrink further and it will be similar to what it was in the 1970s as risk-averse venture capitalists proceed with caution and withhold lending, says Chaplinsky, noting that recovery is still far away. “I think, in general, that’s when you will see returns get better again, but the weeding out is going to take a long time.” But as early stage venture investments plummet, Chaplinsky sees better prospects for later stage capital and predicts a growth in the sector as firms eye successful tech companies that have solid roots. To inject life into the early stage venture market, Chaplinsky suggests better government incentives and programs that motivate the creation of larger companies with expansion potential. “Part of the reason the Valley works is because you generate lots of large companies. But if you don’t get to that scale point, you are never going to build the eco-system.” When it opens its Toronto office, Bridgescale Partners will specialize in later stage capital investments. He says the firm has been receiving a lot of “interesting” inquiries but there is no firm offer on the table yet. The firm has investments in Cortina Systems, a communications semiconductor company with offices in Ottawa, and Proofpoint, which was recently acquired by Fortiva, an email archiving company in Toronto.

New Toronto venture capital firm targeting later-stage technology companies

Broadcast | August 14, 2009

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