By Peter Vanderlee
Ottawa’s innovation sector has long been constrained by limited venture capital (VC) investment, a situation now further eroded by a recession that has stifled fund raising efforts through the past two years.
According to today’s Ottawa Business Journal, data from a report released Tuesday by Canada's Venture Capital and Private Equity Association shows Ottawa-area investments totalled $10.94 million in the third quarter, down from the $51.5-million peak recorded during the same period a year earlier, and also from the $18.39 million invested in the second quarter of 2009.
So if you’re a growing company in Ottawa with an innovative product or service that’s market ready, but are cash constrained and have limited prospects for raising traditional venture capital in the near future, what are you going to do to survive, much less grow?
One solution – look to a public venture funding program that has been fueling the growth of resource, technology and innovation companies across Canada since 1987, and is available to Ottawa companies.
“Canada has long had limited access to traditional venture capital, in spite of vibrant resource, technology and life sciences sectors that badly needed to find a sustainable way of sourcing seed and early stage growth capital for emerging companies showing strong market promise,” said Glenn Williamson, a Phoenix-based investment banker who moved from Canada to Arizona more than 20 years ago, and is also founder and CEO of the Canada Arizona Business Council. “That’s what led to the development of the Capital Pool Company (CPC) program offered through the TSX Venture Exchange (TSX-V).”
The program allows 3 to 5 founder/directors to collectively invest between $100,000 and $1.8 million into a capital pool company that issues a prospectus offering, and upon completion of that offering, receives a public listing on the TSX-V. That company, essentially a public venture vehicle, then has 24 months to complete a qualifying transaction – identifying, disclosing and acquiring a target growth company. At the time of the qualifying transaction, another private placement is usually completed, typically raising an additional $2 million to $4 million, or more, depending on the operating needs of the acquired growth company and its market appeal.
Since the inception of the CPC Program, 2,021 companies have been listed, 80% have successfully completed their qualifying transaction, and each has an average market capitalization of $13.6 million. Some have gone on to even greater success, with 247 former capital pool companies currently trading on the TSX, which requires that a minimum company market capitalization of $30 million be maintained.
Lowell Thomas, a Tucson-based partner with Snell & Wilmer LLP, who specializes in business and finance with an emphasis in cross-border U.S. and Canada transactions, including several deals involving TSX and TSX-V companies, said, “There are a number of things you have to have in order to make a deal successful. You need Canadian board members with capital market experience that can work with your management team, a strong broker champion who believes you have something unique to the market and can execute your growth plan, good advisors who can help you plan ahead for tax and legal considerations, and a focused and sustainable investor relations program. With those things in place you have a clear route to a listing that is internationally recognized.”
One reason for that recognition, Thomas points out, is that both the TSX and TSX-V conduct a due diligence process that’s at least equal, and probably more rigorous, than what traditional venture capitalists would put a company through. Extensive background checks – more than 7,000 annually – are run on prospective company directors and officers.
“The bottom line though,” said Thomas, “for the right companies, executed the right way, this is a program that can work and provide a sound platform for sustainable financing.”