Long-time Canadian technology startup investors Matt Roberts and David Dufresne have teamed up to launch their own fund at a time when early-stage investment in Canada’s tech sector is needed more than ever.

The pair, who have been working in the venture capital (VC) industry since around the time of the dot-com crash, has backed a wide range of Canadian tech startups through VC firms like Panache Ventures, BDC Capital, and ScaleUp Ventures. In the process, Dufresne and Roberts have navigated a variety of different tech market cycles, from the 2008 financial crisis to the VC funding boom of 2021.

“We won’t pretend to fix the whole problem,” said Dufresne. “We’re two guys that have experience that know what we’re going to do. We’ve seen multiple cycles, and we know we can do a good job.”
– David Dufresne

Now, as Canadian tech stares down the barrel of another challenging macroeconomic period that has seen other investors step back and could entail a sector-wide shakeout, Roberts and Dufresne have launched their own early-stage VC firm, CMD Capital. The pair are joined by RenoRun and Fasken alumnus Gabrielle Paris as principal.

In an exclusive interview with BetaKit, Dufresne and Roberts laid out their plans for CMD (pronounced “Command”) Capital, the seed-stage lead investor market gap they hope to help fill, and why they feel their experience and expertise make them the right folks for the job at the right time.

Split between Toronto and Montréal, CMD Capital aims to raise between $50 million to $75 million CAD from limited partners (LPs) to lead and price rounds in startups that use artificial intelligence (AI) to solve problems across the B2B and enterprise sectors. According to Roberts, the firm has generated “lots of verbal interest” from prospective LPs but does not yet have any committed capital.

As CMD Capital co-founders and general partners (GPs), Dufresne and Roberts intend to stick to their generalist, early-stage investment roots, while also focusing on pre-seed and seed-stage firms leveraging AI in interesting ways. The VC firm has begun the fundraising process and hopes to reach a first close by the end of 2023.

As market conditions have deteriorated, seed-stage investment has fallen, and company creation has dropped, Dufresne and Roberts said they honed in on one particular but important problem—Canada’s dearth of pre-seed and seed round lead investors.

“Ontario and Canada have lost their early-stage lead cheques, or people who focus consistently on that space,” Roberts argued.

RELATED: “A new bottom”: Toronto and Waterloo Region VC funding fell short in Q1 2023

“We won’t pretend to fix the whole problem,” said Dufresne. “We’re two guys that have experience that know what we’re going to do. We’ve seen multiple cycles, and we know we can do a good job.”

Canada’s tech sector is currently in the midst of the “survival-of-the-fittest” part of the cycle. As interest rates have risen, fundraising has become much more difficult, and many firms have executed deep staff cuts to preserve cash, sought bridge financing at onerous terms, sold for pennies on the dollar, or closed up shop entirely.

However, seed-stage investment levels in Canada have been an issue for at least a few years now. As Canada’s tech ecosystem has matured, seed funding has remained low, failing to keep pace with increases in VC financing totals and deal counts at later stages. As Roberts previously told BetaKit, amid the downturn, seed-stage fundraising has become particularly challenging for local companies in the last few months. These conditions have also contributed to a decline in company creation.

CMD Capital co-founders and GPs David Dufresne and Matt Roberts.

While lots of Canadian VC firms play in the seed stage, few focus primarily on it and lead rounds, Roberts added. “Those founders are having a harder and harder time finding someone who will lead the round for them,” he said. “It becomes almost like the same conversation over and over.” Roberts told BetaKit that many entrepreneurs have secured verbal commitments but no cash or lead investor willing to perform the necessary due diligence.

Dufresne noted that a variety of factors have contributed to this state of play. Some Canadian tech investors that previously focused on seed startups have moved up the food chain to later stages, while others have joined the sidelines or disappeared altogether.

Though an abundance of relatively new, early-stage investment firms currently exist in Canada, many are solo GPs or write only small cheques and aren’t positioned to lead rounds, added Dufresne, who claimed that at the angel level, things have also slowed down recently as public market conditions have worsened.

RELATED: Investor liquidity issues are putting the squeeze on Canadian startups

Speaking about the overall state of the Canadian tech funding market today, Dufresne said, “There’s this slowness and lack of momentum everywhere in the value chain.” As interest rates have increased, public tech stocks have tanked, and startup investment and valuations have fallen precipitously.

Canada’s lack of pre-seed and seed-focused investors, which some have argued has been fed in part by the country’s shortage of risk-taking LPs, has forced many Canadian tech startups to turn south of the border for funding. Meanwhile, as BetaKit has reported, deteriorating economic conditions have made it more difficult to raise new venture funds, and fuelled liquidity issues for some existing LPs and VCs. The latter has fuelled an environment during which companies that thought they had closed rounds have never seen funds materialize or be clawed back.

“Ontario and Canada have lost their early-stage lead cheques.”
– Matt Roberts

Lead investors play an important role in bringing startup funding rounds together. They also help founders and existing investors navigate future rounds, which in today’s environment often come with more structure and stringent deal terms.

“As the terms in the Series A, Series B, and Series C [stages] become a little bit more onerous, you want someone who has sat at the table to provide that sort of protection for the existing shareholders and mentorship for the founders as they spend the money they’ve raised,” said Roberts. “That’s what we keep hearing in the market.”

Though early-stage tech startup valuations have since fallen from bull-market highs, Roberts said that today, they are “still not rational enough” at certain stages. According to Roberts, a “disconnect” exists between what the pre-seed financing market will bear in terms of pricing and investment, and what investors are willing to invest at in the Series A stage.

“That’s the market problem,” he said. “That’s not going to last—one of those is going to break.”

Feature image courtesy CMD Capital.

The post Ex-Panache, ScaleUp partners team up to launch new early-stage VC fund CMD Capital first appeared on BetaKit.

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