Friday Interview with Growthworks' Les Lyall

If you haven’t been paying attention of late to the Canadian venture capital market, you may not have noticed that Growthworks has become one of the tallest trees in the forest. With serious assets under management (for a CDN group), and a successful fundraising program constantly underway, Growthworks seems destined to be a player for years to come, regardless of what happens Premier McGuinty’s plan to sunset the Ontario Labour Sponsored Fund market (collective boo, hiss, there).

We were lucky to get some time with Les Lyall for this week’s interview. Les heads up the Growthworks’ Ontario effort. And not only is Les deeply involved in the investing side of their business, he is also spending a big chunk of time trying to help our elected representatives understand the importance of capital formation and disbursement to the Canadian economy.

Question 1: Growthworks has been a prime consolidator of some of the smaller labour-sponsored funds of late. How big has the firm grown, in terms of assets under management and deal professionals?

GrowthWorks started in 1992 and has grown to $850 million under management. All of our investing is venture capital oriented and focussed on early stage technology and life science companies. Our investment team is comprised of 25 investment professionals located in Vancouver, Saskatoon, Toronto, Ottawa, Halifax, St. Johns and Fredericton with a combined experience of over 200 years in the venture business.

Q2: Are you still focused mainly in B.C. and Ontario? What kind of chequebook can you deploy this year in those 2 provinces, assuming the quality of the deals meets your liking?

Yes, the bulk of our investing activity is in BC and Ontario, however, we are active in Saskatchewan ($30 million in the past 4 years), Nova Scotia, New Brunswick and Newfoundland. To provide some perspective, we invested $100 million across Canada in 2006 and we are on track for similiar results this year.

Q3: With no apparent change in the mood of Queen’s Park towards the labour-sponsored fund market, which puts a damper on the sector’s historical ability to raise funds from retail investors, how will the industry re-invent itself?

To begin with, the Ontario situation does not impact GrowthWorks’ or any other labour-sponsored funds’ (LSVCCs) investing activity in the rest of Canada, so outside of Ontario it’s business as usual. In Ontario, venture capital investing has plummetted due to both the Ontario government decision affecting LSVCCs (for example, in the Ottawa region, only one new company was venture financed in Q207 and is a GrowthWorks investee) and the lack of institutional venture capital fund raising over the past 2 or 3 years. In our case, however, our investing activity has not been impacted unduly since we are liquid and have funds to invest (In Ontario, we exited $2 for every $1 that we invested and thus our maintained our liquid position during 2006). The problem that we do face is the shortage of Ontario based syndicate partners. To help mitigate this problem, we have been building relationships with U.S. venture funds and we are now seeing the results of these efforts.

Q4: It seems to me that the labour-sponsored fund industry has had just as many winners over the past 5 years and the traditional GP/LP VCs have enjoyed. What’s your perspective on the performance of the two manager “types” in the post 2000 window?

Overall and quartile performance is virtually identical for both LSVCC and institutional fund mangers. The similiarity of performance was illustrated in the CVCA Duruflé Report published last year. And this makes sense since both groups frequently syndicate with one another.

Q5: In the first five months of 2007, Growthworks has put out about $50 million in new capital, which is more than any other VC fund in Canada. Which investment areas are your team focused on these days?

We invest in early stage companies in the IT, Life Science, and Advanced Technology sectors. This is a wide spectrum of technology covering most tech businesses that have an IP base to them. We tend not to choose specific sub-sectors to invest in, but judge each business plan on its own merits and prospects. Consequently, our portfolio is broad and reflects the technology activity in the province. We are finding that there lots of great new companies to invest in.

Q6: What’s your perspective on the role of debt at Canadian VC-backed firms? The top 5 debt groups have disbursed over $125 million so far this year, which exceeds the funds advanced by the 5 most active Canadian-based VCs. Is it that the debt market is growing, or that the VC market is contracting? Perhaps, both?

Venture debt, properly used, is under-utilized in Canada. As long as the covenants and repayment terms make sense in the context of a company’s needs and stage of development, debt is a very effective means to lower the cost of capital and minimize shareholder dilution. In Ontario, due to the low levels of new VC financings, the recent debt activity is likely the result of mature venture portfolios utilizing debt more than in the past.

Q7: What’s on your iPod?

I have eclectic tastes, so everything from AC/DC to Mozart, a couple of audiobooks at any one time, and the NY Times Book Review and Quirks and Quarks podcasts. Enough to keep me from being bored during long flights and interminable airport waits.

We appreciate your time, Les. And congrats to you and the team for shooting the lights out of late!

MRM