Georgian Partners, once celebrated as Canada’s leading venture capital (VC) firm, is facing significant headwinds, raising questions about its performance and future trajectory. This article delves into the factors contributing to Georgian Partners’ recent struggles, examining how a firm that once symbolized the resurgence of Canadian tech financing now finds itself grappling with underperforming funds and substantial write-downs.
Georgian Partners initially carved a niche by backing rapidly growing startups leveraging artificial intelligence (AI) to revolutionize various industries. A prime example is WorkFusion Inc., a New York-based company specializing in robotic process automation (RPA) software. In January 2017, Georgian Partners spearheaded a US$35 million funding round for WorkFusion, impressed by its “powerful vision” to enhance productivity for financial giants. Further investments followed, culminating in a US$200 million equity injection in spring 2021, making Georgian Partners the majority owner with a 52% stake.
However, WorkFusion’s performance deteriorated, with revenues declining in three of the subsequent four years. Mounting losses and dwindling cash reserves forced WorkFusion to seek a buyer. In the second quarter of 2024, Georgian Partners drastically reduced the valuation of its WorkFusion holdings across three funds to US$91.2 million, a significant drop from the initial US$275.2 million investment. Industry feedback suggests the actual sale price could be even lower, highlighting the extent of the setback for Georgian Partners.
WorkFusion is not an isolated case. During the first half of 2024, Georgian Partners implemented write-downs on 28 investments across 21 companies within its five oldest active funds, resulting in a staggering US$430 million reduction in book value. This includes four complete write-offs of companies that had collectively received US$190 million from Georgian Partners. These figures, revealed in confidential quarterly reports to Georgian Partners’ limited partners (LPs) obtained by The Globe and Mail, provide an unprecedented glimpse into the challenges faced by a prominent Canadian private capital player.
These reports paint a picture of a fund manager grappling with the aftermath of aggressive investments made during the peak of the COVID-19 pandemic tech bubble. Instead of capitalizing on inflated valuations and selling assets, Georgian Partners doubled down, a decision that now appears to be contributing to its current difficulties. The repercussions of Georgian Partners’ performance extend beyond the firm itself. A decade ago, Georgian Partners emerged as a leader, revitalizing Canada’s struggling tech financing ecosystem and becoming the nation’s largest independent VC firm. Having raised over US$4.3 billion and managing US$5.6 billion in assets, its influence is substantial.
Georgian Partners’ investor base includes prominent Canadian institutions such as the Business Development Bank of Canada (BDC), Export Development Canada, and Caisse de dépôt et placement du Québec. Bank of Montreal also invested in multiple Georgian Partners funds and facilitated access for its asset management clients to Georgian’s second alignment fund. Furthermore, Georgian Partners benefited significantly from a federal program designed to inject public funds into the venture capital sector. Crucially, Georgian Partners distinguished itself as one of the few Canadian VCs capable of attracting substantial investments from U.S. investors, including Prudential Insurance Co., various state retirement and pension funds, private foundations, university endowments, and even the NFL players’ retirement fund. UK clients, including pension funds for major corporations and organizations, also invested through Willis Towers Watson Ltd.
Georgian Partners initially built its reputation on an innovative, hands-on approach, even developing software for its portfolio companies. Its early and highly profitable investment in Shopify Inc. became a hallmark of its success. However, recent performance has fallen short of expectations. The bursting of the tech bubble in late 2021 created a challenging environment for VCs. Overvalued startups faced pressure to cut costs as investor appetite for unprofitable tech ventures waned. Rising interest rates further hampered software revenue growth due to tightened corporate spending. Many VCs who invested at inflated valuations were forced to devalue their portfolio companies. BDC alone devalued its VC holdings by $1 billion in the past two years, reflecting the widespread impact of the market correction.
Despite these industry-wide challenges, Georgian Partners’ performance lags behind its peers. Even after the recent write-downs, the returns for its five oldest active funds, primarily investing in the U.S., remain in the single digits. While these returns might be acceptable in traditional asset classes like stocks or bonds, LPs investing in high-risk VC typically expect significantly higher returns. Industry benchmarks for VC returns average around 15% over five- and ten-year periods, establishing VC as a top-performing asset class. However, compared to these benchmarks, all five of Georgian Partners’ funds rank in the bottom half of their U.S.-based peer group, according to Cambridge Associates LLC, and similarly in the bottom half among growth equity managers, as per data from Hamilton Lane Inc.
As of June 30, Georgian Partners’ Fund II (launched in 2013) and Fund III (2016) exhibited average annual internal rates of return (IRR) of 8% and 3% respectively, placing them in the bottom quartile of funds of their vintage, according to Cambridge Associates. In stark contrast, Power Corp. of Canada’s Portage Ventures, for instance, boasts a 33.3% IRR for its 2016 fund. Funds IV (2018) and V (2019) also underperformed, with IRRs of 9% and 8%, both in the third-lowest quartile. The 2020 Alignment I fund, heavily invested in WorkFusion, recorded a zero IRR, also in the third quartile. Georgian Partners’ two oldest active funds, Funds II and III, are now unlikely to reach their target of returning three times the invested capital. The firm has acknowledged to its LPs that several companies initially expected to be strong performers have delivered inconsistent results. This underperformance has eroded the perception of Georgian Partners as Canada’s elite VC firm.
Adding to the challenges, Georgian Partners has experienced significant staff turnover. Of the 107 employees listed on its website in December, 32 have departed, including key executives such as the CFO and heads of finance, innovation, product, AI, and information security, along with investors and engineers. Recent layoffs further reduced the team to 87 employees. A Georgian insider suggests that these departures may be linked to the firm’s disappointing returns, which could impact employee compensation. Georgian Partners, like many VC firms, compensates employees with a share of investment profits (“carry”) in addition to management fees. With Funds II and III potentially generating zero carry, employee incentives may be diminished.
Chad Bayne, co-chair of Osler, Hoskin & Harcourt LLP’s technology practice, points out that “Ultimately the amount of money you raise doesn’t necessarily translate into results. You still need to make prudent investment decisions, and ultimately realize cash returns on those investments.” He acknowledges Georgian Partners’ past success, particularly with Shopify, but emphasizes the need for consistent performance. Some observers and LPs speculate that Georgian Partners’ rapid growth, potential overpayment for assets, inexperience navigating market cycles, or reluctance to divest at opportune moments may have contributed to its current situation. Instead of selling during the peak of the tech bubble, Georgian Partners increased its investments in highly valued companies.
While Georgian Partners presented itself as a different kind of VC firm, appealing to LPs during periods of stronger performance, this narrative is now facing increased scrutiny. Fundraising for its sixth fund fell short of its US$1.1 billion to US$1.5 billion target, reaching US$892 million. Similarly, a second alignment fund raised US$508 million against a comparable target. Long-term backer BDC notably did not invest in either fund. Several LPs have expressed disillusionment, with one stating that Georgian Partners “took its eye off the ball” and that its differentiated strategy “seems like it hasn’t worked out.” While not ruling out future investments, the LP indicated that backing another Georgian fund would be a more challenging decision.
Although some Silicon Valley VC firms have successfully rebounded from underperforming funds, concerns persist that Georgian Partners’ downturn could negatively impact the reputation of the still-developing Canadian VC sector. The sector is already striving to consistently deliver strong returns and reduce its reliance on government support. Given the widespread holdings of Georgian Partners’ funds by other Canadian funds, its underperformance could also drag down returns across the domestic VC landscape. Alison Nankivell, BDC’s former senior vice-president of fund investments, notes that Georgian Partners, like many VCs, benefited from the “unprecedented bull market” but “were not necessarily focused on managing future down cycles.” She highlights that for the largest VC manager in Canada, “declining market valuations and a lack of distributions becomes a more high-profile problem for your investors.”
Georgian Partners was founded by tech entrepreneurs who recognized the potential of emerging technologies after the 2008-09 recession. Justin LaFayette, co-founder and former professional hockey player, previously built and sold customer data management company DWL Inc. to IBM Corp. He partnered with Simon Chong and John Berton, also with tech and finance backgrounds, to establish Georgian Partners. Initial fundraising was slow, but Georgian secured $67 million for Fund I, pitching their understanding of industry giants’ technology needs and leveraging US connections through DWL backer Insight Venture Partners.
However, it was a domestic opportunity in 2011 that propelled Georgian Partners to VC stardom: Shopify. Shopify was seeking $12 million in funding, with US VCs already heavily invested. To maintain Canadian-controlled private corporation status, Shopify offered $3 million in equity to Canadian VCs, including Georgian Partners. Georgian Partners secured the deal, and when Shopify went public in 2015, Georgian held 5.4% of the stock.
This early investment in Shopify cemented Georgian Partners’ reputation. Fund I delivered strong returns, further boosted by investments in U.S. companies like 41st Parameter and Kinnser Software, generating $2.50 for every $1 invested and achieving a 25% net annual return, placing it among top-quartile funds. This success facilitated rapid growth. Georgian Partners raised $200 million for Fund II in 2013, supported by government-backed fund-of-funds managers. Subsequent funds grew even larger: US$375 million (2016), US$550 million (2018), US$850 million (2019), and US$900 million for its first alignment fund in 2020. Georgian Partners expanded its portfolio to over 70 companies, investing in sectors like cybersecurity and digital automation, and established an “impact team” to support portfolio companies.
Georgian Partners also developed proprietary software to assist its portfolio companies, particularly in navigating AI adoption by building trust with clients regarding data sharing. This unique approach, along with its early success, impressed LPs. Connecticut treasurer Shawn Wooden praised Georgian Partners’ “innovative, value-added investment strategy” in 2022, committing US$100 million to Fund VI and US$50 million to Alignment II. However, a due diligence report accompanying Wooden’s plan cautioned that Georgian Partners’ strong track record relied heavily on unrealized paper gains, a risk that has now materialized.
Georgian Partners attributes its recent underperformance primarily to broader market forces, citing the “unprecedented growth” of 2020-21 followed by market corrections and rising interest rates. Chad Bayne confirms the market downturn, noting that software company valuations have plummeted and companies are struggling to raise capital at previous levels. Revenue growth for software companies has slowed, impacting Georgian Partners’ portfolio. Furthermore, some investments simply did not perform as expected. For example, Fund IV’s US$11 million investment in Trusona Inc., a cybersecurity company, has dwindled in value. Ritual Technologies, a food pickup app, and Integrate.ai Inc., an AI solutions company, also faced significant challenges and write-downs.
However, beyond market factors and individual company struggles, Georgian Partners’ willingness to pay high valuations during the peak of the bubble is also contributing to its current woes. The investment in Noname Gate Ltd. exemplifies this. Georgian Partners led a US$135 million round in 2021, valuing Noname at approximately US$1 billion, a multiple exceeding 1,000 times revenue. While the recent sale of Noname to Akamai Technologies Inc. for US$450 million allowed Georgian Partners to recoup most of its investment, it still resulted in a capital loss.
{width=1400 height=1456}ClickUp represents another example of missed opportunities. Georgian Partners co-led a US$35 million financing in June 2020 at a US$200 million valuation, followed by another round at a US$1 billion valuation. By October 2021, ClickUp’s valuation soared to US$4 billion. Despite this 20-fold increase in valuation within 16 months, Georgian Partners did not sell, even as other investors bought in at peak prices. Instead, it invested further. Georgian Partners’ ClickUp stake, once valued at US$636 million, is now valued at US$412.6 million. Similarly, with CS Disco Inc., Georgian Partners held onto its shares after a successful IPO in July 2021, despite the stock price subsequently plummeting. In contrast, Bessemer Venture Partners, an early CS Disco backer and also an early Shopify investor, strategically sold a portion of its holdings shortly after the IPO, realizing significant gains.
Georgian Partners’ Alignment I fund further compounded this strategy by doubling down on existing investments in 2021, foregoing potential gains from selling at peak valuations. Justin LaFayette defended this approach, emphasizing a long-term belief in the portfolio companies over short-term profit taking. However, this decision has proven costly, with unrealized valuations across Alignment I companies now reduced, and WorkFusion experiencing the most significant decline.
Russ Jones, former Shopify CFO and now an advisor to Georgian Partners, suggests that “I would have done the bird in the hand” by selling earlier stakes, acknowledging the benefit of hindsight but also the potential for long-term benefits from Georgian Partners’ approach. However, Georgian Partners now faces the challenge of divesting holdings in a less favorable market. While deal activity may be returning, buyers are seeking significant discounts, impacting liquidation values.
The challenging market conditions have put pressure on several Georgian Partners portfolio companies. Strivr Labs Inc. is struggling with product-market fit and faces limited options. True Fit Corp. encountered bids well below its valuation, leading to lenders taking control and a complete write-off for Georgian Partners. WorkFusion continues to struggle with declining revenue and significant losses, facing potential capital raising needs in a difficult environment. OpenWeb, another Georgian Partners investment, recently ousted its CEO amidst controversy and legal action, adding further complexity.
Despite these challenges, Georgian Partners still has strong performers in its portfolio, including Armis Security Ltd., Cority Software Inc., eSentire Inc., and IEX. The firm maintains that lessons have been learned and that Fund VI investments may prove to be its strongest yet, citing Island Technology Inc. as an example. All Georgian Partners funds still show positive returns, meaning investors have not yet lost money overall. However, pressure from LPs is mounting. Georgian Partners has increased transparency in its reports, enhanced governance, and committed to disciplined portfolio management. Whether these measures will be sufficient to improve returns remains to be seen. Cash distributions to LPs remain modest compared to invested capital. Fund III, for example, has sold or written off numerous investments, and achieving significant improvements in returns will require outsized exits in a challenging market. Furthermore, even if returns improve, Georgian Partners employees may not immediately benefit due to guaranteed returns owed to investors before carry can be earned. Fund II faces similar hurdles. Several portfolio companies within Fund II are experiencing revenue declines and financial strain. Freshbooks, for instance, has faced executive departures and financial challenges, requiring potential capital infusions to remain operational, which could further impact Georgian Partners’ stake.
Georgian Partners capitalized on the early success of Shopify. Now, it needs a broader resurgence across its portfolio to regain its standing as a top-tier VC firm. While its underperforming funds still have time to mature, market conditions remain challenging. The firm’s ability to navigate these headwinds and deliver improved returns will be critical in determining its future success and the broader perception of the Canadian venture capital landscape.
