Nick Kozak for the Toronto Star
Case Studies

Toronto startup launches a venture capital fund for the littler guys

Vital Stats
Name:
Pycap Venture Partners
Owner:
Stuart Browne
Contact:
www.pycap.ca, info@pycap.ca, 416-315-7892
Field:
Venture capital, financing
Employees:
1 full-time, 4 investment committee members
Active:
6 months
Offering:
$10 million venture capital fund aimed at technology startups
Core customers:
Accredited retail investors

Stuart Browne isn’t naïve. He realizes what he’s trying to do is risky and somewhat unconventional.

“I want to make it possible for a dentist in Saskatoon to comfortably invest in the world of startup tech and be a part of the excitement without the stress of having to do all the research himself like an angel investor,” says the CEO and founder of Toronto-based Pycap Venture Partners, a new venture capital fund geared towards startup technology. “We’re looking for very niche investors.”

But really, he’s after the mavericks — the doctors, lawyers and high-income earners with an appetite for risk but no real interest in the world of independent angel investing. The kind whose heartbeats race at the thought of Jetson-esque futurism, who can’t wait to tell their friends and family about the cutting edge development they’re backing over cocktails and hors d’oeuvres. Big data analysis. Wearable tech. Virtual reality, even.

Those investors are going to be the backbone of his planned $10 million pooled investment fund. And he knows they’re out there — he just needs to find them.

“The timing is perfect for Pycap,” says Browne. “The junior mining sector has taken such a huge hit that investors who are more accustomed to doing private placements within that industry are looking elsewhere to make their risky, high-return profile investments.”

He grins and adds, “They’re starting to take a look at startup tech.”

The question is whether Browne can convince investors to trudge into the vast frontiers of startup tech with him leading the expedition. He admits evidence is currently wanting.

“Pycap is a new fund with no track record, so predicting our future earnings potential based on past performance is not possible,” says Browne.

Figuring out how to seduce investor trust is a challenge that has beset the venture capitalist since he first started daydreaming about the fund two years ago. At the time he was working as a strategic advisor to the National Angel Capital Organization — an umbrella organization for angel investor groups in Canada.

“While I was at NACO there was a lot of talk about starting up an angel fund dedicated to startup tech,” says Browne.

But there were holes in the approach.

For starters, in Browne’s experience, entrepreneurs have a tendency to choose venture capitalists over angel investor groups because it means more money and a more guaranteed investment from institutionalized lenders versus the softer commitments from angel investors.

“VCs have the money and they have to invest it, that’s their job,” says Browne.

And from an angel investor perspective, it can be daunting to look at all these budding tech entrepreneurs and decide which one’s worthy of their $25,000.

So in July, Browne started rolling out what he thinks is the best of both worlds. A pooled investment fund that solicits bids from accredited brokers and investment advisors and through them their high income clients. It’s a way of tapping into the sort of investors that VCs usually eschew in favour of institutionalized lenders. It gives individual investors a structured, diversified way to put their money in a sector normally dominated by institutional investors, he argues.

“The biggest challenge we have to address is communicating to the masses that we’re making startup tech an investable asset class for anyone” who is an accredited investor, says Browne.

So far the fund has raised $100,000, most of which has come from the six-person team, who have all put in their own cash on equal footing with investors. Thus far, brokers for interested investors only appear once every few weeks.

“I have about a million in soft commitments,” he says adding that ideally, he’d like to have the $10 million in the bank by the end of March. “We haven’t really blasted the word out about the fund yet, we’re working on that.”

Once Pycap has raised the funds, it plans to spread them over 30 to 40 companies — some of which have already been scouted out by Browne and co.

But Steven Gedeon, an angel investor, venture capitalist and professor of entrepreneurship and strategy at Ryerson University’s Ted Rogers School of Management, says despite the fact Pycap is targeting an unconventional investor crowd, there are still a myriad of competitors operating in the sphere.

“He has to deal with the same things every other entrepreneur has to deal with. It’s a competitive environment out there and he has show Pycap has a sustainable competitive differentiation,” says Gedeon.

That extends beyond just being able to raise the capital. What early stage companies — like the ones Browne is hoping to inject capital into — need most is executive excellence.

“They need help with their boards of directors, recruiting top quality talent, getting connected with customers and they need help with finding positive liquidity events,” says Gedeon. “I think the bigger issue is going to be convincing (potential investors) that he’s the guy that is going to make that happen.”

Browne has already made moves to establish Pycap’s position of expertise in startup tech amongst investors. In September, they organized an information session called “The Brave New World of Startup Tech Investing.”

“We had 120 people turn out and it was fully booked,” says Browne. “Ninety per cent of the people there were individuals or brokers curious about the world of startup tech but didn’t know anything about it.”

In addition to the info session, Browne says he is also hoping to quell any misgivings held by potential investors by co-investing with other major VCs.

“They can find comfort in the fact that all of our investments are co-investments with the biggest VC funds,” says Browne, adding that he’s worked tirelessly establishing relationships with the massive players for several years now.

The challenges are daunting and building trust once he finds his investors might take some time, but Browne has confidence that Pycap can raise its funds by the end of March.

EXPERT VIEWS

As Interviewed by: Rosemary Westwood

These six guys are experienced, but they haven’t been able to demonstrate a track record because Pycap is so young. And they don’t have direct access to retail investors. There is also a lot of competition for the startups these funds target. They’ve got to show they are capable of sustaining profits, and they need to synthesize their existing experience and communicate that. Do it with numbers, showing the success of funds they’ve been in charge of and how they’ve managed them. They need to use their reputation in the industry and get big names on their advisory boards and board of directors. They need to talk about the hard won partnerships they’ve got with big venture capital funds. The info sessions are great, and they could think about doing virtual info session for people they want to connect with, as well. They need to prove their expertise in the tech sector, too, and talk about how they’re choosing which companies to invest in, and why they think those companies will be successful.

by Deirdre Fitzpatrick - GBC

Labour-sponsored venture capital once offered retail investors the chance to invest in a venture capital fund and offered tax incentives, because the investments were quite risky. But returns on those funds were dismal. Ontario phased out its legislation in 2011. And it’s not 100 per cent clear to me what Pycap is going to do that is different, or how they will appeal to retail investors without a tax credit. I applaud anybody that wants to make our venture capital industry bigger. But if I were a retail investor I would like to know how they propose to generate returns where other retail invested funds were unable to. And I’d like to know what constraints they have on their activities, and I would also want to know: If investors want money back, what mechanism would they have? Pycap is entering an industry of big name players, and it even has competition from successful venture capitalist Mark Skapinker, who’s trying to do something similar. People will have questions, and hopefully they come up with a way to address them.

by Douglas Cumming - York

This is not a new idea, look at the now mostly defunct labour-sponsored venture funds. They had hundreds of millions under management, experienced, professional, investors at the helm and still struggled to generate sufficient returns. Browne's target investors will be few. Most high net worth individuals want an active role in how their money is spent. On the founder side, what does his team bring to the table? Seed stage ventures need more than just money. There have been a plethora of accelerators popping up across Canada, run by serial entrepreneurs who have “been there, done that,” that offer more than money. They add education, network, resources, supervision and mentoring to their startups. Further, many of these groups allow for high net worth individuals to play a role, either active (e.g. mentor) or passive (e.g. shareholder of their fund). So I'm not entirely sure what value Browne is bringing to investors or entrepreneurs. The former are unlikely to back a first-time manager and the latter can get more value from existing accelerator programs.

by Sean Wise - Ryerson

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