Be careful what you wish for

The TJ has a thoughtful opinion piece today about the need for access to capital in New Brunswick:

The No. 1 issue standing in the way of business development in New Brunswick isn’t rising power rates, trade barriers, a growing labour shortage or the high Canadian dollar, though each of these has a pronounced negative impact. The greater challenge is limited access to capital investment. Without the capital to start businesses or expand, New Brunswick’s economic boom will never arrive. Increasing access to capital is the prerequisite to economic growth, population growth, and improvements to public services.

The TJ is right – sort of. It does take ‘capital’ – or money for the rest of us – to expand or incubate new good business ideas. Specifically, funding not from the cash flow of the business but external in the form of loans or equity.

However, it is not just access to capital that is the problem, it’s the accessors of capital.

A few considerations.

There is an interesting story (legend) about the McCains. One day, a long time ago, they decided to built another plant. However, this time they actually needed external financing. As the story goes, the banks were clamouring over themselves to lend the McCains money.

A grizzled old veteran of New Brunswick’s economic development scene told me that New Brunswick entrepreneurs don’t want to take on external ‘equity’ partners – they don’t want to lose control over the business. I have seen this effect myself.

When businesses do access external capital it can go horribly wrong. An elearning firm was out of business 18 months after receiving external equity, an IT firm that I know made it six months.

Most of New Brunswick’s businesses are far too small for traditional sources of equity. Am I the only one that finds it amazing that a company can make the list of top 101 companies in Atlantic Canada by revenue with only $5 million in sales? I know that a few of the big guys like the Irvings aren’t in this list but come on – you can make the top 101 with $5 million in sales? There are something like 120k small businesses in Atlantic Canada and only 33 have sales of $100 million or more? 33? Cripes, this region has a population of well over 2.3 million. When people start to face the fact that we have a few large businesses, a very large government sector and tens of thousands of mom and pop shops, then we will start to get somewhere.

In the U.S., the small business sector is typically defined as firms up to either 500 employees or about $100 million in sales. Think about it.

Real entrepreneurs are not satisfied with being small. Lifestyle, small business owners are. Real entrepreneurs have a discontent about them and can’t rest until they grow their business. We have tens of thousands of small, lifestyle business owners that need ‘lines of credit, they don’t need real expansion capital.

So, I think we need to slightly reangle this thing.

1. We need more ‘entrepreneurs’ – even if we have to import them. Iowa and several other states have set up VC pools and attracted California VCs on the condition that they work with their young start ups and when they get the VC, they have to set up an operation in Iowa. That might be a good way to import entrepreneurs.

2. We need more business investment generally – don’t isolate this to small businesses. If Google puts a facility here that is massive business investment and at least as good as any other.

3. We do need to educate the few real, older, second generation entrepreneurs on the importance of accessing external capital. Of course, the problem here is that the naysayers will decry this. When Gtech buys out Speilo for $250 million, they say “there goes another one” lost to the evil multinational firm. You can’t have it both ways. The vast majority of capital sources are outside New Brunswick. Therefore if a firm here recieves equity from outside, they will lose at least some control. That’s a fact.

4. We should try at least a little to unlock a tiny tidbit of the billions in public New Brunswick pensions for economic development in New Brunswick. There is a little irony – maybe a lot – that our own government doesn’t feel like investing in its economy. It is safer to invest the New Brunswick teachers’ pensions in Ontario or India. Fun. I am not asking for the world here. Maybe 5% or 10% maximum. You need to be diversfied. It just seems that with our RRSPs, RESPs, public pensions, etc. that ‘diversification’ means anywhere but here.