Private equity and venture capital
One of the writers used to work with a colleague who said the first places a new company looks for money are the three Fs: friends, family and fools. But having exhausted the first two, and once a company can no longer find any fools, where does it go for funding to achieve its business goals?
Some companies seek out private equity (PE). PE is simply money available to companies from outside of the public markets. PE sometimes takes the form of a venture capital (VC) fund, which is a pool of money set up for the purpose of allowing investors to get in at an early stage of a company’s life, whether as a ‘startup’ or something slightly more ‘mature’. Sometimes a particular VC fund may focus on companies active in a certain sector or industry.
These days, a lot of VC funds are focused on technology companies because investments in those companies have provided some spectacular returns for their early VC investors in recent years. Imagine being in on the ground floor of Twitter.
Here in Manitoba, after the close of the Crocus and ENSIS VC funds many moons ago, there has been a local venture capital drought. And the numbers don’t lie. In the first quarter of 2022, the Canadian Venture Capital Association logged just two VC deals in Manitoba worth $1 million and no PE deals at all. Compare that to six deals worth $107 million in Saskatchewan, and six in Nova Scotia worth $42 million. In the case of both VC and PE deals, Manitoba ranked dead last of all Canadian provinces for Q1 2022.
There is clearly a gap in the market.
Some companies seeking investment have gone to other jurisdictions – sometimes close to home. Recent examples are the investments made by Conexus Venture Capital (a Saskatchewan-based VC fund hatched from Conexus Credit Union) in Manitoba upstarts Taiv and Callia Flowers. We have also seen a Manitoba-born company move to another jurisdiction as a condition of a VC fund’s investment.
Once mature enough, companies may be able to attract a PE fund. In the last few years, we have acted for the sellers of multiple Canadian technology companies who have sold to foreign-based PE funds. Usually these are somewhat mature software- as-a-service companies which sell at high multiples of EBITDA. However, PE funds may not be interested in investing in the early stages of a company.
So where is the VC money?
Well, things seem to be looking up for Manitoba companies. The government of Manitoba recently announced that it will be investing $50 million in a “fund-of-funds” strategy to kick-start the venture capital industry in Manitoba. This fund will aim to provide support through other VC funds for the companies like those referred to above, who have suffered through the VC drought of the last decade or more. In our preliminary discussions with a representative from the province of Manitoba, we are very optimistic about what this might mean for Manitoba startups in all sectors, and particularly in the Manitoba technology community.
Every day, the lawyers at our firm are working with great people creating innovative technology in great companies right here at home. We believe these companies can grow from seed to healthy exit at home here in Manitoba with the right supports. We’ve done it with our clients before and we look forward to helping them and others do it again. If you’d like to talk to us about your startup idea or your growing company, we would be pleased to chat.