Patient capital: Investment fund CEO eyes Ottawa companies for long-term growth

Canadian Business Growth Fund CEO and Ottawa native George Rossolatos says a lack of patient capital is condemning too many of this country’s startups to quick deaths
George Rossolatos
Canadian Business Growth Fund CEO George Rossolatos speaks at a recent event at the Canadian Club of Ottawa. Photo provided

Growing up in Ottawa, George Rossolatos received a daily education on the challenges facing small businesses in Canada.

His father Nick was the owner of Nick’s Service Centre, a garage at the corner of Richmond Road and Tweedsmuir Avenue in Westboro. An engineer by training, Nick Rossolatos turned to business after Canadian authorities wouldn’t recognize his educational credentials when he immigrated to the country from Greece in 1967.

For the next three decades, the elder Rossolatos toiled away at his service station. George helped out in the summers while earning a commerce degree at Queen’s University, and later embarked on his own career as an entrepreneur after a four-year stint at EY’s Ottawa office.

After seven years as CEO of Toronto-based tech security firm Avante Logixx, George Rossolatos decided to put his experience to work helping other emerging startups find their own paths to growth. In 2018, he became the head of the Canadian Business Growth Fund, a national VC fund backed by 13 of the country’s largest banks and insurance companies.

Now worth more than $500 million, the Toronto-based fund provides long-term investments of between $3 million and $20 million to enterprises with high-growth potential. The eight companies currently in its portfolio include startups from as far away as Victoria but none in Ottawa.

Rossolatos, 47, is determined to change that. He recently spoke to OBJ about why his hometown is high on the list of places he’s targeting for the fund’s next round of investments. What follows is an edited transcript of that conversation.

OBJ: How did you come into your role as head of a startup investment fund?

GR: To go way back, I went to Ernst and Young to do a CA (chartered accountant designation), which is now a CPA (chartered professional accountant designation), and got exposed to a lot of small and medium-sized companies in my role there in Ottawa. That, combined with my upbringing, which is in a small business environment ​– my dad started a business as an immigrant to Canada ​– I just had this passion for entrepreneurship. Eventually I did an MBA in the States and joined a private equity fund, where I got to meet entrepreneurs all day long and invest in those companies. After 10 years on the control private equity side, I decided I wanted to run my own company (Avante Logixx, where he served as CEO before being approached to run the Canadian Business Growth Fund). 

It just really resonated, given everything I’d done to that point. It was kind of a combination of my passions in one role, and I jumped at it. We started from scratch, and five months later we closed on $545 million. A year and a bit later, we are eight investments in, invested just under $90 million … and (we’re) really making an impact.

OBJ: What’s the idea behind the fund?

GR: The thesis for the fund was that (in Canada) we have venture capital that helps start companies, we have buyout capital that buys control of them, but great companies aren’t built in the three- to five-year cycle that most private equity funds operate in. Great companies are built over 10 years, 15 years, sometimes longer, and there’s very little patient capital in Canada to take a company and help them grow over the long term. Because of the way funds are structured, they’ve got to look at forcing exits in generally three to five years. That’s not a long time to build a company, and we lose a lot of our intellectual property and our companies get sold to foreign buyers. Our thesis is we need to build more companies over the long term and keep those entrepreneurs in control of their companies longer. So, we’ve come to market with this fund, which is not only evergreen – which means that we don’t have to force (owners) to sell – but two, we’re only looking to buy a minority interest in companies. We want that entrepreneur to stay in control of their company so that they control their own destiny.

OBJ: What sorts of services do you offer in addition to capital?

GR: We’ll bring help to the table, we’ll bring relationships to the table, we’ll bring a network, we’ll guide them through some of the challenges of growing. I think it’s easy to say, ‘We don’t have enough talent in Canada, enough CEOs, enough VP sales, enough VP marketings.’ Well, we’ve got to grow them from somewhere. No CEO of a big company has just jumped into that role. They were at one time the CEO of a small company. I don’t think we do enough to mentor our young entrepreneurs so that they become able to take their companies public and stay in charge and become able to do acquisitions and integrate them. Those skills aren’t just inherent. They have to be taught and mentored. That’s part of our mandate. We bring that advice to the table. We let them run their company, but we try and help them through some of these challenges. Most entrepreneurs in Canada would rather have a Canadian partner, and we give them this long-term, patient minority Canadian partner option. It’s really resonated so far.

OBJ: Why do you think so many Canadian startups fail before they can mature into global firms?

GR: It’s a great question. There isn’t a lot of patient growth capital to take them from the stage that they’ve proven their business model to a stage where they really try to expand nationally, internationally across the world. They don’t get to that stage. What usually happens is they take on an investor, it’s usually … a three- to five-year window where they’re looking to exit. Control is lost often to a foreign buyer. You’re seeing the repercussions of this in the IPO market, for example. We used to have orders of magnitude more IPOs in Canada than we do now. And the reason is that we’re not getting (companies) to a size level where they can be IPOd with liquidity. Often, some of the investment banks are taking up companies way too early, and they get stranded on the TSX Venture and don’t trade and they can’t raise money. To the extent we can grow some of these companies longer, it would start solving all these issues we’re having. When you look at the banks, their interest is to grow more SMEs into large companies. This is the pool of companies they’re serving. I equate it to the baseball system, where you’ve got a minor league system, and you’ve got the major leagues. We need to cultivate these companies through the system. I don’t think we’re doing that well enough.

OBJ: How has that lack of long-term patient capital affected the development of the Ottawa economy?

GR: I know there’s obviously a great technology hub (in Ottawa), but I also know there’s a great non-technology hub. There’s a great number of businesses across the Valley that are growing, but they’re capital-starved. They don’t have any opportunity to raise the capital that’s right for them to grow. There is capital chasing the great technology businesses, but usually that’s three- to five-year capital. What usually happens is those great, up-and-coming companies get sold. And then we look for new ones to start. Our message is, think about growing these longer, where they can become lasting, meaningful, impactful companies for 10, 15, 20 years. We don’t have as many of those anymore as we used to. 

When I was working here, you had Terry Matthews, Michael Cowpland, (Jozef) Straus, Mitel, Nortel, Cognos, Corel. You had all these companies that had made a global impact coming out of Ottawa. You don’t see that as much anymore. You see kind of the three- to five-year buildup to a certain level and then they’re sold. One of the reasons this is happening is that entrepreneurs don’t have that patient (capital) option, and if they’re gonna give up control of that company, they’re just saying, ‘You know what? Just buy the whole company – I don’t want a new boss.’ When I came to Ottawa, I met 15 different companies, some of which were technology-oriented and some of which weren’t. None of them thought this was an area where they can easily find capital – in this patient, minority growth capital dynamic.

OBJ: Why hasn’t there been a fund like this before?

GR: It’s an interesting question. The way private equity funds are structured, it’s been a historical norm. It’s been this way for 20 years. They’ve got five years to invest their money and five years to exit. It’s really hard to create a patient, minority capital fund in that legal structure. The groups that have done it are the pension funds, which have obviously unlimited lives. They’re not in the fund structure, per se. But the pension funds in Canada have gotten so big that their minimum cheque sizes are hundreds of millions of dollars, and so they’re not able to pursue the lower, middle market. It doesn’t move the needle for them. So there’s this hole that’s been created. It’s taken these financial institutions to come up and say, ‘We’ll sign up for this and we’ll make this fund evergreen.’ I see the benefit of it every day. It really resonates with entrepreneurs. They don’t want to be forced to sell in three to five years. Especially the young ones. We’ve backed entrepreneurs that started their companies in their dorm rooms at university and five or six or seven years later they’ve built $20-, $30-, $40-million revenue companies and they’re in their twenties. They don’t want to sell when they’re 33. They might want to grow this for 15 years, and there’s not that many options of external capital that set them up to do that.

OBJ: What sorts of up-and-coming startups have you seen in Ottawa?

"A manufacturing company in the Ottawa Valley that’s growing at 25 per cent a year is just as important to the Canadian economy as a fledgling technology company growing at 60 per cent a year."

GR: You have your range of companies. There are some manufacturing companies that are quietly growing at 25 or 30 per cent a year that are sizable, that are outside of the Ottawa core but are selling internationally and have really great opportunities if they (get) a little bit more capital. The AI companies I met were very impressive. And then there are the technology-enabled businesses that aren’t necessarily building new technology but are using technology to enable older-economy businesses. Ottawa’s really unique in that we’ve got this range of (industries). It’s known for its tech community – it gets a lot of publicity for it and rightfully so – but there’s such a range of businesses in the Ottawa area, I think all of which are underserved (by the capital markets). A manufacturing company in the Ottawa Valley that’s growing at 25 per cent a year is just as important to the Canadian economy as a fledgling technology company growing at 60 per cent a year. SMEs create such a disproportionate number of our jobs in Canada – upwards of 90 per cent of our new jobs. We really have to focus our efforts on those companies that are under 500 employees and help them get bigger and get international and think about exporting and think about expanding, think about acquiring. And that’s our goal as a fund.

OBJ: What elements have come together to make Ottawa such a vibrant economy?

GR: Having lived there my whole younger life, it’s really a well-kept secret in that you’ve got a combination of a beautiful city – you’ve got the scenic side of it, which is wonderful, you’ve got the outdoors, you’ve got a ton of world-class entertainment options, you’ve got the government there which kind of anchors the economy in some ways and you’ve got a great standard of life. You’ve got two great universities that every year are generating a ton of great talent. It’s got a lot going for it. Everyone seems to focus on Toronto and Vancouver and Montreal to some extent as hubs in Canada, but I think Ottawa for that reason has been underserved in capital. And that’s why we’re spending a lot of time there. Capital hasn’t really gravitated to the city in the same proportions as it has to others. As a result, I think you’ve got some great fledgling businesses here that are ready to take their companies to another level but need a bit of help to do that. Ottawa, I would say, tends to look in Ottawa for its capital. There are great venture funds in Ottawa, but I think you won’t find any long-term, patient, evergreen minority funds in Ottawa that can do the type of capital that we invest. I’d encourage businesses to contact us. It’s a short flight. We would come see them and tell them what we do and see if there’s a fit.