Raymond Fitzpatrick

Raymond Fitzpatrick

An economic downturn is never good news for startups raising capital, but early-stage companies in Atlantic Canada will likely be buffered somewhat by the strong participation of government in funding high growth companies.

Interviews with several Atlantic Canadian funders revealed a belief that there will still be funds available to promising companies – especially those that need less than, say, $1 million. They added that debt financing will likely play a bigger role in raising capital than it has in the past.

On the downside, the inevitable downturn sparked by the Covid-19 virus will likely impact the financial position of the region’s innovation-driven companies in three ways. First, there’s a unanimous view that revenues will suffer. Second, companies looking for Series A or B rounds may find it more difficult to raise money from venture capital funds outside the region. And third, angel funding will certainly be scaled back after so many wealthy individuals lose money in the stock market.

“Probably not much will change because a lot of the VCs here are backed by the governments,” said Patrick Hankinson, Partner at the Atlantic Canadian pre-seed fund Concrete Ventures. “It will probably be business as usual for the most part.”

Atlantic Canada is coming off two very good years in raising equity capital. According to data collected by Entrevestor, the region’s companies raised $166 million in equity funding (excluding money raised on the stock market) in 2018. They shattered all records in 2019 thanks to the $515 million equity-and-debt round reported by St. John’s-based Verafin.

In recent years, most of the funding generated by Atlantic Canadian companies has come from funds outside the region, and there is some concern that it will be harder to attract external funding, especially if company CEOs can’t fly to meetings.

“We could start seeing some implications there but it’s my impression that meetings can still be done over things like zoom,” said New Brunswick Innovation Foundation Investment Director Raymond Fitzpatrick. “It’s my impression that VCs will not stop taking meetings; they just might not be face to face. It will slow things down but there hasn’t been a grinding halt yet.”

For companies seeking less capital, funders predict deals will still get done largely because government-backed funds will still be doing deals.

“We haven’t changed anything in what we’re doing,” said Innovacorp CEO Malcolm Fraser. “We’re going to be hearing from the federal and provincial governments on how they’ll support small and medium-sized businesses, and we’ll be looking at how we can fill in the gaps  . . . in our community.”

That’s not to say it will all be smooth sailing. Build Ventures Partner Rob Barbara said his top priority right now is making sure companies already in his portfolio have sufficient “runway” (enough capital to last a long time) to weather the storm rather than finding new investments. And another funder, who asked not to be named, said: “There are a couple of deals in our pipeline that I’m walking away from until we see how this whole thing pans out.”

What’s more, angel investors will likely be less active. “I would definitely expect angel investing to slow down with some individuals choosing to get out of the game for a period of time and some others writing fewer cheques or smaller ones,” said Fitzpatrick.

Meanwhile, several funders noted that they see opportunity in the downturn. With some funders on the sidelines, prudent investors can find good companies at attractive valuations, and these companies can do well and exit at high multiples once the downturn ends.

Said Barbara: “Of all the variables that go into making an investment, the quality of the founder is still the most important, and that doesn’t change during a recession.”