Getting Beyond Government Venture Capital in Atlantic Canada
Much venture capital funding in Atlantic Canada comes from government sources. That can have its drawbacks, so the challenge is to attract more private-sector investment to bring badly needed diversity to the region say some investors.
Brightspark Ventures believes diversity is vital to creating a more robust startup community in Atlantic Canada and throughout the country.
Run by managing partners Sophie Forrest and Mark Skapinker, the firm has been investing in the Canadian VC industry since 1999. They started out traditionally, managing funds from big firms and institutions, but they discovered there was a gap to be filled.
“We’ve always been very entrepreneurial at Brightspark … so we’ve always looked at everything and tried to optimize and make the best of out of it,” says Forest. “So about two and a half years ago, we thought ‘we will not raise our funds and we’ll capitalize on this new opportunity where wealthy individuals want to get access to venture capital deals and we have the ability to do that.’”
Brightspark now structures its investments by allowing individual accredited investors to invest with them in their deals. The model also helps their portfolio companies by giving them a network of investors they don’t necessarily have to manage.
Though allowing wealthy individuals access to VC deals was a big reason for changing their model, the other was to help bring more variety to the venture capital industry in Canada.
“[We] also did not want to go the route of raising a larger traditional fund again because the market was shifting even further than in the past to be more government-funded, which was not attractive to us,” Forest says.
“So we decided to do that and said ‘You know what? There’s a challenge in Canada with the venture capital industry.’ One of those challenges is that there’s not enough private money being invested in those companies and we can solve that while at the same time capitalizing on the great opportunity for us.”
Forest says government does play an important role in venture capital. However, it often comes with additional needs compared to privately run VC funds. With private money, the objective is to help companies become successful and scale fast while providing the investors a good return.
“When you get government funding, that objective is still there obviously, but there can be other objectives. Other objectives could be geography focus … it could be jobs … it could timing. There can be many things that have an impact on this potential of creating returns. Sometimes it’s positive, but sometimes it can just change the objectives.”
David Crow, a director at Toronto-based Danger Capital, echoes that concern about government-dominated venture capital. He says when governments use non-professionally managed funds or economic development agencies to invest, there are challenges, including government turn-over.
“So what happens to most economic development agencies, or the non-professionally managed, is their value of their funds is determined by the annual or a four-year election cycle budget,” says Crow.
“So when you have an election cycle every four years … the specific accountability starts to separate.”
This means people can lose track of objectives. There can be a lack of consistency with how funds are dispersed.
“If the government agency employs an individual that makes an investment and then that individual moves on … the department that makes those investments may not be held to the performance of the startups before getting their next budget cycle,” says Crow.
“While the individual making the investments may have the best of intentions, if they move on or the government changes, all that’s left in place is the legal contract … but the people or the decisions about how that money gets invested are already separated out not based on the past performance.”
Though this can be expected with government-managed funds, Crow says the trouble begins when these agencies try to act like private firms when there are no supports in place to ensure they will actually behave like one.
“The challenge I’ve always had is you end up with bureaucrats who act like venture capitalists. In order to stoke the fires or the flames, they want to think it’s really venture capital, that they’ve gone out and raised as funds, that they’re held accountable to the same sets of terms and they want their startups to think that as well,” he says. “But then they are not always in alignment with that and they don’t always behave in the same way or the same understanding that many of those professional funds do, which is to generate returns.”
That being said, Brightspark’s Forest says government-managed money plays a huge role in setting the stage for entrepreneurs in their communities.
“I think government 100 per cent has a role to play in investing impact, mostly in the really earlier phase because there’s a need to create an ecosystem, in Canada especially … But part of it is not going to create returns so it’s really hard to get the private money to be funnelled in there,” she says. “So accelerators, incubators, super-early stage or helping angel groups, stuff like that … that’s where it’s really more government money that is needed there.”
But when it comes to having a VC system that will help companies grow and yield big returns, government funds may not be as effective.
“There is where I think in many cases private money is more aligned,” says Forest.
But in the Maritimes, there are few private-sector VC funds. While there are government funded organizations like the New Brunswick Innovation Foundation and Innovacorp, accessing only these kinds of sources can end up causing longer-term problems for startups.
“I think most companies end up being capital constrained. Having additional capital from additional sources, provided they are well-behaved sources, it reduces the friction for entrepreneurs to get the capital for the things that they need to grow,” Crow says. “Usually, the primary two things are dollars and people. You need the capital to pay salaries. So if you can make it easier because there’s a great abundance of money, you should be able to grow faster.”
That’s why Crow says it’s important for startups in the region to branch out, get on a plane and target customers and investors outside the region. The notion that startups are tied to the region needs to change.
“Just like AngelList and BrightSpark make it easier for investors to invest in the region, [startups are] only a plane flight away from Los Angeles, New York or Boston, Toronto, San Francisco,” he says.
“When you look at great companies doing great things, whether there are those in Toronto, those in Halifax or those in Moncton, they get on planes and talk to customers who are not in the region. They talk to investors who are not in the region because they are solving the needs and the pains of customers anywhere. All they really need is growth and execution in customers and good investors will find those deals.”
As for BrightSpark, they are currently on the hunt for Atlantic Canadian companies to invest in. The last company from the region they funded was Radian6, which successfully exited in 2011 with a $350 million sale to Salesforce. Forest says that’s not because there aren’t any good startups, it’s that none have yet to fit their specific requirements. It’s also an issue of scale.
“We’re just looking for the best stuff possible. We would love to invest in the Maritimes, but it’s hard to find companies that are at the stage that we like, with a really strong management team,” she says.