Firm is tapping into its “superpowers” to spot early winners in frontier tech.
Toronto-based Two Small Fish Ventures (TSFV) has secured the final close of its third venture fund, meeting its $40-million CAD target.
The announcement comes less than two years after the fund’s initial close of $24 million CAD ($17.5 million USD) in October 2022. Since then, TSFV, which invests in early-stage “industry-disrupting, world-class giants of the future,” has been in deployment mode with Fund III, making early bets on frontier tech startups that are already showing returns.
“If we look at the seven investments that we’ve made, for many of them, we were the only Canadian investor.”
Eva Lau
A $41-million CAD fund is substantial for a firm that invests at the early stage. But TSFV is looking to capitalize on a new generation of tech startups—one that needs more capital and greater technical chops.
To fill those needs, the firm is looking to leverage its partners’ ”superpowers” to pick winners early and offer them something differentiated in the Canadian market.
The fund is “unique” in the ecosystem, co-founder and general partner Eva Lau told BetaKit in an exclusive interview, given its three partners’ technical and operational expertise, not to mention experience building “one of the most successful tech companies in Canada.”
Two Small Fish Ventures was created by Eva and her husband, Allen Lau, the co-founder of fanfiction giant Wattpad, which sold to South Korea’s Naver Corp. in 2021. Eva also served as Wattpad’s head of community and content for four years. The Laus’ goal in launching TSFV was to bring operational experience to early-stage investing in Canada. The firm has seen a handful of exits since its founding in 2014, including SkipTheDishes, CalendarHero, and Semantic Health.
Fund III includes new institutional limited partners (LPs) Northleaf, which this week closed its own fund, as well as BDC Capital, New Brunswick Innovation Foundation, and Relay Ventures. They joined repeat investors from TSFV’s previous fund Inovia Capital and CIBC Innovation Banking. The fund also saw backing from a number of private high-net-worth individuals and family offices.
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Allen, who serves as TSFV’s co-founder and operating partner, said Fund III has invested in seven of its targeted 20 portfolio companies, including unannounced investments Axiomatic and Applied Brain Research, with several more deals expected to close in the coming months. Eva projects that the fund will already be halfway to its target portfolio size this summer.
The firm’s strategy for Fund III to date has centred on getting into highly coveted deals early, building a strong portfolio that it can support operationally, and allowing the fund’s success to naturally attract potential LPs.
To that end, TSFV has already started to see promising signs from its first deployments from the fund. One portfolio company is Toronto-based AI image generator Ideogram, a cheque the firm wrote, according to Allen, “at company inception.” In February, the Midjourney competitor closed $109 million CAD in funding, and has already scaled to over seven million users.
‘You are too early’ or ‘find a lead first’ are common refrains heard by many early-stage startups in Canada, but Two Small Fish Ventures has a history of being “bold,” as Eva put it—being among the first institutional investors in companies like Ada, BenchSci, and SkipTheDishes, the latter of which exited for $110 million in 2016.
“That cheque was unusually early from a Canadian standard, and we got it done,” Allen added. “We’re kind of using the same playbook [as we did with previous investments], but it’s also not an apple-to-apple comparison, because in our current fund, we lead or co-lead, and in some cases, we syndicate.”
Growing the fund gives Two Small Fish Ventures more than the ability to lead rounds. According to Eva, it will also open doors to highly sought-after deals. In addition to Ideogram, Fund III portfolio companies include San Francisco-based Story Protocol, which closed more than $54 million USD last year from investors including Andreessen Horowitz, as well as investments into companies like Beaubble, Glif, and Blumind.
“[If there are] US investors leading the round, then we are usually the second-largest VC on the cap table, and most of the time, [we are] the only Canadian investors on the cap table,” Eva added. “If we look at the seven investments that we’ve made, for many of them, we were the only Canadian investor.”
Another factor behind the firm’s significant size relative to its target investment stage is the explosion of AI and the resulting demand for computational resources to power that technology. Allen describes the fund’s thesis as “investing in the next frontier of computing and its applications.” Eva added that the last decade’s mantra of “software eats the world” is evolving into “software and hardware will rule the universe.”
The advent of AI also means that “the old days of shallow tech are long gone,” according to Eva, who noted that the next generation of truly transformative companies will require more money and deeper domain expertise in order to scale—a comparative return to the pre-cloud days of yore.
And TSFV’s fund partners speak this deep tech language fluently. Beyond scaling and exiting Wattpad, which Allen highlighted as an AI company, the partners’ backgrounds are rooted in deep tech. Allen is an electrical engineer by training, while Eva previously managed the entry product line at fabless chip company ATI before its $5.4-billion acquisition by semiconductor giant AMD. Partner Brandon Zhao also has experience working at AMD competitor Nvidia.
The partners believe this combination of industry acumen and operational prowess sets their offering to startups apart from other Canadian VCs.
“We’ve been in industry long enough, and most importantly, we have built something very transformative when everybody was a naysayer,” Eva said. “So, in a way, we have the superpower to see 10 years later, what an opportunity may look like.”
Eva noted that Fund III experienced exceptional demand from family offices, with some unable to join before the final close deadline. While she was clear that the fund will not reopen to new investments, as the firm would rather concentrate on building the portfolio, she hinted that these family offices could become anchor investors for a larger fourth fund.
“There’s a continuous demand for great fund managers who understand this space. People realize this is a real platform shift, rather than a gimmick, and they do actually want to deploy,” Eva added. “I think we are in a great position to capture that opportunity.”
Feature image courtesy of Two Small Fish Ventures.
