Diagram Ventures closes $100 million for latest fund as it continues to invest in FinTech

Diagram Ventures remains bullish on FinTech companies as it launches its latest venture fund with an initial close of $100 million CAD.

In an exclusive interview with BetaKit, Francois Lafortune, co-founder and CEO of Diagram, indicated that the Desmarais family-related venture builder is not worried about the current slowdown in the FinTech market and sees many problems in the financial sector that still need to be solved.

Diagram will invest in both companies it helps create, as well as companies it doesn’t.

While much remains the same for Montréal-based Diagram in the third iteration of the fund, one change is that the venture builder is moving beyond company creation. Through this latest fund, the firm will invest in both companies it helps to create, as well as companies it does not.

Lafortune said the idea is not to limit the fund’s ability to invest when it comes across existing companies it sees potential in.

“It makes a lot of sense, when we find the right team, to just invest in that team instead of building something,” he said.

Speaking of teams, Diagram is also expanding its own with the addition of two new US-based partners. Steve Schultz, formerly of Amazon Web Services, and Ken Nguyen, of Insight Capital, joined the Diagram team earlier this year. With the addition of Schultz and Nguyen as partners, Montréal-based Diagram is also looking to expand its presence in the United States.

The CAD$100 million raised for the fund represents Diagram’s original target size, but the goal post changed, as Lafortune said the firm has commitments that bring it closer to CAD$120 million. This is more than double the size of Chart’s other fund, which closed at $55 million CAD.

While this latest fund represents Diagram’s third fund to support its venture building efforts, it is the firm’s fourth overall. In 2021, Diagram raised a $60 million CAD Opportunity Fund to continue investing in the promising companies in the portfolio. This portfolio spans 13 companies. Diagram helped build, from mortgage startup Nesto to Toronto-listed health technology company Dialogue.

RELATED: Chart and Real Ventures-backed Breathe Life acquired by US insurtech SE2

In terms of limited partners (LPs) for this fund, Diagram only disclosed Power Corporation’s asset management company Sagard Holdings as its anchor, which was also the lead investor for the Opportunity Fund. Lafortune explained that other LPs include a mix of family offices and high-net-worth individuals that it brings into its network as advisers and co-investors. He added that new for this fund are “a handful” of corporate investors that Diagram sees opportunities to work with to find new ideas for start-ups, and who may also be future customers for these companies.

Sagard as anchor investor in this fund represents a transition in the Power Corporation organization that anchors Diagram’s main fund. In the first two funds, Sagard’s venture capital arm, Portage Ventures, was the anchor.

Sagard taking over as anchor from Portage was about simplifying what is a complicated web of connections in the Desmarais family’s Power Corporation organizational chart. Sagard, owned by Power Corporation, is a multi-strategy alternative asset management firm that includes venture capital, private equity, private credit and more, while Portage is more focused on direct investments.

Regardless of the anchor organization, Diagram has long been a central part of Power Corporation’s FinTech investment strategy, which spans various subsidiaries, Wealthsimple, Koho, Clearco, Borrowell and Portage as its global FinTech venture investor. Paul Desmarais III, part of the third generation in the family business, has played an active role in this strategy. He is a co-founder of both Diagram and Portage, where he serves as chairman of both organisations. He is also chairman and CEO of Sagard, as well as chairman of Wealthsimple and Dialogue, and has a seat on Nesto’s board.

This commitment to building a broad FinTech portfolio comes despite the recent decline in valuations and funding in the space. In recent years, Portage has launched several new funds comprising more than $1 billion, and a special purpose acquisition company (SPAC) on the Nasdaq.

RELATED: Chart doubles size of Opportunity Fund with final $60 million closing

This bullish focus on FinTech comes as the state of the sector has been a mixed bag over the past year. In 2021, interest and investment in FinTech companies was high as COVID-19 accelerated the digitization of the financial industry. The tide turned in 2022 with the broader technology downturn. Previously high valuations fell and access to capital slowed in a number of sectors, including FinTech.

For Power Corporation and its subsidiaries, that meant a significant decline in net asset value amid the broader public market downturn. Last year, the value of Power Corporation’s FinTech portfolio fell when it wrote down the valuation of Wealthsimple and other FinTech-focused investments in two Portage funds.

But Lafortune is not concerned with the current state of the market, especially because of the area that Diagram invests in – pre-seed to the Serie A stage. Lafortune argued that the current slowdown in FinTech has little effect on Diagram companies because the firm is still mainly focused on helping to create companies. These startups will not hit the market for a few years.

However, Diagram’s current portfolio has felt the effects, as seen recently with the closure of neobank startup Pillar. TSX-listed Dialogue has also seen its share price fall significantly since it went public, amid the broader market decline. However, Dialog has also seen positive growth over the past year, reporting a 31.5 percent year-over-year revenue increase in the fourth quarter of 2022.

RELATED: Portage Ventures Rolls Out New Late-Stage FinTech Fund, Aiming to Raise Up to $1B USD

Lafortune argued that Diagram’s portfolio overall has been quite successful. He stated that the number of Diagram companies that have made it to the Series A and B stages is greater than the overall average. On average globally, around 30 percent of startups make it to the Series A stage. Although Lafortune did not share statistics on Diagram’s success rate, it appears that the majority of the companies are still operating or have been acquired.

Because of this, Lafortune feels that since Diagram launched in 2016, the playbook has proven to work through its initial means. In addition to adding the ability to invest in companies it doesn’t create, Diagram doubles down on that playbook. The new fund will invest in approximately 20 companies from pre-seed to Series A stages. The majority of the capital (two thirds) will go to startups that Diagram is helping to create, while the rest will be external companies. Overall, Diagram plans to invest between $3 to $5 million CAD per company.

The Opportunity Fund remains active, with approximately 50 percent of its original investment capital remaining. It allows Diagram to continue investing in its companies through the Series B stage. Lafortune expects Diagram to be in the market for its second Opportunity Fund sometime next year.

Functional image courtesy Diagram.