The Regional VC Fund, which launched last week, was created largely to solve the lack of capital in Atlantic Canada.

It was an age-old complaint from entrepreneurs in the region: there simply wasn’t enough capital in these parts to nurture world-class businesses. But now that problem will abate – abate, but not vanish – with the creation of the new fund. And because the problem of scarce capital will linger, the creation of this new fund should be considered just a first step toward a healthier financing regime.

The three Maritime provinces last week announced that the yet-to-be-named fund will launch with an initial capital of $37.5 million, including investments of $15 million from both Nova Scotia and New Brunswick and $2.5 million from Prince Edward Island. Technology Venture Corp. of Moncton will kick in a $5 million contribution, bringing the prestige of a private investment.

Patrick Keefe, the Innovacorp Vice-President who will leave the early stage funding agency to manage the regional fund, said his aim is to find 10 to 12 fantastic Atlantic Canadian companies to back. By the time the fund is fully up and running, he expects it will have commitments of $50 million to $60 million.

There is absolutely no bad news in this. Keefe is universally admired and the fund will no doubt help a dozen companies in the next few years. But no one should pretend that it is the silver bullet that will slay the demon of insufficient capital in the region.

Just check out the numbers.

Assuming the fund reaches $60 million, the 10 to 12 companies it backs will receive over time between $5 million and $6 million each. My guess is that in the first two years, Keefe and his team will invest between $1 million and $2 million in about eight to 10 companies, then proceed accordingly. He’ll take on a new company here and there, and provide follow-on funding to these core portfolio companies as needed. Venture capital firms like to back target companies with a bit of money early, and keep money in reserve so they can participate in follow-on rounds, possibly bringing in other VC funds as co-investors. This fund will be no different.

All of which is great for the 10 to 12 companies that get funding. But there are at least 50 companies in the region that are looking for $2 million or more of equity financing in the next two years. This single fund simply won’t have the capacity to meet the demand for all that follow-on capital.

What we’ve seen in the past two years is a huge acceleration in seed funding, companies raising between $250,000 to $1 million. That’s a healthy sign for Atlantic Canada. Lots of young companies are gaining traction. But suddenly there is a swarm of companies needing follow-on funding like we’ve never seen before.

Some are meeting this need for capital by spending more time in larger centres, foraging in San Francisco and Boston for genial billionaires. Some are looking for funding from local VC funds, or courting wealthy individuals, or seeking some combination of all these solutions. What’s needed now is for the four provincial governments to realize that more is needed in order to foster growth in the fastest growing segment of the economy. 

The four Atlantic Provinces should work toward a regional equity tax credit with an annual maximum credit of $250,000. It would allow a range of companies to assemble a syndicate of eight investors from any province and come up with that $2 million so many entrepreneurs need.

It’s good for the companies, and it will keep the capital gains from these companies in the region, so we’d create wealth among people with a disposition to invest. It would be the perfect corollary to this admirable fund they’ve just launched.