Investors offer practical suggestions for cash strapped entrepreneurs
As told to Quentin Casey
In late 2012, LeadSift, a Halifax startup formed by four international students, secured $1.1 million from A-list tech investors, including $500,000 from OMERS Ventures, the venture capital arm of one of Canada’s largest pension funds. LeadSift, which is focused on social media marketing, had to turn investors away.
In June, the company announced a “seed extension round”, again led by OMERS.
LeadSift CEO and Calcutta native Tapajyoti Das says the undisclosed funding haul will act as a “cushion”, allowing the company to secure more customers before seeking a Series A round of $5 million, likely at the end of this year.
“As we’re starting to see some good traction with clients, we’re doubling down on business development and marketing,” Das says. “The goal is to become a much bigger company than we are.”
The LeadSift experience proves that East Coast start-ups are able to raise impressive amounts of cash. How and where should your start-up seek financing? Atlantic Business Magazine contributor Quentin Casey talked to investors to get advice, strategy, and a list of potential funders.
Nicole LeBlanc is well versed in the finance options available to East Coast start-ups. LeBlanc is currently associate director of venture capital with BDC Capital. Her main focus is BDC’s convertible note program, which is run in partnership with 10 start-up accelerators across Canada, including Propel ICT on the East Coast. Start-ups graduating from the select accelerators are often eligible for a BDC note of $150,000 for IT start-ups, $250,000 for clean tech and hardware companies, and $500,000 for life sciences companies.
The note is a loan that is later converted into shares, based on the valuation of a lead investor. In three years, BDC has doled out convertible notes to 116 start-ups, including 13 in the Maritimes.
Though now based in Toronto, LeBlanc still covers the East Coast start-up scene extensively. She previously worked at the New Brunswick Innovation Foundation, a government agency that provides early-stage funding allotments between $100,000 and $1 million. Last year, NBIF invested $12.5 million in New Brunswick start-ups.
Says NBIF chief executive Calvin Milbury: “We’re looking for start-ups with a real in-depth knowledge of the market, in particular the pain points in that marketplace… We’re also looking for companies that are not blind to the fact that the market is a global market. We want them thinking big, aiming high.”
LeBlanc says there are many more sources to pursue, including Innovacorp (a Nova Scotia government agency focused on early-stage funding); ACOA (which has funding to help start-ups with staffing, marketing, business development, and exporting — often in the form of repayable loans); the First Angel Network; and the NRC’s Industrial Research Assistance Program (IRAP), which helps with technical development.
Then there are the various provincial grant and loan programs — covering topics such as export and talent development. There’s also the Scientific Research and Experimental Development (SR&ED) program, a federal tax program meant to encourage private sector R&D.
“Investors in Atlantic Canada are very forgiving and are very helpful. But I think it’s important for startups to make sure they’re prepared,” LeBlanc says. “If they’re going to NBIF or Innovacorp or BDC, they should talk to some companies that are already in our portfolios to find out what we look for, what questions we ask.”
The East Coast is home to a number of new capital sources, most of them substantially backed by government. Halifax-based Build Ventures, which was launched by the four Atlantic provinces, has $65 million under management. It has invested in five companies.
Then there’s Pelorus Venture Capital Limited. Launched in May, the fund currently sits at $12 million, of which $10 million was put up by the Province of Newfoundland and Labrador. The goal is to hit $20 million by tapping accredited investors.
The fund aims to encourage new angel investment by providing a professionally managed fund where angels can pool their money. Investors will also receive a 30 per cent provincial tax credit. “It’s all about making angel investing easier for the angel,” says Chris Moyer, the fund’s director. “(Previously) everyone kept going to the same angels. And that put stress on the community.”
Moyer recently pitched his fund at the Atlantic Venture Forum in Halifax. He says the fund with likely make 20 to 30 seed investments of between $150,000 to $300,000, most of them within Newfoundland and Labrador. Two-thirds of the fund will be reserved for follow-on investments. Moyer expects to make four to five investments a year. An initial investment is expected soon.
East Coast start-ups are also securing funds from investors outside the region. Earlier this year, Toronto-based McRock Capital led a $3-million Series A round in Moncton’s RtTech Software.
And more money is coming in. At the Atlantic Venture Forum, Sophie Forest, the managing partner of Brightspark Ventures, explained how her Toronto- and Montreal-based VC firm is moving further into Atlantic Canada.
Brightspark was a seed investor in Radian6, the New Brunswick tech company purchased by Salesforce for more than $300 million. The firm is now partnering with Gerry Pond’s East Valley Ventures to pursue East Coast investments more consistently, and with a local presence.
Forest expects to make two deals a year in the region, with an average deal size of $1 million, plus follow-on investments. Over five years she expects to invest up to $15 million. Brightspark’s target investments are software companies seeking amounts that typically fall between seed and Series A funding rounds. The firm recently invested in Halifax-based InNetwork. “We know the region, we know the quality of deals,” she says.
When funding companies, Brightspark combines its own money with that of accredited investors, which East Valley Ventures is helping Brightspark find. “It’s new cash. That’s what gets us very excited,” Forest adds. “There needs to be new capital in the region and we can’t continuously rely on government.”