Innovacorp is accelerating its investment plans in light of the COVID-19 virus, not just to boost the economy but because it sees an opportunity to make money, said Managing Director Andrew Ray.
In an interview, Ray said the venture capital agency, whose lone backer is the Nova Scotia government, believes investments made during economic downturns tend to produce strong returns in the long-run.
What’s more, he said the participation of governments in VC funding in Atlantic Canada means the stronger companies in the region will survive, while their competitors in other regions may fail. So Atlantic Canadian startups may emerge from the crisis stronger and with less competition.
“We think investing through the crisis will provide a return to us, but we also think it will be good for our companies,” said Ray, who took over the investment team in 2018. “They will be able to beat out the competition.”
Overall, Ray said 10 to 20 percent of Innovacorp’s 39-company portfolio is benefitting from the crisis, and the same proportion is suffering sharp pain. A band of about 70 percent in the middle look set to endure the pandemic and emerge into the recovery.
Innovacorp is working on emergency investment rounds for three of the 39 companies in its portfolio. These three companies were performing well before the crisis hit, and two were on the cusp of raising capital.
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The agency is focused on helping its existing companies, but it expects to make equity investments in new companies. Ray anticipated Innovacorp would make 12 to 15 investments this year, about half of them in new companies.
In most places around the world, venture capital firms are backed by limited partners, or LPs, from the private sector, mainly pension funds or wealthy individuals. Most of these private LPs are now suffering losses in stock market investments and other asset classes, so they’re telling their VC funds to show restraint and not make new investments, said Ray.
In most markets after March, total VC investment will fall by one-half and valuations will fall by 25 percent, said Ray. “Twenty-five percent fewer startups will get funded and some aren’t going to make it,” he said.
However, he added that Atlantic Canadian VC funds are backed by government. Even the private fund managers like Build Ventures, Concrete Ventures and Pelorus Venture Capital receive much of their funding from government. And governments want the VC funds to invest right now.
Atlantic Canadian startups tend to be “lean and scrappy”, he said, as there is usually less VC capital in the region than in other areas. With some support from the government-backed funds, they are well positioned to emerge from the crisis in a good position.
Innovacorp has the ability to make investments of as much as $2 million (though it rarely reaches that level). On top of that, BDC Capital is working on a program in which it will match VC investments,,as outlined by Betakit earlier this month. Ray said this all means many Atlantic Canadian companies will be able to tap equity capital to help them endure the downturn, or to grow if their business models benefit from the current situation.
“In Atlantic Canada, I think we’re much more resilient [than other jurisdictions] in the startup space,” said Ray. “If you make it through this crisis, you will be better off.”
Disclosure: Innovacorp is a client of Entrevestor.
