Benchmarking government support for venture capital: Canada
Table of contents
Canada’s venture capital (VC) market was marked by two major events in the first decade of the 2000s: the dot-com bubble and the Global Financial Crisis (i.e., GFC). VC activity fell by 51% between 2000 and 2004 after the dot-com crisis and by 30%, reaching its lowest level in 2009, after the GFC. By 2011, however, VC activity had surpassed the 2009 levels, also thanks to record-low interest rates. Between 2014 and 2019, total VC investment grew steadily from EUR 1.2 billion to EUR 3.3 billion, more than tripling in just five years. The COVID-19 pandemic was another turning point: year 2021 saw record levels of VC investment in Canada, with a total volume of EUR 8 billion. This increase in volume has been matched by an increase in the average deal size over the years. In 2022, VC investments declined slightly by 5% and in 2023 it declined by 32%; however, they remained relatively resilient compared to the decline in other markets.
Late-stage investments were the prevailing investment form between 2007 and 2011, while early-stage investments received proportionally more funding between 2013 and 2019, also thanks to the intervention in that period of a major government-backed VC programme, i.e. the Venture Capital Action Plan (VCAP), which prioritised early-stage investments. After a decline in VC investment activity in 2020 (both in volume and as a share of GDP), the exceptional growth of 2021 saw start-up and other early-stage investments take the lead over later-stage investment, with a total value of 0.242% of GDP in 2021, compared with 0.197% in 2020. This trend was reversed in 2022, when growing interest rates caused a pause in the expansion of the VC market globally, including Canada. In 2023, investments in late-stage declined the most compared to early and start-up.
Sector-wise, ICT accounted for 72.45% of total deal value in 2022, with CAD 6.2 billion invested in 381 deals. Cleantech and life sciences followed with 12.79% (45 deals) and 12.14% (112 deals) respectively. The top three provinces for Canada’s VC investment activity are Ontario, Quebec, and British Columbia, which together accounted for 88% of all Canadian dollars invested in 2022, which confirms the strong regional concentration of VC activity worldwide.
Note: Panels A, B and C refer to venture capital investments made by formal fund managers, including private equity funds making private equity investments, active in Canada in Canada-based companies. Investments made by business angels, incubators, infrastructure funds, real estate funds, distressed debt funds, primary funds of funds or secondary funds of funds are excluded. For Panel D, the following acronyms apply: IT = Information Technology Venture Fund, ICE = Industrial, Clean and Energy Technology (ICE) Venture Fund, VCAP = Venture Capital Action Plan, GVCF = Growth Venture Co-Investment Fund, GEP = Growth Equity Partners, WIT = Women in Technology Venture Fund, VCCI = Venture Capital Catalyst Initiative, IIVF = Industrial Innovation Venture Fund, IP = Intellectual Property-backed Financing, BFP = Bridge Financing Program, IGF= Indigenous Growth Fund. Always for Panel D, for indirect investments (including VCAP and VCCI), assets under management correspond to the capital committed by BDC to funds that have been closed. Amounts are included according to the year in which the funds were created.
The main government institution supporting the VC market in Canada is the Business Development Bank of Canada (BDC), which is Canada’s public development bank. Its investment arm subsidiary, BDC Capital, had almost CAD 7 billion of assets under management (AUM) in 2024. Panel D presents the evolution of BDC Capital’s AUM since 2011, including the main programmes which have been launched over this period. BDC Capital’s AUM have increased significantly in the last 13 years, from CAD 0.8 billion to CAD 6.9 billion. Furthermore, while the split between direct and indirect investments is quite balanced, the share of direct investments has marginally increased in recent years, from 56% in 2017 to 64% in 2023. In 2024, 62% of AUM at BDC Capital stemmed from direct investments.
BDC Capital’s operations hinge on four pillars, the first three of which are closely related to investment activities: direct investment, indirect investment and government mandates. BDC’s VC investment strategy aims to support undercapitalised innovative industries in Canada, helping Canadian technology innovators build companies which can compete globally.
Direct investments. BDC manages a portfolio of internally managed investment funds (100 investment professionals) by which it invests directly in selected promising companies (core direct business) through venture capital, private equity, and flexible financing solutions. BDC’s direct investment funds replicate the private model, with fund managers suggesting investment opportunities to the investment committee of BDC1, which approves all investment transactions that exceed managers’ delegation of authority and recommend to the Board of Directors those that exceed its own delegation of authority. BDC direct investment funds typically operate over 10-12 years. As of June 2023, the direct business portfolio counted 11 teams investing through 18 different active funds in 227 Canadian-controlled companies. Overall, direct investments accounted for CAD 3.6 billion of AUM and CAD 1.4 billion of commitments (outstanding portfolio and undisbursed amounts). The gross internal rate of return (IRR) over 5 years was 19.6%.
Indirect investments. BDC Capital is the largest and most active limited partner (LP) in Canada when it comes to indirect investments. As of June 2023, indirect investments in private-sector VC funds and funds of funds had CAD 1.7 billion of commitments in 127 active funds investing in 578 Canadian companies. As of end-2023, BDC was a limited partner in VC private independent funds representing 62% of capital actively investing in Canada.
Government mandates. These programmes are directly set out by the Federal Government of Canada, with BDC acting as the implementing agency. Because of the strategic orientations of some of these programmes, returns expectations are sometimes lower or have a longer-term horizon compared to BDC’s direct and indirect investment activities. Examples include the Venture Capital Action Plan (VCAP), which was launched in 2013 with the main aim of supporting early-stage technology-based companies; the follow-up Venture Capital Catalyst Initiative (VCCI) and Renewed-VCCI, respectively set up in 2017 and 2021, whose objectives included investing in new priority areas such as life sciences (Renewed-VCCI) and inclusive growth (Renewed-VCCI); and the Bridge Financing Programme (BFP), which supported VC-backed companies during the Covid-19 pandemic. In the case of government mandates, a selection Committee supported by the VCCI Secretariat, consisting of employees from both BDC and the federal government2, provides investment recommendations to the Minister, who in turn provides ministerial direction to BDC to invest in specified funds. Subsequently, these investments also require BDC’s Board Investment Committee (BIC) approval prior to the official legal closing.
In addition to VC investments, BDC Capital’s VC strategy also involves the overall development of the national VC ecosystem (fourth pillar). For example, FUNDamental Principles (FP) is a series of seminars designed to address topics of interest for Canadian investors, while BDC’s GP Academy provides Canadian GPs opportunities to increase their network and receive advanced training to manage their funds.
While BDC is by far the largest government player in the national VC ecosystem, Export Development Canada (EDC) also supports growth and export-oriented companies through the provision of different forms of equity finance, notably through programmes such as the Investment Matching Programme and the Inclusive Trade Programme.
In addition to federal entities, Canadian provinces sometimes also have their own VC investment agencies and programmes. For example, the Government of Ontario operates Venture Ontario, a VC agency which supports Ontario-based investments (CAD 410 million invested), while the Alberta Enterprise Corporation (AEC) invest in VC funds that have a track record of success and a demonstrated commitment to the province of Alberta.
As noted earlier, BDC is the main government institution supporting VC in Canada. In the case of direct investments, BDC only invests in Canadian-controlled private companies3. In the case of indirect investments, selected funds need to pledge to invest mostly in the Canadian market, including at least 60% of fund investments in qualified Canadian VC funds, at least 90% of direct investments in Canadian-controlled companies, and at least 40% of capital under management in Canadian-based companies.
BDC has often experimented with new and innovative limited partnership agreements (LPAs), for example in terms of public/private investment ratios and return rules between public and private investors. BDC’s government-mandated programmes have always applied asymmetric returns to attract private investors in government-sponsored VC programmes. Details have slightly changed between VCAP and the two cycles of the VCCI programme, but “preferred returns” for private investors have been a constant.
For example, VCAP followed a contribution schedule of 10%-90% between private investors and government, by which the government invested a larger amount of capital first. Furthermore, VCAP applied a specific 7% preferred return-rate distribution, by which the private sector received returns first until it reached an internal rate of returns (IRR) of 7%, after which it was the time for the government to receive returns until an IRR of 7%. After these two initial phases, both the government and private investors received returns in an equal manner.
The contribution schedule and returns distribution in the case of VCCI were different from VCAP. In particular, for the first VCCI, the contribution schedule between the public and private sector was on a pari-passu basis to address concerns of private capital investment being delayed for too long. As to investment returns, these were more preferential for private investors than in VCAP and were based on the following sequence: i) private sector capital is returned, plus a 7% preferred return; ii) public-sector capital is returned, plus a 3% preferred return; iii) GPs receive full catch-up of carried interests (5% for funds and 12% for direct investment); iv) pro-rata distribution based on committed capital (subject to GP carry).
The incentive infrastructure of the Renewed-VCCI is very similar to the first cycle of the programme, with capital contributions flowing on a pro-rata and pari passu basis, although the preferred returns for private investors were lowered to 5% from 7%. As a result, in this case, investment returns follow this sequence: i) private sector capital is returned, plus a 5% preferred return; ii) public-sector capital is returned, plus a 3% preferred return; iii) GPs receive full catch-up of carried interests; iv) pro-rata distribution based on committed capital (subject to GP carry). 4.
Finally, Over the last 10 years, BDC’s direct investment funds have moved from targeting specific sectors to targeting high-potential underserved markets. Examples include the “Thrive Platform for Women”, which was endowed with CAD 500 million in 2022 to provide equity finance to Canadian women-led businesses and to invest into women-led and women-focused VC funds across Canada, and the “Seed Venture Fund”, which is expected to play an anchor role for Canadian seed-stage businesses in regions which currently face limited access to seed funding.
References
[1] Business Development Bank of Canada (2023), “Canada’s Venture Capital Landscape - May 2023”.
[4] Business Development Bank of Canada (2023), “Equity for SMEs in Canada and the role of BDC Capital”, OECD Informal Steering Group on SME and Entrepreneurship Financing - September 2023.
[3] Canadian Venture Capital & Private Equity Association (2023), “Canadian Venture Capital Market Overview - 2022 Year in Review”, CVCA Intelligence.
[2] OECD (2023), “Venture capital investments”, Structural and Demographic Business Statistics (database), https://doi.org/10.1787/60395228-en (accessed on 11 August 2023).
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The full paper is available in English: OECD (2025), Benchmarking government support for Venture Capital: A comparative analysis, OECD SME and Entrepreneurship Papers, OECD Publishing, Paris, https://doi.org/10.1787/81e53985-en
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← 1. https://www.bdc.ca/en/about/corporate-governance/governance-committees
← 2. Notably, from the Innovation, Science and Economic Development (ISED) department.
← 3. To qualify as a CCPC, the company must be resident in Canada for tax purposes and generally, at least 50% of the corporation's shares must be owned by Canadian residents or other CCPCs.
← 4. Carried interests are a share of profits of private equity and VC funds which is due to GP typically based on the performance of the fund itself. As such, “carried interests” partly align the GP's compensation with the fund’s return.