The Xanadu company office in Toronto.Eduardo Lima/The Canadian Press
When Christian Weedbrook founded Xanadu Quantum Technologies Ltd. XNDU-T a decade ago, he was determined to raise as much of his financing in Canada as possible. Some investors told him he was wasting his time. “I thought, ‘Maybe it’s true, but why don’t we see how close we can get to that ideal situation,’” he said in an interview last week.
Canada’s startup financiers are happy the Australian expatriate stuck to his plan. Xanadu stock has had a strong run since it went public in late March by combining with a Nasdaq-listed special-purpose acquisition company. It closed up 24 per cent on Friday, giving the quantum computer developer a market capitalization of US$10.8-billion. Xanadu is now Canada’s fifth most valuable public tech company.
While Xanadu’s early investors are subject to a lock-up and can’t sell until late September, some of their paper returns at the moment beggar belief.
Ontario Municipal Employees Retirement System led Xanadu’s first two financings through its venture capital arm, investing less than US$30-million. That stake is now worth US$1.45-billion. To put that in perspective, the pension giant’s top public stock holding on Dec. 31 was an US$862-milllion position in Nvidia Corp. OMERS’s Xanadu stake is worth more than its combined holdings in Canada’s Big Five banks, JPMorgan Chase & Co. and Mastercard Inc. on Dec. 31.
The magnitude of its Xanadu gain “is wacky,” OMERS chief executive officer Blake Hutcheson said in an interview. However, he added, “I’m keeping perspective. It’s on paper and it’s locked up, so I don’t want to get overly zealous. But it’s proof” of OMERS’s thesis in the early 2010s that it could generate 15-per-cent returns over 10 to 20 years from venture capital.
Other early Xanadu backers are sitting on massive unrealized gains. Montreal-based Real Ventures’ 2017 fund, which raised $150-million, put less than US$10-million into Xanadu; that stake is now worth US$668-million. If that gain holds, Real’s investors and partners will share a giant windfall.
The same is true for Toronto’s Golden Ventures; its $40-million Fund II has US$493-million worth of Xanadu shares. Two other Toronto VC firms that invested in later financings could return their entire funds on their Xanadu holdings alone: Georgian’s US$550-million Fund IV has US$1-billion of Xanadu stock; Radical Ventures’ stake from its second, US$350-million fund is worth US$430-million.
They are among 33 locked-up Canadian investors in Xanadu, according to securities filings. The list features three banks (Bank of Montreal, Canadian Imperial Bank of Commerce and Royal Bank of Canada), hedge funds (Polar Asset Management Partners and MM Asset Management), Business Development Bank of Canada, plus several other funds. It also includes prominent Canadian tech entrepreneurs/investors Michael and Richard Hyatt, Michael Serbinis, Dennis Bennie, Anthony Lacavera and Daniel Debow, as well as ex-Manulife CEO Donald Guloien. Many are associated with Creative Destruction Lab, the University of Toronto-based accelerator that accepted Xanadu when it was just an idea.
“Xanadu’s success is a massive win for the Canadian ecosystem, proving we can scale world-class deep technology right here while delivering the kind of liquidity that fuels the next generation of founders,” Michael Hyatt said. “While this is a great milestone for early backers, I’m convinced Xanadu is only just getting started. The most significant value creation is still ahead of us.”
The depth and breadth of Canadian backers are unusual for a Canadian tech company at this stage; usually as domestic startups evolve and attract larger funding rounds, they take on investors from the United States, Europe or Asia. Xanadu has attracted backing from foreign investors (including Bessemer Venture Partners, Lockheed Martin Corp. and Advanced Micro Devices Inc.) but Canadian investors including Mr. Weedbrook own 64.3 per cent of the stock. Even when Xanadu raised a US$275-million private financing alongside its go-public deal, about half came from Canadian investors, Mr. Weedbrook said.
Sid Paquette, who led the three deals for OMERS Ventures when he was a managing partner there, said that “Christian was determined to make this successful and had no plan B. It was a binary bet on a person and an idea.” Mr. Paquette, who now leads RBC’s innovation banking unit, RBCx, said, “This is exactly what we need more of in Canada – betting on a smart and extraordinarily driven entrepreneur who was ahead of the hype cycle. It’s just one example of what we can do in this country if we mix the right companies with the right capital at the right time.”
Of course, none of Xanadu’s early investors are counting their winnings yet. Quantum stocks have been volatile. The industry is in its infancy and no company, including Xanadu, has yet produced a commercially relevant quantum computer that can achieve the technology’s full potential, though several are valued into the billions of dollars. (Quantum computers derive their computational power from the peculiar effects of subatomic particles and are expected to some day vastly outperform supercomputers, opening up uses in finance and materials and drug discovery.) Short sellers have targeted several quantum companies, including Xanadu.
But if valuations hold through summer, it will create a dilemma for investors. Do they cash out when the lock-up lifts, or hold for potentially bigger returns if Xanadu delivers on its promises? OMERS, for one, is haunted by the fact that it quickly liquidated its Shopify Inc. holdings – picked up in a 2013 venture capital deal – after its 2015 initial public offering, missing out on the Ottawa company’s massive subsequent run. “We did sell early and we probably learned some lessons from that,” Mr. Hutcheson said.
Mr. Weedbrook also hopes Canadian investors learn something from Xanadu’s experience: “The next time someone says, ‘You can’t do it,’ at least one or two people can say, ‘Well, we’ve seen Xanadu do it.’ We need more of that.”