The Way I See It… by Michael C. Volker
Why a
vibrant junior capital market is needed
Starting a
company takes money. For most technology entrepreneurs, especially the
first-timers, raising equity capital is the first and usually toughest
challenge in their career.
As companies
grow and mature, the task of accessing capital becomes easier once they have
satisfied customers and steady cash flow. The uncertainty as to the feasibility
and viability of the venture is then greatly diminished.
At the outset,
the risks are enormous. The people, the products, the business strategy, and
the market’s response are all unknown factors. Early stage investors are
gambling on long shots.
There are only
two types of investors: individuals and organizations. Individuals are the
founders themselves, people they know and arms-length investors such as angels
(successful entrepreneurs betting their own money). Organizations range from
groups of individuals (e.g. partnerships, capital pools, clubs) to venture
capital companies, investment bankers and banks.
There’s a very
important philosophical difference between these two categories of investors.
Individuals such as angels are accountable only to themselves and when
assessing an opportunity they tend to look for reasons why they should invest. Venture capitalists are risking other
people’s money and it is their duty to think of all the reasons why they should not invest. It’s their job to take only very
calculated risks on behalf of their investors.
This is why it
is so difficult for startup companies to get any form of institutional
investment. In contrast, angels have a completely different mindset. They will
invest based on their instincts about the founders, their own industry
knowledge and because they can experience vicarious entrepreneurship.
Finding
wealthy angel type investors is difficult enough let alone getting them to buy
in. I think it was one of our politicians who once said that in Canada we have
an acute shortage of wealthy people. Securities regulations, depending on which
province you live in, preclude modestly wealthy almost-millionaires from
investing small amounts of capital, say $10K to $100K. Only the wealthy are
really allowed to invest and when they do, they’ve had to, by law, invest much
larger amounts (usually over $100K).
On the other
hand, anyone may invest (or speculate) any amount in the shares of a publicly
traded company – regardless of its size and maturity. Shares can be bought and
sold almost instantly without much fanfare and without investor restrictions.
Although the risks are enormous, so are the rewards. There are many examples of
successful technology companies - QLT Inc., Westport Innovations Inc, ALI
Technologies and StressGen Biotechnologies to name a few - that all got started on the Canadian
Venture Exchange (CDNX) and who received their early financing from the
not-so-rich.
This is
exactly why there’s a need for a stock exchange that allows young, unproven
companies to offer their shares to many small speculators in the public at
large.
In the past
decade, our disparate provincially regulated securities commissions have
emphasized investor protection over business development. This appears to be
changing with the B.C. and Alberta Securities Commissions leading the way by
adopting a caveat emptor approach through adequate corporate disclosure.
High overhead
costs, the time, the legalities and administrative burden associated with
public offerings have kept companies out of the market. Investors have
retreated from the public markets in general but the junior markets in
particular have suffered because of the absence of new deals. Liquidity in this
market has dried up.
Even the
brokers have retreated from the junior markets. The banks and larger dealers
have gobbled up the junior brokerages. They now focus on mutual funds and large
cap companies. The juniors have been orphaned. The CDNX must open its doors to
new players – boutique dealers, financiers and angels and allow them to bring
in new listings, relaxing the traditional sponsorship rules. It must also promote itself a lot more as
financing alternative by talking up its own successes.
The way I see
it, a junior equity exchange such as the CDNX is the only way to spread risk
among many investors and give entrepreneurs access to risk capital. But to make
this really work, we need to increase deal-flow and encourage junior brokers,
deal-makers and market players back into the game.
Michael Volker is a high technology entrepreneur and director of Simon Fraser U's University/Industry Liaison Office. He runs Vancouver’s Angel Technology Network and is a director of the BC Advanced Systems Institute and the Vancouver Enterprise Forum. He may be reached at mike@volker.org.