Federal wage subsidy leaves startups in the dust, says VC fund director

Posted on March 31, 2020 | Sarah Smellie | 0 Comments

Chris Moyer wants to be clear: he’s fully on board with the Canadian government’s 75 per cent wage subsidy for businesses.

But the revenue test companies must pass to qualify for the subsidy will leave startups behind, he says.

“The government is doing the right thing, but for the startup ecosystem it doesn’t have the impact that it should have and that it can have,” says Moyer, the director of Pelorus Venture Capital Ltd., a Nova Scotia-based venture capital firm.

Pelorus manages the Venture NL fund, which has a portfolio of nine tech startups based in Newfoundland and Labrador, including CoLab and Mysa.

“Changing the test will have a material impact on saving an industry that Canada needs to grow, and that Newfoundland needs to grow, and where the future really lies,” Moyer says.

The Canadian government announced Monday that it was offering a subsidy to cover 75 of wages for any company showing a revenue drop of at least 30 per cent due to the COVID-19 pandemic. The idea is to help businesses big and small, as well as non-profits, avoid laying off staff.

But startups are in a different stage of the game than established businesses, Moyer points out. Some may be in the pre-revenue stage, where they’ve hired programmers and project managers for builds, some may have had their first few contracts which began early in the year, he says.

Neither of those scenarios would show lost revenue, but companies in both scenarios would still be hit hard by COVID-19 and would need help keeping their employees on the payroll. 

Venture NL’s figures show that after investment from the fund, those nine companies hired 87 new employees, and have a collective payroll of just over $10 million.

READ MORE: A look at Venture NL’s portfolio and its impact on the N.L. economy

How many of those companies will be affected by the revenue test? “All of them,” says Moyer.

Salaries make up 60 to 80 per cent of expenses

Moyer’s research shows that startups also have a different overhead structure than most established companies, he says. 

“Between 60 and 80 per cent of all [startup] company expenses are wages,” he says. “The real cost to these companies are their people and it’s costly to let people go and it’s costly to bring people back and to train them.”

Startups across Canada will be hit by the revenue test fail, he says, but with finding and keeping talent such a pressing issue in Atlantic Canada, startups in this region could be hit especially hard.

Jeremy Andrews, one of CoLab’s founders, leads a presentation in St. John’s. (Photo by Sam Russell)

Moyer points to the list circulating among national tech companies of high-tech employees who have been laid off because of COVID-19—as of March 31, there were just over 2,000 names on the list.

“We don’t want that to happen here,” he says.

He says the trick is to eliminate the revenue test for startups and come up with some other criteria by which they could qualify.

Supporting startups = supporting future economy

Moyer says helping startups keep staff on board so they can keep following through with their businesses growth plans is an investment in the economy that will emerge when the pandemic ends. And many of the tech startups in the country and in the Venture NL portfolio are building products geared toward that economy, he says. 

Pointing to CoLab, a St. John’s based company building cloud-based software that lets engineering teams collaborate on projects and builds, Moyer says big companies will come out of this crisis with more experience using remote workers and cloud computing. That’s great news if  a company like CoLab can stay on track right now.

“If the right companies are given the supports to get through this, they’ll come out better off,” Moyer says.

Atlantic Business Magazine has asked the federal government for comment but did not hear back by publication time.

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