In the discussion about support for startups, Jeff White is worried about positioning the companies that survive the current crisis so they can resume their previous growth.
The CEO of the New Brunswick Innovation Foundation says the fabric of support programs for high-growth companies must target specific dynamics of the startup world, in particular the need to raise growth capital. It’s a given that some companies will fail in the current climate, but White hopes the best companies can be saved and that the talent pool will remain in place and grow once the crisis passes.
White, one of the most experienced startup accountants in the region, contacted Entrevestor on Tuesday after we posted our analysis of whether federal wage supports would benefit Atlantic Canadian startups. (We have since removed this piece after talking to several people.) White believes the bigger issues in the current crisis are attracting growth capital and retaining talent.
“I think there’s a pent-up demand for capital and it’s going to get tighter on account of this [crisis],” said White in an interview Wednesday. “There’s not going to be as much liquidity in that market as there might have been because of the need of venture capital funds to support their existing portfolio.”
Last week, White convened a conference call with 15 CEOs from the NBIF portfolio and witnessed the range of experience – from companies whose revenues had plunged to zero to those that couldn’t keep up with increased demand. In the middle were a range of CEOs who were coping with uncertainty, trying to retain staff and intrigued by new markets that are cropping up in the crisis.
White said his greatest worry is loss of talent. Companies have spent years finding good people in a tight market, and these people will be needed to help the companies scale in coming years. He’s also been talking to young entrepreneurs who have had to lay off substantial portions of their workforce.
“It’s probably the hardest thing they’ve done as CEOs – to let people go when there’s no other choice,” said White. “We’re natural builders, and it’s just a disgusting thing to go through.”
He added that rebuilding the team will be the hardest thing to do in the recovery. “Building the team is the most expensive form of growth,” he said.
To preserve teams and to ensure future growth, White believes the key is to take steps to unlock the equity funding ecosystem, which is facing a range of problems.
Early-stage companies are doing what they can to extend the life of their cash accounts, but will eventually need more money, said White. But angel investors are stepping back because most if not all have suffered losses in the stock market. Much of the government funding announced recently doesn’t apply to startups (especially those without revenue) and debt is not an option for many of these companies. So early-stage VC funds are preparing to support their existing portfolios, meaning they can’t fund new companies in the current climate.
The early-stage companies will eventually need to raise more capital, preferably a Series A round (typically $2 million to $10 million). But to do that, they have to bring in new investors, and White said growth-stage investors won’t back a new company unless there have been face-to-face meetings and visits with the company. That’s impossible in the foreseeable future.
White noted that groups like the Council of Canadian Innovators, and the Canadian Venture Capital and Private Equity Association are lobbying the government to support venture capital funding, and he hopes there will be some movement on this.
“I am fearful we’re going to lose some good companies, and I just don’t want us to lose the top-performing companies,” he said. “A lot of [the current financial supports are] just not applicable to this type of company, but I do believe they [governments] are working on it.”
Disclosure: NBIF is a client of Entrtevestor.