McRock Capital has successfully closed its third industrial tech-focused fund, securing over $120 million CAD. This achievement marks a significant milestone for the Toronto-based venture capital firm, especially within a challenging fundraising environment. The fund aims to back promising industrial software startups, a sector McRock believes is poised for transformation through technological advancements and the growing influence of artificial intelligence. The firm’s strategy has evolved to focus exclusively on industrial software for this latest fund, a decision made after observing the different growth trajectories of hardware versus software companies within the venture capital lifecycle. The closing of this $120 million fund represents McRock’s largest to date, bringing their total assets under management to $300 million. This growth aligns with the firm’s long-term vision established when it was founded 13 years ago. Despite falling short of their initial $200 million target, McRock’s managing partner, Scott MacDonald, expressed satisfaction with the achieved scale, highlighting the firm’s concentration of effort and expertise in industrial technology. The fund attracted strategic limited partners (LPs) from the construction space, including industry giants Caterpillar and Autodesk, who join a roster of established institutional backers like EDC, BDC Capital, and Fonds de solidarité FTQ. McRock Capital targets Series A and Series B-stage industrial software startups, typically those generating between $5 million and $20 million in annual revenue, with the goal of helping them scale significantly. What is industrial software? Industrial software refers to the specialized applications and systems designed to manage, control, and optimize operations within industrial settings, such as manufacturing plants, energy grids, and logistics networks. It plays a crucial role in enhancing efficiency, safety, and productivity in these environments. The firm’s investment thesis, which posits that industrial markets are ripe for technological disruption, has been validated over the years. The emergence of AI is now fueling another wave of innovation, creating new opportunities for investment. McRock’s strategic shift to exclusively focus on industrial software in Fund III was informed by their experience. They found that while hardware businesses could be strong, their longer investment and exit timelines were less suited to the typical 10-year venture capital fund structure compared to software companies. The initial $200 million target for Fund III was ambitious, contingent on securing substantial support from larger institutional funds. However, market conditions tightened, leading some prospective LPs, like the Canada Pension Plan Investment Board, to pause or scale back their venture capital commitments. Despite these headwinds, McRock’s ability to raise its largest fund and secure backing from major corporate VCs like Caterpillar and Autodesk underscores their strong reputation and focused strategy. McRock Capital’s previous funds have demonstrated success, with Fund I on pace to generate a 3x return. Fund II has already returned 40 percent of its committed capital, aided by strategic acquisitions of portfolio companies. The firm’s active portfolio includes innovative companies in areas like 3D scanning and crisis detection. Two companies within their current portfolio, E2ip Technologies and Miovision, have already surpassed $100 million in annual sales, showcasing McRock’s ability to identify and nurture high-growth potential. With Fund III, McRock plans to build a portfolio of approximately 10 companies, with a significant portion of investments expected in Canada, followed by the US, and select opportunities in Europe and Israel. The firm has also expanded its leadership team, promoting Udit Bhatnagar to a fourth partner role. The commitment to industrial software and the strategic partnerships formed with industry leaders position McRock Capital to capitalize on the ongoing technological revolution in industrial markets.
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