Talks are now under way between Innovacorp and the Nova Scotia government about what should be done with the $104 million that Innovacorp received from its investment in Metamaterials Inc.
Last week, Entrevestor reported that the Nova Scotia government’s early-stage venture capital agency made a return of $101 million on its $3 million investment in META. That’s a total return of 35 times, and a superb performance for a fund whose financial assets amounted to just $36 million five years ago.
I’ve spoken to several people familiar with the matter in the past few days, and I hear that Premier Tim Houston’s government wants the entire $101 million to go toward the general funds of the provincial government. Innovacorp is arguing that this money should be used to further support the innovation ecosystem – not necessarily be kept within Innovacorp itself, but be used to support innovation-driven enterprises within Nova Scotia and Atlantic Canada.
This is a contentious issue in the startup community, and I’ve already had one seasoned founder call me out of the blue to express his outrage (his word) at the government’s temerity. I should highlight that Innovacorp and the provincial government are clients of Entrevestor, then offer six thoughts, many of them contradictory, on the subject:
- Innovacorp deserves to be rewarded – Have you tripled the value of your RRSP in the last five years? Me neither. But the team at Innovacorp has more than tripled the value of its Nova Scotia First Fund in that time. And unlike private-sector VC investors, Innovacorp’s fund managers don’t benefit financially when they produce high returns. What the team at Innovacorp wants is for the fruit of their labours to continue to build up great companies, for the benefit of the economy. The greatest risk of ignoring that reasonable demand is that Innovacorp’s investment team could grow frustrated and be lured elsewhere. It’s in Nova Scotia’s interest to keep the team together given their stellar performance.
- The startup community has to acknowledge the massive demands facing the government -- The pandemic whacked Nova Scotia with a $341 million deficit last year, and Houston came to power with a promise to spend an extra half-billion on healthcare. There’s now an 8.4 percent unemployment rate, and the word “crisis” is being applied to homelessness, housing costs, care for the elderly, to name a few. The startup community needs to understand the dire need for funding in other areas.
- Nova Scotia is doing well off the startup community and should perpetuate its success – Entrevestor’s Databank showed Nova Scotia startups employed 3,700 people at the end of 2020. We can round that up to a conservative estimate of 4,000 people by adding in staff of companies that have exited like Kinduct or Ocean Nutrition Canada. Innovacorp estimates the average salary paid by its portfolio companies is $70,000, so the total payroll of startups in Nova Scotia is probably about $280 million. If those employees pay 40 percent of their gross salary in taxes, that means all levels of government make about $112 million off startups. Each year. Just in individual taxes. It’s in everyone’s best interest to continue to perpetuate this success.
- We need more transparency on this issue -- The startup community, the broader business community and the general population should be apprised of the situation, the options and the strategies. We should be informed of the government’s intentions and, ideally, be told how Innovacorp would like to deploy the $100 million. There are limits to how many early-stage companies are investment-worthy, and it’s not a great idea for a provincial government agency to be making later-stage investments. Maybe the agency wants to make further investments in independent funds like Build, Concrete or Sandpiper ventures. Whatever it envisions, it should be made public.
- It’s outrageous to think the community could out-outrage the already outraged – I’ve heard a few people say the startup community needs to get a campaign going to express its outrage. It’s not a battle the startup community would win. In case you haven’t noticed, these are angry times in politics. There are voters who believe strongly – to put it mildly – that governments spend too much money supporting private business when so much money is needed for health and other social programs. The startup community does very well off government largesse, and a campaign of outrage would only make startup founders look selfish in the public eye.
- There’s room for compromise – I’ve tried to present both sides of this debate, as both have their merits. There’s enough money involved here that it could be split and leave both sides feeling good about it.
