Nova Scotia commits another $25 million to two venture capital funds

HALIFAX — Nova Scotia’s government has plans to put another $25 million into two venture capital funds, with the expectation that other Atlantic provinces and private investors will join in.

Innovacorp Inc., a Crown agency that already has invested in a $65-million regional venture capital fund started in 2013, announced Friday it plans to put a second round of investment into startup firms in Atlantic Canada.

The agency says it will commit to $15 million to be invested by fund manager Build Ventures, with the expectation that New Brunswick, Newfoundland and Labrador, Prince Edward Island and private venture capitalists will become partners in a fund that is hoping to raise between $50 million and $75 million for investments.

There is also a plan to invest a further $10 million in another venture fund, though a manager hasn’t yet been chosen.

“They will make seed investment in the most promising start-ups in Atlantic Canada,” said Charley Baxter, the vice president of investment at Innovacorp.

Baxter said the government involvement is part of an effort to help encourage the growth of a private sector venture capital industry in Atlantic Canada.

Venture capital funds typically start rounds of investment at the mid-point of an existing portfolio of investments, in part to ensure the continued existence of the current fund and its management.

The first round of investments in the Innovacorp project led to the selection of 14 Atlantic firms, many of which are still in their early stages, with about $36 million, or 55 per cent, of the original $65 million flowing to the companies to date.

The success of venture funds tend to be measured later in the 10-year cycle. Articles published in the Harvard Business Journal have suggested that if a fund invests in 10 companies, it will have one or two success stories, three to four will break even and five will go bankrupt and cease operations.

That means the successful firms need to make a major breakthrough in order for the fund to be profitable.

Baxter said it’s too early to judge the success of the first round of investments, as more years are required to develop the firms.

In the original venture capital fund, Nova Scotia invested $15 million, New Brunswick also invested $15 million, while Newfoundland and Labrador invested $10 million and Prince Edward Island invested $2.5.

The Business Development Corp. provided $10 million, and there was also a private investor, Technology Venture Corp. of New Brunswick, that brought money to the table.

A 2014 study of the government’s role in venture capital in Nova Scotia noted a gradual growth of venture investment over the past 20 years.

In 1998, the province was attracting just US$46 million in investment, or .6 per cent of investment in Canadian firms. By 2013, that had grown to US$101.2 million, or almost two per cent of the Canadian total.

Meanwhile, the region has seen some successful startups that were fuelled by venture capitalists.

Halifax-based GoInstant received investment from three well-known U.S.-based venture capital funds for its technology. The firm was reportedly sold for close to $70 million.

Radian6 Technologies Inc. of Fredericton, which created social media monitoring tools, was purchased by in 2011 as part of a deal valued at US $326 million.

Baxter points to these success stories as a helpful track record that has helped increase venture capitalists’ interest in the region.