Invest Atlantic concluded yesterday with a reasoned plea to allow the coming Regional Venture Capital Fund to make investments beyond the borders of Atlantic Canada.
The fund, being championed by Nova Scotia and New Brunswick, will have a better chance of raising capital, rewarding its backers and supporting Atlantic Canadian companies if it invests in other markets as well as the four eastern provinces, experts said.
``Putting handcuffs on the management team to look only at opportunities in the Atlantic Region would in my mind be a mistake,’’ said Dominique Bélanger, Director, Strategic Initiatives, Business Development Bank of Canada.
Bélanger was speaking in the Regional VC Fund session at the close of Invest Atlantic, the pan-regional conference for investors and entrepreneurs. The session was sponsored and moderated by Tom Hayes,
Both Nova Scotia and New Brunswick have committed $15 million to the regional fund, and have begun a search for a team to manage it. It is expected to begin operation in 2012.People familiar with the matter say the current organizers hope the fund attracts more money from four sources: the governments of Canada; Newfoundland and Labrador; Prince Edward Island and private backers.
The exact terms of the fund haven’t been drawn up, and there are plenty of questions to be answered, including where it can invest. The fund will undoubtedly make most of its investments in Atlantic Canada because VCs customarily invest close to home, where they hear of early opportunities and know the entrepreneurs.
However, Bélanger (and other professionals in the field) believe the fund will have a greater chance of success if it can also invest elsewhere.
The VC world is a club, and VC fund managers tend to invest alongside peers with whom they work well and have had success. If the Atlantic fund could invest in Boston, New York or London, it would encourage VCs from other places to co-invest in Atlantic Canadian opportunities. We’ve already witnessed a similar occurrence: Innovacorp put money into the Montreal-based Cycle Fund, which came back a few years later and invested $4 million in LED Roadway Lighting of Halifax.
``If you don’t have the ability to invest beyond the Atlantic Region, then you can’t build those relationships,’’ said Bélanger.
Gregory Smith, the President of Canada's Private Equity and Venture Capital Association, also favoured placing no geographic restrictions on the manager or management team. He said the team should comprise people from the Atlantic Region who are in touch with the local market, rather than managers brought in from elsewhere. Bélanger said the investment manager should invest a ``significant’’ amount of money in the fund as that commitment will ``clarify his thinking’’ when making an investment.
Smith flagged the challenges there may be in paying for the fund’s administration. For example, if it ends up at $50 million, then a 2% annual commission would equate to $1 million. He questioned whether that would be enough for an operation with offices in four provinces.
The management team and the terms will be important because the fund will need to attract private capital, and the individuals and/or institutions backing the fund will need assurance that it will earn an attractive return. This is important not just now but in coming years, as the organizers raise successive funds and need to boast success to attract investors.
Following the session, Smith explained we need more venture capital across Canada to complete the ecosystem for young companies. There are ample sources of seed and early stage finance, but without the venture capital backers who can put $5 million or more into a company, entrepreneurs are starved for capital just when they’re beginning to succeed, then they exit too early and too cheaply, and the whole system is starved of funds that could be reinvested.
Across the country, he said, we need more investment in innovation coming from individuals, government, corporations, institutions and foreign investors.
Entrevestor’s take on this: The Regional VC Fund has to be given the greatest chance possible to maximize returns for investors, and that will mean the odd investment outside the region.
Therefore, the manager of this fund will have to possess special qualities not usually seen in a VC job description. Specifically, he or she will have to have incredible acumen in politics and public relations. The manager will have to manage the relationship between at least two and possibly five governments. No mean feat.
But beyond that, this lucky soul at some point will have to convince the local media of the wisdom of investing millions of taxpayers’ dollars in a venture outside the region. The explanation will have to convince voters, politicians and entrepreneurs who’ve been turned down for funding. It will be a crucial part of the mandate.
Disclaimer: Peter Moreira helped to organize Invest Atlantic.
