Brightspark Capital launches new fund for promising early-stage software plays

Brightspark Capital Partners Inc has raised $50 million in new funding to launch a second early-stage fund and seek opportunities in niche areas such as voice-over IP, wireless and eventually radio frequency identification (RFID) chips. The Toronto-based venture capital firm is bringing together four Canadian fund-of-funds investors ( see chart) with grassroots strength in their respective target markets to seek software opportunities in Toronto, Montreal and Ottawa.

The fund has been left open and discussions are underway to raise another $50 million from Canadian and non-Canadian partners over the next year. Management expects a series of closing to raise the fund’s equity to $100 over the coming year.

Brightspark is focusing on early-stage software plays at a time when financial markets are still taking a cautious approach to tech companies, following the tech crash and bursting of the Internet bubble. While high risk, the approach has the advantage of lower valuations and therefore much higher potential rates of return. Industry niches viewed as having the most potential include communications and infrastructure and enterprise software.

“The good news is that we’re starting the fund at the bottom of the marketplace. There’s a huge potential to go up,” says Mark Skapinker, Brightspark’s managing partner. “The repercussions of the crash are by no means over (but) there will come a time when people will get over the bubble and get back into tech investments.”

The dramatic changes in the investment environment since Brightspark launched its first fund in 2000 has prompted a shift in its investment strategy away from an incubation model to what Skapinker calls “a more strategic involvement with its companies”.

“We’re early stage. That’s where the biggest opportunities are and emerging markets are where there is a lot of money being spent,” says Skapinker. “

Brightspark is seeking investment opportunities in the early-stage market ranging from concept-stage (pre company formation) to companies with strong management and plans for rapid growth. The former type of company is what Skapinker refers to as a proactive investment, while investing in companies with existing track records falls into the reactive category. When Brightspark makes an investment in concept-stage companies, it tends to own them outright, choosing investments selectively so that more time can be spent grooming fewer prospects.

“First to market is not as important as getting it right. With this fund, we plan to be more strategic,” says Skapinker. “With the first fund, we had a very large space to locate firms. We’re no longer doing that although we still have some space where companies can move for a few months until they get on their feet.”

Brightspark’s approach to venture capital investment has already proven itself. In 2003 , Think Dynamics Inc — one of nine investments made with its first fund — was sold to IBM, resulting in the most significant return on capital in the Canadian VC industry that year (R$, October 27/03). The divestment was acknowledged by the canadian Venture Capital Association, which awarded Brightspark its Annual Deal of the Year Award.

The new fund sees a widening of Brightspark’s focus to three metropolitan areas, with a strong emphasis on Quebec. Two of the fund’s four investors are Quebec-based and Brightspark has brought on a third partner, Montreal-based Sophie Forest.

“There's been a major shift in Quebec. The early stage market was originally dominated by government money,” says Skapinker. “That has been largely dismantled and the Quebec government and institutions there have been encouraging investors to come into the market. ”

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