How Georgian Partners, Canada’s venture capital leader, turned into an industry laggard

WorkFusion Inc. was supposed to be a big winner for venture capital firm Georgian Partners Growth LP. The Toronto firm had been looking to back fast-growing startups that used artificial intelligence to transform the business world. WorkFusion was ideal: It had a “powerful vision” to improve productivity with robotic process automation (RPA) software it deployed to help financial giants automate and optimize business functions, Georgian head of firm Justin LaFayette said.

That was in January, 2017, as Georgian led a US$35-million funding of the New York company. A year later, Georgian topped up as part of a US$50-million financing, then went all-in, buying US$200-million of WorkFusion equity in spring 2021, mostly through an “alignment” fund that backed its winners. It now owns 52 per cent of WorkFusion.

It hasn’t worked out. WorkFusion’s revenue sank in three of the past four years, losses mounted and cash dwindled as the RPA business declined. WorkFusion hired Deutsche Bank to find a buyer, and in the second quarter of this year, Georgian cut the value of its combined holdings in the company across three of its funds to US$91.2-million, down from US$275.2-million invested. Sector feedback received by WorkFusion suggests it could fetch much less.

WorkFusion isn’t Georgian’s only disappointment, nor its worst performer. During the first half of 2024, Georgian wrote down 28 investments in 21 companies – wiping out US$430-million in book value – across its five oldest active funds. Among those are four total writeoffs of companies that got US$190-million from Georgian.

The information comes from quarterly reports sent confidentially to Georgian investors, or limited partners (LPs), and obtained by The Globe and Mail. The documents offer a rare look into a key Canadian private capital player, portraying a fund manager dealing with a serious hangover after investing heavily at the height of the COVID-19 pandemic tech bubble rather than selling when spendthrift funders were plentiful.

How Georgian performs has broader consequences. Georgian led a wave of emerging managers that rebuilt Canada’s broken tech financing industry a decade ago, becoming the country’s largest independent VC firm. It has raised more than US$4.3-billion from investors and manages US$5.6-billion in assets.

Its funds have been backed by crown corporations Business Development Bank of Canada (BDC) and Export Development Canada, and pension giant Caisse de dépôt et placement du Québec. Bank of Montreal invested in several Georgian funds and put more than 100 asset management clients in its second alignment fund. Georgian was one of the largest indirect beneficiaries of a federal program that put hundreds of millions of public dollars into venture capital to revive the sector.

Georgian is also one of the few domestic VCs that persuaded U.S. investors to bet big on Canadian managers. It raised funds from Prudential Insurance Co., government-backed retirement and pension fund managers in Connecticut, Massachusetts and Cincinnati, private foundations and university endowments, and even, according to Pitchbook, the NFL players’ retirement fund. Willis Towers Watson Ltd. put U.K. clients into Georgian, including pension funds for Jaguar, Land Rover, Merchant Navy and Audit Commission employees.

Georgian promoted itself as an innovative financier that took a hands-on approach with portfolio companies, even building software for them. Its calling card was an early, lucrative bet on Shopify Inc.

But Georgian’s results haven’t lived up to the hype. It has been bleak for VCs since the bubble burst in late 2021. Overvalued, free-spending startups slashed costs as investors lost their appetite for money-losing tech plays. Interest rate spikes impaired software revenue growth as corporate spending tightened. Many VCs that invested at inflated prices subsequently slashed valuations of portfolio companies once destined for windfall exits; BDC alone devalued its VC holdings by $1-billion in the past two years.

Even against that backdrop, Georgian has underperformed. After this year’s writedowns, returns to date for its five oldest active funds, which invest mostly in the United States, are in the single digits.

If Georgian invested in stocks, bonds or real estate, those results would look fine. But LPs invest in high-risk VC expecting high returns: Five- and 10-year net pooled returns for all VCs are around 15 per cent, making it a top-performing asset class.

Compared with industry benchmarks, all five Georgian funds rank in the bottom half of their U.S.-based peers by performance, as measured by research firm Cambridge Associates LLC, and in the bottom half of growth equity managers, data from investment giant Hamilton Lane Inc. shows.

As of June 30, Georgian’s Fund II, launched in 2013, had an average annual internal rate of return net of fees (IRR) of 8 per cent, while Fund III, from 2016, had a 3 per cent IRR. That put both in the bottom quartile of funds of their vintage, according to Cambridge. (By contrast, Power Corp. of Canada’s Portage Ventures has a 33.3 per cent IRR to date in its 2016 fund.) Fund IV, launched in 2018, and Fund V (2019) had IRRs of 9 per cent and 8 per cent, respectively, both in the third-lowest quartile. Georgian’s 2020 Alignment I fund, which bet big on WorkFusion, had an IRR of zero, also in the third quartile.

Georgian’s two oldest active funds, (II and III) are on track to miss their goal of returning three times invested capital. Several companies the firm thought would be strong contributors have performed inconsistently, it told LPs this year. For those who bought into its reputation as Canada’s elite VC firm, the sheen is gone.

One reason for some voluntary departures, according to a Georgian insider, is that its low returns could hit their compensation. Instead of bonuses, Georgian offers all employees a share of its investment profit, called carry. (Like other VC firms, Georgian collects an annual management fee equal to 2 per cent of assets plus 20 per cent of investment profits). Based on the latest results, Georgian’s Funds II and III carry could be zero – not counting the tens of millions of dollars in fees each will generate.

“Ultimately the amount of money you raise doesn’t necessarily translate into results,” said Chad Bayne, co-chair of law firm Osler, Hoskin & Harcourt LLP’s technology practice. “You still need to make prudent investment decisions, and ultimately realize cash returns on those investments, which they had a track record of doing” by investing early in Shopify.

Some observers and LPs believe Georgian grew too fast, was too willing to overpay, too inexperienced managing a cyclical business or too enamoured of its companies to divest shrewdly. Instead of selling into the biggest tech bubble in 20 years, it bought more of its highly valued companies.

Georgian styled itself a different sort of VC, which appealed to LPs when results were better. It’s a tougher sell now. Its sixth fund fell short of its US$1.1-billion to US$1.5-billion fundraising target, topping out last year at US$892-million, as did a second alignment fund, which raised US$508-million against a similar target. Long-standing backer BDC, Canada’s biggest institutional investor in VC, didn’t back either.

Georgian’s performance has left several LPs disenchanted. One said in an interview that Georgian took its eye off the ball and that its strategy to do VC differently seems like it hasn’t worked out. The LP didn’t rule out backing another Georgian fund, but said it would be a more difficult decision than before. (The Globe interviewed six LPs and one company insider; all were granted anonymity because they were not authorized to discuss the matter publicly.)

Some storied Silicon Valley VC firms have rebounded from underperforming funds or internal challenges, but observers worry a Georgian slump could negatively affect the reputation of a young Canadian VC sector that hasn’t proven it can consistently deliver strong returns nor wean itself off federal support.

Given how widely Georgian funds are held by other Canadian funds, the firm’s results could drag on returns across the domestic VC sector, which until recently had narrowed the performance gap with its U.S. peer. It’s been hard enough for Canadian VCs, and many LPs here have complained of meagre cash returns, though that has been a broader problem for the sector globally of late.

“Georgian built out its investment platform with a level of optimism fuelled by an unprecedented bull market” for VC, said Alison Nankivell, BDC’s former senior vice-president of fund investments. Like many other VCs, “they were not necessarily focused on managing future down cycles. But when you are the largest venture manager in the country, declining market valuations and a lack of distributions becomes a more high-profile problem for your investors.”

Like many current Canadian VC firms, Georgian was founded by tech entrepreneurs who looked past the 2008-09 Great Recession and saw boundless opportunity as smartphones, data science and cloud software proliferated. Mr. LaFayette, a towering, confident but low-key ex-professional hockey player, had built Toronto customer data management company DWL Inc. and sold it to IBM Corp. in 2005. He stayed at IBM as a strategy executive before leaving in 2008 to co-found Georgian with fellow DWL/IBM sales executive Simon Chong and John Berton, another tech entrepreneur with finance experience.

Fundraising was slow, but Georgian secured $67-million for Fund I. Its pitch was that the trio understood what technologies industry giants wanted to build or buy and would back startups developing them. Georgian had U.S. connections that included DWL backer Insight Venture Partners, giving it an in on American deals.

But it was a 2011 opportunity at home that made Georgian a VC star. Shopify was raising $12-million from a trio of U.S. VCs that had invested US$7-million months earlier. Lead backer Bessemer Venture Partners wanted to buy even more.

However, if it did, that would end the Ottawa ecommerce software startup’s status as a Canadian-controlled private corporation, reducing some tax advantages. So, Shopify invited five Canadian VC firms, including Georgian, to bid for US$3-million of equity – common shares sold by early Shopify investors and employees, not preferred shares with more rights, which the U.S. funds had. The winner wouldn’t get a board seat.

Some bidders balked at that. Georgian didn’t. It won the deal. When Shopify went public in 2015, Georgian had 5.4 per cent of the stock.

Being an early backer of Canada’s most successful software startup secured near-legendary status for Georgian. Its debut fund had other winners, including U.S. companies 41st Parameter and Kinnser Software, and returned $2.50 to investors for every $1 invested. Its 25 per cent net annual return put Fund 1 among the top quartile of its peers.

Georgian got big, fast. It raised $200-million for Fund II in 2013, backed by all four “fund-of-funds” managers chosen by the Conservative federal government to invest $350-million in Canadian VC funds, including Northleaf Capital Partners, one of its earliest backers.

Its next three funds raised US$375-million (in 2016), US$550-million (2018) and US$850-million (2019). In 2020, it raised US$900-million for its first alignment fund. Georgian backed more than 70 companies and went on a hiring spree.

Georgian funded fast-growing companies in such areas as cybersecurity and digital automation that had advanced past startup stage, generated millions or tens of millions in revenue from corporate customers, but weren’t ready to sell or go public. The firm established an “impact team” of experienced executives it parachuted in to help portfolio companies. It won the lead on competitive U.S. financings including for IEX Group Inc., operator of the stock exchange highlighted in Michael Lewis’s Flash Boys.

The firm adopted startup lingo to describe its business. Georgian labelled itself a “fintech,” called its companies “clients” and declared its engagement, education and networking program for fledgling startups was a “freemium version of Georgian.” Other VC firms didn’t do that.

Its unique approach impressed LPs. Connecticut treasurer Shawn Wooden praised Georgian’s “innovative, value-added investment strategy” when he told the state’s retirement plans and trust funds’ investment advisory council in early 2022 that he planned to invest US$100-million in Fund VI and US$50-million in Alignment II, after previously backing Fund V.

Georgian’s prepandemic returns were top tier, but unrealized paper gains accounted for much of its track record, a due diligence report on Mr. Wooden’s plan noted. The report called that a risk. It was.

Georgian has largely blamed market forces for its recent woes. “The unprecedented growth that resulted in market highs in 2020-21, particularly for early-stage technology companies, put significant pressure on the portfolio” when rates rose and markets sank, it said in its second-quarter report.

That’s true, to a point. Multiples for software companies crashed in late 2021 and “most companies aren’t able to raise near even close to the valuations they raised at” earlier in the pandemic, said Mr. Bayne. “If you’re not getting back to the water line you’re not making any return on these investments.”

Revenue growth for companies that sell software to corporations slowed or reversed as clients cut spending. Several Georgian companies lost momentum.

Georgian, like many VC firms, also took bets that didn’t pan out. Fund IV put US$11-million in Arizona cybersecurity company Trusona, Inc.; revenues and cash have dwindled to nothing, though its founder is expected to keep it going.

Ritual Technologies was an exciting Canadian startup until the pandemic hit demand for its food pickup app geared to office workers. Fund III invested US$45.3-million and now values its 11 per cent stake at US$13.6-million.

Toronto’s Integrate.ai Inc., founded by an ex-Facebook executive in 2017, was supposed to build AI solutions for corporations. It generated just US$300,000 revenue in the first half of 2024, lost US$3.4-million and has little cash. Fund III invested US$18-million and still values its 32 per cent stake at US$47.9-million.

But there’s another factor: While Georgian won over young companies with its software and support, it was also willing to pay up as valuations soared in the pandemic. When they crashed, Georgian was left with many overpriced holdings that were eventually devalued.

For example, Georgian led a US$135-million investment into Noname Gate Ltd. in 2021, valuing the maker of security products for software developer tools at around US$1-billion. That was more than 1,000 times revenue that fiscal year and 100-plus times the next year’s sales. By comparison, average multiples for the top quartile of publicly traded cloud software companies reached 24 times forward sales in 2021 and are now eight times. Noname had a big valuation to grow into. It didn’t get there. This year, it sold to Akamai Technologies, Inc. for US$450-million. Georgian got back 86 per cent of its US$59.9-million investment due to its liquidation preference rights, but the shortfall was a capital loss.

As cloud software valuations peaked Georgian doubled down

Cloud software forward revenue multiples

June 2020: Georgian invests

in ClickUp at US$200-million valuation

March 30, 2021: Georgian’s US$900-million Alignment Fund I invests in Tealium,

Tophatmonocle, IEX Group, WorkFusion

Oct. 2021: Georgian

invests

in ClickUp at US$4-billion valuation

the globe and mail, Source: bvp.com

As cloud software valuations peaked Georgian doubled down

Cloud software forward revenue multiples

June 2020: Georgian invests

in ClickUp at US$200-million valuation

March 30, 2021: Georgian’s US$900-million Alignment Fund I invests in Tealium,

Tophatmonocle, IEX Group, WorkFusion

Oct. 2021: Georgian invests

in ClickUp at US$4-billion valuation

the globe and mail, Source: bvp.com

As cloud software valuations peaked Georgian doubled down

Cloud software forward revenue multiples

March 30, 2021: Georgian’s US$900-million Alignment

Fund I invests in Tealium,

Tophatmonocle, IEX Group, WorkFusion

Oct. 2021: Georgian

invests in ClickUp at US$4-billion valuation

June 2020: Georgian invests in ClickUp at US$200-million

valuation

the globe and mail, Source: bvp.com

While other VC firms also invested at the peak, Georgian missed or ignored several chances to cash out at high prices. Georgian’s Fund V co-led a US$35-million financing of a San Diego product management software developer known as ClickUp in June, 2020, at a $200-million valuation. Georgian led another round that December at a US$1-billion valuation and months later ClickUp was valued at US$4-billion – more than 40 times its next year’s revenue – in a US$400-million round led by Andreessen Horowitz and Tiger Global. ClickUp’s valuation had appreciated 20-fold in the 16 months since Georgian first invested.

But Georgian didn’t sell as others bought in at penthouse prices. It invested more. At the peak, Georgian valued its ClickUp stake at US$636-million, equal to three-quarters of what investors put in Fund V. If Georgian had sold its holdings and distributed the gains, Fund V would rank among the top 5 per cent of funds from its vintage in cash distributions.

When software stocks fell, Georgian devalued its ClickUp stake. It’s now worth US$412.6-million on Fund V’s books. ClickUp is growing fast but losing money. Its valuation could take a while to recover.

Georgian made another costly decision with Fund IV’s investment in CS Disco, Inc. When the Austin, Tex., legal software company went public in July, 2021, at US$32 a share, Georgian’s 5.93-million shares were worth nearly US$190-million, more than 175 per cent above what it paid. The stock quickly doubled.

Georgian didn’t sell a share, and still hasn’t. CS Disco’s stock soon deflated, falling further when chief executive officer Kiwi Camara resigned last year over allegations he’d groped an employee. The stock recently traded for US$6. Georgian’s stake is worth about half what it paid.

By contrast, early CS Disco backer Bessemer – the veteran U.S. VC firm that funded Shopify – began selling two months after the IPO, reclaiming more than four times its invested capital while retaining more than half its shares. If Georgian had sold the same proportion of stock at the same time as Bessemer, it would have cashed out 125 per cent of its investment and still kept most of its shares, according to Globe calculations.

Georgian took other big bets as the market peaked. Alignment I doubled down on five Georgian investments in 2001 while its earlier funds held their stakes. Mr. LaFayette told BMO customers in a 2023 video that Georgian’s offers weren’t the highest on any Alignment I investments. That means its earlier funds, had they sold, would have locked in returns at one of the best moments ever to sell a software company. Instead, it invested at a discount because the companies and Georgian were happy to keep working together.

Not selling was a point of pride for Mr. LaFayette, even though VC funds, with 10- to 12-year lives, eventually must exit their positions. “That is many tens of millions of carry that would have been paid out,” he said on the video. “We are not doing this to lock in carry and provide liquidity to ourselves,” but because Georgian believes in the companies.

Georgian’s LP advisory committee members supported the move, but it cost investors and employees. In the second quarter, Georgian cut unrealized valuations on all five Alignment I companies (and the stakes held by earlier funds), valuing three at less than what it paid – though IEX has more than doubled in value overall since the alignment fund invested. The biggest decliner? WorkFusion.

Ex-Shopify chief financial officer Russ Jones, now an adviser to Georgian, said in an interview that rather than doubling down, “I would have done the bird in the hand,” by selling Georgian’s earlier stakes. But “hindsight is a wonderful thing. Two years from now we might say the Georgian approach was more beneficial.”

It’s a fair point. Quarterly results are snapshots in time. Valuations change; some strongly performing companies are appreciating. Georgian’s final fund performance could differ.

But Georgian, which largely sat out a hot seller’s market, is also now divesting into a perilous one. The firm is focused on liquidating holdings and has 18 companies in market. “These processes have made plain that while deal activity appears to be returning, buyers are pricing in significant discounts in negotiating transaction terms,” Georgian said in its Q2 reports.

Negative feedback and market conditions have prompted many writedowns and left some Georgian holdings in a bind. Silicon Valley virtual reality training company Strivr Labs Inc. is struggling with product-market fit. It lacks customers, and cash and financing or exit options. Georgian wrote down its US$40.2-million Fund V investment to US$6.1-million in Q2. The firm warned that any solution Strivr finds likely won’t improve Fund V’s performance.

Fund III company True Fit Corp., whose software is used by apparel sellers to provide personalized size and fit recommendations, was optimistic early this year when it looked for a buyer – until bids came in. They were well below the fund’s valuation of True Fit and arrived as the company was renegotiating its debt covenants, which put pressure on timing. Lenders took control, the board quit and Georgian wrote off its US$75-million investment.

Meanwhile, WorkFusion’s annual revenue has declined to US$34-million and sales widely missed management’s second quarter targets. Its first-half operating loss was 69 per cent of revenue, it has US$29.9-million in debt and US$6.1-million in cash. If WorkFusion sells, Georgian does not expect to recoup its investment. If it doesn’t, and performance doesn’t improve, WorkFusion will have to raise capital at a vulnerable time.

Another recent investment, Israeli advertising technology company OpenWeb, last month dumped founder and CEO, Nadav Shoval. He publicly rebuked the move as contrary to the company’s interests, called out “concerning conduct” by the board, which includes a Georgian investor, and sued. Georgian has invested US$178.4-million in OpenWeb, including a stake from Alignment II.

Georgian still has several strong performers, including Armis Security Ltd., Cority Software Inc., eSentire Inc. and IEX. It has told LPs it has learned from experience and Fund VI deals may be its best yet, including browser developer Island Technology Inc., which raised US$175-million in April, doubling its valuation to US$3-billion. All Georgian funds still sport positive returns; investors haven’t lost money.

But Georgian is feeling pressure from LPs. The firm, which used to be aloof and terse in disclosures to investors, has recently provided expanded commentary about market challenges and portfolio issues in quarterly reports. It has enhanced governance, valuation and investment processes, and committed to managing its portfolio with transparency and discipline.

It’s not clear how or if that can improve returns. Georgian has divested many holdings already, but those haven’t made investors whole since Fund I. Cash distributions to LPs on Fund II were 70 cents for every $1 invested at June 30; 60 cents for Fund III and less for later funds.

Those distributions are among the top half of peers for Funds III, IV and V, but the question is how much more Georgian can reap. Fund III has already sold all or part of five investments and written off two more. Excluding Ritual and Integrate, it has four others. It would take outsized exits in bleak conditions to markedly improve Fund III’s returns.

Even so, that might not benefit Georgian employees who have been promised carry. Georgian is obliged under Fund III’s terms to make investors whole and pay a guaranteed annual 7 per cent return before it earns any carry. With net IRR at 3 per cent, it wouldn’t even be able to cover the guaranteed return at this point, let alone earn any carry.

Fund II faces similar challenges, with an 8 per cent net return and an 8 per cent guaranteed return to cover. Four of seven companies it still holds have sustained revenue declines this year and last, and Georgian has slashed their valuations. A fifth, Freshbooks, lost its CEO and CFO this year and revenue growth is weak. The company has little cash and high debt. At midyear it was looking for capital to remain operational, which may affect the value of Georgian’s stake. On Oct. 1 Freshbooks announced 140 layoffs.

Georgian made the most of an early win on Shopify. Now it needs several portfolio companies across several funds to spring back. Most of its underperforming funds still have time: They have 10-year lives with potential to extend for two more. If prospects for software companies improve, so could its companies’ fortunes, and fund performance. So far the markets aren’t co-operating. If only Georgian could create software to solve that problem.