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OP ED: More Cash Needed For Nova Scotia Startups

Ross Finlay took some management accounting courses at university, but you really don’t need an MBA to understand when he explains the numbers.

In its Now or Never report, Ray Ivany’s commission on the future of Nova Scotia called for 4,200 startups in the near future, a 50 per cent increase over the current 10-year average.

“That’s going to be a challenge,” says the co-founder of the First Angel Network Association, who understands from experience that it takes an absolute minimum of $50,000 to open the smallest new business.

Finding millions in new startup dough won’t be easy in a province of 900,000.

For the same reason, it’s going to be equally hard to fulfil another of the commission’s avowed goals: ensuring our five-year per capita venture capital investment — $24.80 over the 2007-11 period — is equal to or better than the Canadian average, which was $41.10 when the report hit the presses in early 2014.

By my calculations — unlike Finlay, I needed summer school to pass Grade 11 — that amounts to another $14 million or so that has to come from somewhere.

That wouldn’t be a huge amount of dough were it not for one undeniable fact: There’s just not a lot of capital out there in this province, no matter where in the funding cycle a company finds itself.

Bootstrapping — starting from scratch when an entrepreneur digs into their own pockets or convinces friends or family to invest — is always a challenge.

Finlay’s group of angel investors — wealthy individuals with a penchant for backing startup companies — has invested some $14.5 million in 30 Atlantic Canadian companies but now usually has to leave the region to find folks willing to take a risk on early-stage companies.

Build Ventures, Atlantic Canada’s largest venture capital fund, has $60 million to spend throughout the region. Thus far, only one of its five investments is in Nova Scotia, although the founders have said they plan to add seven to 10 companies to their portfolio.

No wonder word last year that a $50-million Chinese venture capital fund was on the hunt for small- to mid-sized Nova Scotia companies and hoped to announce its first investment in the next few months caused such a stir.

It’s always been a scramble to match capital with companies that need it around here, says Tom Hayes. The former president of GrowthWorks Atlantic Ltd., he’s the managing director of Pelorus Venture Capital Ltd., which runs a fund in Newfoundland and Labrador.

When he started out in the venture capital business in Nova Scotia some 30 years ago, the debate was the same as it is today: Is the problem the shortage in venture capital or that there’s simply not enough commercially viable companies in which that capital can find a home?

“The quality of companies today is far superior than it was 20 to 30 years ago,” says Hayes.

There are countless more support systems in place, including a whole range of government funding and lending bodies like Innovacorp and accelerators like the Halifax startup agency Volta.

What’s more, entrepreneurs in these parts now have winners to emulate: New Brunswicker Gerry Pond, who created Maritime millionaires with Radian 6 and Q1 Labs, and closer to home, Jevon MacDonald, who sold his Halifax startup Goinstant for $70 million in 2012.

That every young business student wants to be the next Pond or MacDonald would seem to be just the thing to bolster our entrepreneurial spirit.

Yet the fact that everyone wants to be an entrepreneur nowadays could, ironically, be part of the problem, says Ying Tam, president and CEO of Halifax startup Mindful Scientific.

“There has been an uptick in the number of entrepreneurs” says Tam, who has been involved in several startups that have reached the commercial stage.

“Everyone is asking for money, but not every startup is at the point where they are ready for investment.”

The end result, he says, is that there is definitely not enough money to go around.

There are ways to change that, everyone agrees. A few more high-profile local exits — startups being acquired or going public in a way that makes investors serious dough — will open up the faucets and let the money come in.

The startup community is still waiting to see whether there’s substance to persistent rumours that the Nova Scotia government is planning to launch a $25-million venture capital fund.

Upping the equity tax credit in Nova Scotia, which is currently 35 per cent up to $50,000, could also help shake some angel investment money out of the trees. In neighbouring New Brunswick, by comparison, the tax credit ceiling is a whopping $250,000.

New Brunswick, the last I heard, isn’t California’s Bay Area or any of the other venture capital hubs.

But it might be something for us to aim for if we really hope to reach those ambitious goals.