I believe that one day we’ll look back on 2021 as the year in which the Atlantic Canadian startup cluster began giving back to the governments that have supported it.
From our standpoint, the story of the year in 2021 was the governments of Canada, Nova Scotia and Newfoundland and Labrador receiving a total of about $300 million from transactions involving Meta Materials Inc. and Verafin.
These moves were important because they mean the people who finance much of the ecosystem are seeing the benefits of supporting the sector.
Of course, there could have been other contenders for Story of the Year:
META’s Nasdaq listing – The Dartmouth-based materials company raised US$160 million when it listed on the Nasdaq, beginning life on the New York exchange with a market capitalization of more than US$2 billion. Though the share price has fallen, the company is still worth about C$980 million, just outside unicorn territory.
Introhive’s funding round – The Miami- and Fredericton-based SaaS company raised US$100 million in June, the largest funding round ever closed by a New Brunswick company. The venture also made Deloitte’s Tech Fast 50 for a third time, a record for the region.
Funding – Atlantic Canadian companies have raised about $500 million this year, including publicly listed ventures raising money through listings or private placements. It won’t break the record of about $651 million set in 2019, but this year’s funding was more widespread and will benefit more companies than ever before.
These are all big stories, but I doubt they’re bigger or more news-worthy than the Finance Departments in Halifax, St. John’s and Ottawa seeing some payback on more than a decade of funding.
When St. John’s based Verafin, which makes anti-fraud and anti-money-laundering software, announced its sale to Nasdaq for US$2.75 billion, we published an article estimating the government of Newfoundland and Labrador would receive about $90 million to $100 million in taxes from the deal. We consulted with accountants on the article, and no one has said the estimate is off-base. We could have added that the federal government would make about the same amount from the Verafin deal.
Then META listed on the Nasdaq in June, allowing Innovacorp to cash in on its $3 million investment in the company by selling its shares for $104 million – a return of 35 times. Innovacorp’s only shareholder is the Nova Scotia government, and it claimed $101 million of the proceeds for general revenue, meaning the money will fund government services.
Together these two deals have inflated provincial and federal government coffers by about $300 million. Verafin in particular is the gift that keeps on giving to its provincial government, as it now employs 800 people, most of whom pay taxes in the province.
Rewarding the taxman is big, firstly, from an ethical point of view as East Coast startups receive sound financial support from federal and provincial governments.
Second, these windfalls should vindicate those of us who have argued that financing startups is sound economic policy. Innovacorp, for example, has said it invested $62 million in startups since 2010. It now has a portfolio valued at $82 million and has returned $101 million to the government. The numbers show it’s sensible policy.
Mandarins in provincial finance departments are seeing clear evidence that placing money in startups is not tantamount to placing money in a bonfire. Two of the four provincial finance department this year are seeing nine-figures flow into their revenues because of innovation-driven companies. Many of these civil servants were sceptical about startups before but that icy viewpoint may be thawing. I doubt it’s a coincidence that less than a year after the Verafin deal was announced, the Newfoundland and Labrador government contributed $10 million to the second Venture NL fund.
Looking ahead to the next few years, it will be interesting to see how governments treat big exits, especially those involving Innovacorp and the New Brunswick Innovation Foundation. Innovacorp has stakes in publicly listed companies Swarmio Media and Appili Therapeutics (though both stocks are weak right now), and its portfolio company CarbonCure Technologies has said it is considering an IPO. There could be exits through stock market transactions or M&A in 2022 and beyond.
Another consideration is the five governments and private representatives are discussing liberalizing the patchwork of investment tax credits in the region. Currently, investors can only claim tax credits for investing in companies based in their own province, but startup support groups want that expanded so investors benefit from funding any Atlantic Canadian company.
These talks have been going on for eons, but two things have changed in the past year. First, there’s now a proposal under which the Atlantic Canada Opportunities Agency would “backstop” investments in which investor and target companies are in different provinces. Second, finance officials are seeing first-hand the wisdom of supporting startups. This file has gone quiet recently but the stars may finally be aligning to spur movement.
Disclaimer: Innovacorp and ACOA are clients of Entrevestor.
