Podcast #236 Industrial Innovation

TRANSCRIPT

Ken: Good day, and welcome to episode 236 of our Momenta Industrial Impact podcast. Today, we're pleased to host Alexandre Préfontaine, principal at BDC's Industrial Innovation Venture Fund. Alexandre has been with BDC Capital since 2017, where he plays an active role in articulating the fund's investment thesis, executing investments from sourcing to negotiation, and working on value creation with portfolio companies, all while supporting key BDC initiatives and partnerships. Alexandre has built a strong reputation in the Canadian technology scene through his engagement on the boards of seven of his portfolio companies, as a member of the Creative Destruction Labs community, and through his lectures on venture capital at local universities. Before joining BDC, he started his career in the financial sector with TD Canada Trust. Alexandre holds a master's degree in financial economics from HEC Montreal and a bachelor's degree in commerce from the University of Ottawa. He is also the proud father of his five-month-old daughter, an active ice hockey player, and a fly-fishing enthusiast. Alexandre, welcome to our Industrial Impact podcast today.

[00:01:54] Alexandre: Hi, Ken. It's a pleasure to be here; thanks for having me. We had a great conversation when we first met at Hannover Messe in April, and I'm pretty pleased to continue the conversation this morning on the podcast.

[00:02:07] Ken: Likewise. We have been co-investors, or in the same domain, investing in some of the same general companies for quite a while, and you guys have an excellent reputation in the industry. It's long overdue for us to connect finally. I always like to start with the question of the digital thread to understand the defining interests and experiences that brought you to this point in life. What would you consider to be your digital thread?

[00:02:36] Alexandre: Very interesting question, Ken. I had to reflect on it because life is a collection of opportunities; sometimes, even the best planners don't end up where they think they will. The assessment of venture opportunities requires a holistic approach. Beyond financial considerations, you must evaluate the market dynamics and the psychology of founders, which is quite important, along with the uniqueness of the technology and other factors. To succeed, you must build strong networks and social bonds that enable deal sourcing. All of this requires a specific skill set. I believe it's best executed as a team so that the collective experience improves decision-making and eliminates blind spots as best as possible. It's also very much fun to live five years in the future. All that said, I took a course on the topic during my master's, and I never really looked back.

[00:03:42] Ken: Excellent. It sounds like you were destined for this space one way or another, or at least created your destiny in that regard. VC can certainly be a fun profile and role to have. Tell us, who is BDC Capital?

[00:03:57] Alexandre: BDC Capital is the investment arm of the Business Development Bank of Canada. We are collectively the most active and largest investor north of the border here in Canada, managing six billion dollars in assets. We're an active limited partner in many local GP franchises, supporting 70 franchises over 150 funds. This practice has grown significantly in the last decade, allowing BDC to have a fantastic outreach across many sectors, tapping into our network's expertise. Additionally, we have seven in-house teams that invest directly. We've built a portfolio of around 300 startups, though that number changes constantly. In recent years, we've launched programs to tackle the big problems of our time, such as sustainability, climate change, and diversity, through a technology lens. We're a team of about 120 people from coast to coast, so that's BDC Capital for you, Ken.

[00:05:06] Ken: You have quite an extensive presence. I know you are an LP behind one of our peer funds, McRock, which has also made many good investments in this space. It's great to have you supporting them in the industry. Regarding venture investments, can you give us an idea of BDC's focus and scope? Stage, geography, check size, etc.?

[00:05:29] Alexandre: BDC has a development mandate, so institutional coverage is an important consideration. Through our various teams, we strive to cover the entire spectrum. We've recently launched a sector-agnostic seed fund. We also have a late-stage group, primarily active through co-investment and transactions that emerge from our network of sponsored GPs. Those are the two ends of the spectrum. For the early stage, we have sector-focused teams, which we call Series A and Series B phases. We have a half-billion-dollar fund focused on female entrepreneurship, which is very successful and the largest of its kind. We also have another half-billion-dollar fund dedicated to the climate crisis, helping capture greenhouse gas emissions through technology. We just launched a sustainability fund, and we have multiple programs that are either thematically or sector focused.

This brings us to the Industrial Innovation Fund, which operates in a very similar space to Momenta. I'm so happy we're talking. You mentioned our friend Ken at McRock. BDC is also sponsored by Builders, Yaletown, and a few other franchises active in this space in Canada, so there is no shortage of co-investment opportunities. We've also had a good track record of attracting more generalists to the industrial space, leading rounds, and bringing syndicates together.

We launched the Industrial Innovation Fund in 2019 with a $250 million envelope when Joe Regan was hired as a managing partner to lead the effort. I was lucky to be team member number two, transitioning from a strategy role at BDC Capital. It was an organic transition for me, having spent the last few quarters working on the thesis and business plan and conducting dozens of interviews with industry stakeholders to identify the problem statement. We are now one of the largest industrial-focused funds globally.

Regarding financial metrics, we are wrapping up Fund 1 with investment number 21. We've been active at the late seed stage, targeting product-market fit with modest revenue and sometimes even at the prototype stage. We've also taken positions in later-stage companies at the Series C stage, with check sizes ranging from 3 to 13 million dollars. We are proud to report two exits to date in the fund's early days, so hopefully, that paints a picture for you, Ken.

[00:08:30] Ken: It does. I heard through the rumor mill that you are considering raising the next iteration. Do you want to say something about that?

[00:08:37] Alexandre: We have the privilege of having a single LP structure, which removes a lot of complexity in fundraising, reporting, and aligning sponsor interests. We are presenting a plan for Fund 2 to the board of BDC, and if all goes well, we'll have an announcement in the fall. The vision is to continue the good work we've been doing with Fund 1 around a similar thesis targeting Series A and B, so stay tuned for an announcement in the fall.

[00:09:13] Ken: That's great. Thanks for sharing that with the audience, and best of luck in getting it raised and approved. I'm sure you guys will not have a problem. I'm curious: What does industrial innovation mean to BDC, and what attracted you to this theme?

[00:09:30] Alexandre: I'm sure you share the feeling, Ken. Industrial technologies often have a hardware component. We don't shy away from hardware or software or purely hardware deals. You can see them in action in the field and feel their impact. You can discuss with the operator and have a good vision and understanding of the ROI. Seeing these technologies' impact in sectors that deeply need productivity enhancements is always highly rewarding. Beyond that, BDC operates on a dual mandate of development and financial performance, so we can also feel the impact on the development side, tackling hard problems in sectors where many investors shy away. All of this combined makes it a fulfilling mandate to execute.

The fund's genesis is as follows: We asked ourselves, "In which domain would we hold a comparative advantage in Canada at building technology solutions?" However, based on the work we've done and realizing that the primary and secondary sectors are structurally crucial to the national economy, it became evident that building technologies for these legacy sectors, which are often under-digitalized, is an area where we could have success. Based on all that work, three pillars emerged. We're investing in ag tech and food tech to impact the agricultural sector; advanced capturing is another sector in which we're quite active; and lastly, we're also active in resource extraction. Never from the perspective of being an asset owner, but always trying to build solutions for the mining and energy industries to be more efficient, clean up their processes, and impact their cost per recovery.

An interesting theme emerges here because while these industries face their challenges, they share similar priorities. I think Momenta has published many fantastic white papers. Taking a page from your book, we're talking about resilient supply chains, critical asset resilience, digital transformation, workplace safety, and human-machine interaction. These priorities dictate the adoption of similar technology levers that can be horizontally applicable through all these sectors. We're talking artificial intelligence, the Internet of Things, robotic automation, and digital twins. All of these levers create a homogeneous theme. I hope that answers the question, Ken.

[00:12:29] Ken: Yeah, it does. It's interesting. I've always thought about our investment thesis as one of pattern recognition. Thus, we do energy, manufacturing, smart spaces, and supply chain. Those are less about hard sectors and more about general patterns, like smart spaces. We always say cities, buildings, farms. People go, "How did you couple those together?" Because the technology stacks and even the problem sets and go-to-markets in many cases are very similar, right? You invest on a horizontal basis, and one is likely applicable to the other. Suffice it to say, there's a robust ecosystem perspective that you can develop, and given your significant critical investments, I'm sure you must do a lot of that in the work you're doing as well.

[00:13:14] Alexandre: We sure do. There is a requirement for deep domain expertise in these three sectors where go-to-market dynamics, adoption, sales cycle maneuvering, and general stakeholder behavior vary from industry to industry. Within the team, we have folks from all of these different industries. Combined with the vision of a few technologists on the team and people like me with a more economic view, we have all the skillsets to bring it to a cohesive approach. That's how we approach it, Ken.

[00:13:55] Ken: Perfect. Well, this is going to be an unfair question. It's like asking a parent which of their children is their favorite. But I always like to know some of your more notable investments.

[00:14:09] Alexandre: I'm here in Montreal, Quebec, and exposed to the great work the aerospace ecosystem is doing. We have a strong agricultural cluster here. Ontario and Quebec share probably 80% of the country's manufacturing capability, so structurally, I'm exposed to two of our three pillars. I've been active in the supply chain, ag and food, and manufacturing. I generally cover two of our three sectors. I can speak of a few examples. We've done a high-profile Series A with Bayer and TELUS for a company based in Montreal called Chrysalabs. They combine spectroscopy and machine learning to produce a probe that can be inserted into the soil. Within 30 seconds, you get a digital reading of the nutrient content across 15 dimensions, including nitrogen, potassium, and organic content. If you're curious about the carbon content of that specific soil, all of that can be consumed in the cloud or uploaded in your farm management system to create heat maps and whatnot, guiding agronomic recommendations and providing fantastic logistic benefits. Growers don't have to wait weeks and travel to a lab to get results back. With such a solution, they can take concrete action and be much more reactive to the health of their soil as they approach agronomic decisions. That's an exciting one, Chrysalabs.

[00:15:57] Ken: Yeah. It's funny. I did some work a while back with Syngenta, so we looked a lot at this space, primarily focusing on digital agriculture. At the time, soil sensors were quite early on, formative if you will. Given how quickly you can get that wide set of readings, what you have just described is quite revolutionary. It is a game changer, especially the carbon capture side, which you quietly inserted into that; it is pretty amazing. Let me ask: what role does BDC traditionally play relative to post-deal value creation? It's what Momenta calls co-creation if you will.

[00:16:36] Alexandre: When we lead transactions and take a large ownership stake, we prefer to be active investors and have a presence at the board level, often through a director and observer seat. We truly like to roll up our sleeves and help in every way, shape, or form we can. We put our networks to work, so whether it's cross-pollination through the portfolio or elsewhere, this is a big part of our contribution. As a Crown Corporation, BDC is also good at governance, and these early-stage companies, graduating first from seed to Series A, need to build these systems to ensure proper governance. That's something quite helpful as well. We have access to many data sources for financial control and go-to-market contracts, so we share a ton of market intelligence with our portfolio companies. Beyond that, we're a very collaborative partner, whether with the founders or the syndicate. We're a very stable partner. It's a big ship anchored in the long-term horizon. We have a reputation for supporting companies through good times and bad times, so long-term financial support through multiple rounds is something many firms claim to do. Still, few actually fulfill when the economy takes a downturn. That's something we are very proud of being able to fulfill. As an example, we just hosted a CEO summit. I was talking about putting networks to work and cross-pollination. We hosted all of our 21 CEOs at an event in Toronto, where we brought fantastic keynote speakers.

We helped our founders brainstorm about attracting top talent, tax planning, and go-to-market strategies, creating a peer-to-peer environment. This is very exciting for our founders because it often feels a little lonely at the top for many of them. Being able to interact with their peers and exchange best practices is something we've received great feedback on. This is just one example of BDC's focus on the fund level here. Hopefully, that answers the question.

[00:18:54] Ken: Yeah, it does, and clearly, you're a good partner. You're not just passive capital—you're also patient capital, which, as you say, is well appreciated in the ecosystem. We have at least five portfolio companies that call Canada home, and we've always heard great things about Canada as a founding region. What are the top reasons a company should consider founding in or operating in Canada?

[00:19:24] Alexandre: Canada has long operated in the shadow of the United States, but after Israel, not long ago, Canada was the most dynamic market after the US and Israel, just in terms of investment activity as a percentage of GDP. A few interesting markets have emerged over the last few years: Sweden, France, Switzerland, and you know as well as anybody, Ken, that the European market is shaping up nicely. There's a lot of activity in Singapore, but nonetheless, Canada consistently ranks within the top 10 VC hubs globally. Toronto itself is home to 4,000 startups. Montreal and Vancouver follow closely behind. My colleague, Tom Park, wrote a piece on the topic recently. Some interesting statistics show the growing rate of startup creation, growing rates of employment within early-stage technology, and a growing investor ecosystem with maturing funds and more franchises. These elements are required to have a dynamic domestic ecosystem, so all of these elements are emerging here in Canada.

To summarize, we also have a pretty attractive incentive program for R&D and strong government support. You'll probably hear this through the BDC. Still, through various programs, world-class universities, top research, diverse talent pools, competitive wages, and a good quality of life—all of that makes for a compelling pitch. I don't think you need to be sold, Ken, because you've already taken a few positions, as you've alluded to.

[00:20:55] Ken: Well, that's a general dynamic: Canada is a great place to come to North America. Ultimately, you might end up in the US or stay in Canada, but your immigration policy has always been more inclusive. Thus, you get some of the best raw talent, which is traditionally your startup talent anyway, and they may choose to stay or expand into North America. That's a good dynamic to bet on and one that you guys should also be proud of from a policy perspective.

[00:21:24] Alexandre: We benefited from a positive brain drain when the US government changed its immigration policy and the green card requirements a few years ago. We have a global talent pool, so that's a big piece of the equation. I agree.

[00:21:40] Ken: Yeah, given the importance of skilled labor in every market, that is gold. Let's talk a bit about industrial AI. We've been investing in what we like to call industrial optimization for over a decade, but we've ramped up our investments around industrial AI over the last 18 months. We've already done four this year alone. What are some interesting use cases and companies you're seeing relative to the application of AI in your industry and Canada?

[00:22:14] Alexandre: About half of our portfolio leverages AI as the primary technology lever or as part of their solution. We rarely see AI as part of the solution set in recent transactions. We're seeing that acceleration within our own portfolio as well as in our own investment decision-making. You mentioned our friends at McRock; they host a fantastic symposium every year here in Montreal. Last year, the keynote speaker was Andrew Ng, and he explained how the first deployment of commercial AI was directed naturally at massive opportunities with relatively high value—we're talking about ads here and web searches. As these massive opportunities get crystallized, think about OpenAI here and that ecosystem; what remains is a long tail of lower-value vertical applications, a single problem set which AI is particularly well suited to tackle but requires specific parameters. Therefore, this creates a long tail of smaller problem sets, all large enough to justify venture investment and building a company in the space. I'm considering food inspection, pesticide application, and soil grading—material grading, quality assurance, and automotive. These task-specific applications can all benefit from AI but are not necessarily suited to generalized models. We're seeing the multiplication of these vertical applications. We just made a very interesting placement in a company here in Montreal called Maxa.ai. They were last year's winner of the Snowflake Challenge; they're an enterprise data play. They enable data extraction from ERPs, aligning data from multiple ERPs and multiple systems, often legacy, to be formalized into single data tables and be able to be consumed by a company's executives as a single source of truth in a dynamic live environment, which is miles away from the spreadsheets and workarounds that these companies had to use in the past. I believe using machine learning to make data available within a company is a fantastic use case of AI.

[00:24:50] Ken: In fact, it's interesting when you think about the examples you talked about earlier—ads, web searches, etc.—that are all highly digitalized, if not completely digitalized. I think the biggest challenge you run into is not necessarily the value of the applications but the amount of cost you have to put into the instrument, something like cement, kiln drying optimization, or metal casting operations. But I would suggest that the upside value is equal to, or in many cases, better, especially for you, including sustainability, resilience, and human centricity as additional measures. But it takes more work and deep domain knowledge to get to it, as you said. I think the impact of industrial AI is still well ahead of us; thus, some of our recent investments are also analogous to yours. Let me ask, what are some of the key trends that you're following in industrial innovation to help your own investment thesis?

[00:25:48] Alexandre: Well, Canada has a massive mining practice, and the technology applied to mineral extraction is really at the top of our minds. We will have to play a role in the clean energy transition, and the increasing demand for critical minerals will only face more pressure in the coming years. The advent of machine learning at the mining site for mineral deposit discovery is something we're closely looking at, whether in combination with current geo stats techniques or as a new way to assess resources we're active in. We're also very active in process controls. Our company deploys sensors for pharma, food bottling, regulating flows, and oil pipelines. We have a placement there as well. We've looked quite a bit at bioreactor control in the context of our ag stream.

Always with the human in the loop, that decision-making can migrate as much as possible to the machine side in the future. With more automation comes cybersecurity risk, so we're always searching for OT security plays. Lastly, I think robotic automation will be a big part of our thesis for Fund 2. We're an investor in a company out of Toronto, Ontario, called Sky Gauge Robotics. They've built a drone with a unique design that offers two degrees of freedom to each gimbal in the drone, which allows the centerpiece of the drone to stay stable. This is critical if you want to do work at height. A traditional drone design will move the object by tilting forward, right, or left. To interact with the surface, it needs to crash into it, which prevents, for example, their first use case in ultrasonic testing. This company has built the tool. It's in the market. We're working with them to make it as intelligent as possible, requiring less training and less human operation. It's repeatable over time, and the parameters are sharply tuned to automate most of that work. This step into the software and machine learning journey to make these robotic tools as autonomous as possible will be repeated across all our assessments of robotic opportunities. One last example is that we've invested in a company called 4AG out of British Columbia, and they're striving to fully automate mushroom picking in indoor farms. That's another use case where labor shortages create hardships for operators that we think robotics can solve.

[00:28:42] Ken: Those are all great investment thematic areas, and we have certainly placed bets in several. As we wrap up, I'm curious. How do you maintain your edge as a leader? Do you have any recommendations you want to highlight for the audience?

[00:28:55] Alexandre: On the topic of investments, I like several podcasts: "Invest Like the Best," "How to Build This," and "Founder Stories." I also like "Acquired." Ben Gilbert and David Rosenthal are fantastic storytellers. They don't shy away from deep dives on the world's greatest companies. On a recent flight, I powered through a four-hour episode on Microsoft. I did not know that Bill Gates' father was such an influential attorney in the Seattle area and was critical in drafting the contract that set the foundation for the software-as-a-service model we know today. Before that, there was no precedent for distributing software as a license and intellectual properties did not protect it. Microsoft had to blaze the way through that. These are the kinds of stories that I find quite interesting. I read a lot about psychology. Kahneman's "Thinking, Fast and Slow" is a must-read for understanding the mechanics of the thought process. It's not the most relaxing read, but it's engaging. I'll stop here, Ken.

[00:30:07] Ken: Yeah, I'm glad you did because that's a very extensive list and a bit eclectic, which I like. We will include links to at least all of the books in the notes associated with this podcast. Alexandre, thank you for taking this opportunity to share insights with us today.

[00:30:24] Alexandre: It was a pleasure to join you, Ken. Best of luck with future episodes, and I truly hope to see Momenta and yourself in the market on a co-investment opportunity in the short run.

[00:30:35] Ken: We'd love that and like having you guys in the market and the space. This is Alexandre Préfontaine, principal at the Industrial Innovation Venture Fund at BDC. Thank you for listening, and please join us for the next episode of our Industrial Impact podcast. We wish you an impactful day. You've been listening to the Momenta Digital Thread podcast series. We hope you've enjoyed the discussion, and as always, we welcome your comments and suggestions. Please check our website at momenta.one for archived versions of podcasts, as well as resources to help with your digital industry journey. Thank you for listening.

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