Until recently, Atlantic Canada has been a no-go zone for global VC funds. But thanks to a shift in attitudes, more capital is flowing into the region than ever before

by Peter Moreira

When local entrepreneurs Paul LeBlanc and Jay Aird were preparing to launch a new gaming company last year, they decided to run their plans by one of LeBlanc’s old classmates. The two envisioned a company that would, among other things, offer games to regulated lotteries in an effort to entice younger people into the lottery sphere. Why? Because almost every lottery in the world is facing the challenge of an aging clientele. But video games appeal to younger people, and the business partners’ plan could introduce a new generation of clients to lotteries.

Confident in their model, LeBlanc sought the feedback of Paul Gauthier, a Dalhousie University graduate who has worked with several Silicon Valley companies and is now the CTO of Groupon, a deal-of-the-day website localized to major markets. Gauthier loved the plan, so much so that he decided to invest in Karma Gaming International and also join the board. In November of 2011 he offered up $250,000 and over 20 years of his own expertise in tech start-ups.

The Karma Gaming story is becoming more and more common in Atlantic Canada. Start-ups in the region are more frequently landing funding from other parts of Canada and the United States. That means capital is flowing into the region’s fastest-growing companies, creating jobs, boosting exports, and generating success. But the true value is that it links start-ups to invaluable contacts who can be customers, advisers, or even purchasers down the road.

The strength of this movement is best illustrated by looking at the venture capital statistics last year for Nova Scotia, using that province as a microcosm for the region. By any definition, 2011 was an extraordinary year. According to the Entrevestor Databank, venture capital firms announced a record $46.5 million in financing, compared with $10.2 million in 2010 and $14.5 million in October of 2009.

The main reason for the increase: one massive deal with Dartmouth-based Unique Solutions Design Ltd. The company makes scanning booths for U.S. shopping malls that help consumers find perfect-fitting clothes for their body shape. Last year Unique Solutions landed $30 million in financing from Toronto-based Northwater Capital Management Inc.’s Intellectual Property Fund. It was the largest VC deal in the region, and it may be some time until we see another of this size.

That said, even if the Unique Solutions deal was stripped out of the total, Nova Scotia would still have reported $16.5 million in VC investments. What’s more, almost $6 million of that amount came from funds outside the region. Cycle Capital Management of Montreal put $4 million into LED Roadway Lighting Ltd. of Halifax, and a host of investors from Silicon Valley placed $1.7 million into GoInstant, a tech start-up that allows people on different computers to work on the same screen.

It’s a promising development in a region that has, until recently, been a no-go zone for global VC funds. And it is the result of a new attitude on the part of VC funds, a conscious effort to develop relationships outside the region, and the maturity of both Atlantic Canadian companies and infrastructure. “We’re witnessing much more interest in the area,” says Damien Steel, a fund manager with OMERS Ventures in Toronto. “Repeat A-level entrepreneurs like Dan Martell from Clarity are returning to Atlantic Canada to start their next companies, and this should have a ripple effect within the region.” Martell is a serial entrepreneur living in the San Francisco area who recently launched Clarity, a web-based application that links budding entrepreneurs to advisors and experts.

According to the Entrevestor Databank, one huge factor in the internationalization of Atlantic Canada’s start-up culture is that, for the first time, the region can boast several high-profile exits by investors. In 2011 social media analysis company Radian6 Technologies of Fredericton sold to Salesforce.com for about $370 million, and Q1 Labs, a security intelligence company, was taken over by IBM in a deal reported to be worth more than $500 million. More recently, Dartmouth-based Ocean Nutrition Canada, which makes omega-3 nutritional supplements, was sold to the Dutch conglomerate DSM for $540 million. And in July, GoInstant agreed to be taken over by Salesforce.com for a reported $70 million.

These exits are proof that investors can make money in Atlantic Canada. Consequently, investors are worrying less about the location or pedigree of an entrepreneur.

“The trend is even bigger than what you’re seeing in Atlantic Canada,” says Mike Grandinetti, the managing director of Southboro Capital in Boston. “I think the cultural change we’re seeing is global, and Atlantic Canada is just one beneficiary of it.” Grandinetti wears many hats; he’s an investor, mentor, serial entrepreneur, start-up guru, and professor of entrepreneurship and digital marketing at the Hult International Business School. He also has a keen interest in Atlantic Canada, having worked with several companies and lectured extensively in the region. His message is that the investment world is changing and investors are looking for the best companies, regardless of where they are based.

Companies are becoming more global not only in seeking export markets but also in participating in international mentorship sessions.

For example, in May Grandinetti took part in Propel ICT’s road trip to Boston (see Know How on page 34). The trip included entrepreneurs from its Launch36 accelerator program and New Brunswick’s McKenzie Accelerator program and was organized to teach the group about the infrastructure for start-ups in that city. Grandinetti invited the group to attend one of his lectures on new business venturing at Hult.

In addition, the most recent cohort of 48 Hours in the Valley—an intense mentorship session sponsored by C100, the group that helps Canadians find their way in Silicon Valley—includes two Atlantic Canadian companies. The first is multi-channel marketing company SimplyCast in Halifax. The second is St. John’s-based Celtx, which provides software for the film industry. Both will travel to California to broaden their network of contacts, including various VC funds. In the end these contacts will likely help them raise their next round of funding. “You’re beginning to see the incredible mobility of entrepreneurs who can get into the best accelerators in the world regardless of where they are based,” says Grandinetti. “That means entrepreneurs and support groups in Atlantic Canada are building relationships with important innovation systems like never before.”

According to Ben Forcier, a Halifax-based partner at Espresso Capital Partners headquartered in Vancouver, one key factor is that the relationships that have been built over the past several years are now bearing fruit. For example, Halifax-based Innovacorp, where Forcier used to be vice-president of investment, developed one new key relationship by investing in Cycle Capital, a Montreal-based $80-million cleantech fund, in 2009. That investment helped LED Roadway land a $4-million investment from the fund in June 2011.

The final piece of the puzzle is the maturity of Atlantic Canadian ventures and their ecosystem. Groups that support innovation-based, high-potential entrepreneurship in the region—such as Innovacorp, New Brunswick Innovation Foundation, Innovation PEI, and the Genesis Centre—are becoming better at developing market-ready companies more quickly. They’re also improving their ability to involve local entrepreneurs in programs in other parts of the world to heighten their exposure. And they’re being reinforced by such groups as Propel ICT and The Next Phase Management Partners, a private company that prepares start-ups for production and investment. The result is that companies not only have the opportunity to participate in international pitching but they’re also being prepared to reach a level at which they can do so effectively.

Looking ahead, there’s every reason to believe this trend will continue. Atlantic Canadian start-ups are raising larger amounts in their early rounds than ever before. In Nova Scotia alone, 11 venture capital investments were announced in the first four months of 2011, and six deals were for $1 million or more. This illustrates that companies are raising more money in their seed rounds than they used to. When they return to the market for subsequent rounds, they’ll be looking for even larger amounts, likely $2 million to $5 million each. And the few sources of capital in Atlantic Canada mean they most likely will have to look for funds in other parts of the world.

That said, consider this: Grandinetti sits on the board of three Atlantic Canadian companies: medical-imaging Halifax Biomedical in Mabou, N.S.; risk-analysis software provider ClearRisk in St. John’s; and music-industry administration-software company Marcato Digital Solutions in Sydney. “I’m helping them raise their next round of capital,” says Grandinetti. “I believe all of them will be successful in raising meaningful capital.”

By “meaningful” money, Grandinetti means an investment from well-connected people in other places. But what’s so meaningful about it? These people and funds are often tremendous mentors for young companies. They’re well connected and can help introduce customers to portfolio firms; they can also help find other investors for subsequent rounds of funding. They can even help find buyers, which is a huge factor in successfully concluding a venture.

Atlantic Canadian innovators and the global investment climate are changing in unison, which means more venture capital will be channelled into this part of the world. “We used to tell fund managers that you can build a tech-enabled business anywhere,’” says Espresso’s Ben Forcier. “We still say that in Atlantic Canada, but now we can point to specific exits to back it up.”

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