“Public venture capital” used to mean venture-capital-type investments by governments. Out of the west, however, there’s a new sheriff in town that’s casting a long shadow over Bay Street. The TSX Venture Exchange, the combined (and relocated) offspring of the Vancouver and Alberta exchanges, is promoting a new concept of public venture capital: risk capital raised directly from individual investors through the regulated (but still speculative) TSXV.
“It’s a vital source of capital for early-stage companies,” says Kevan Cowan, TSXV senior vice-president. “The banks won’t step up, and a lot of people say labour-sponsored funds don’t work.” Although the TSXV is still largely a market for Western-based resource stocks, that’s changing fast as more conservative eastern investors see the merits of public capital for emerging companies.
The result is mind-boggling growth. Last year, TSXV firms raised $6 billion, up 46% over 2004. Most of that was from private placements with individual and institutional investors hoping to get in on the ground floor of promising ventures. Cowan expects growth to continue as the Bay Street lawyers, brokers and accountants who keep the blue-chip TSX bubbling catch the venture spirit.
That can-do attitude is exemplified by the Capital Pool Company program, an initiative that was just short of a crapshoot when the Alberta exchange pioneered it in the 1980s. Then, risk-ready investors bought nickel shares in “blind pool” companies with neither revenue nor business plans. Today, the TSXV encourages brand-new firms with no business to go public and raise up to $1.9 million. But it requires the founding managers and directors to have past securities experience and kick in the first $100,000 — and see their shares cancelled if the company goes bust. Within two years, a CPC must complete a transaction to become a “real” business in an exchange-approved deal. This “qualifying transaction” may be a buyout of another firm, but more often is a reverse takeover (RTO) in which the CPC issues shares to acquire an operating company larger than itself. That puts the owners of the acquired business in charge.
The idea is to create capital pools that will become new operating firms or enable other businesses to go public via an RTO for less than a traditional initial public offering (IPO) would cost. Cowan says a venture-exchange IPO could cost $350,000 to $500,000, a high hurdle for firms that only want to raise a few million. But a CPC company can list for about $60,000. It can then use its access to an orderly, supervised market to attract more investors-usually with far less equity dilution than if it were to deal with hard-bargaining VCs. Last year, CPCs accounted for 85 of the 135 IPOs on the TSXV, up from just 29 in 2003.
As Wise notes, the CPC route extends access to risk capital to many types of businesses that lack the IP assets or easy “scalability” venture investors normally demand. And the public listing offers a regulated market into which to sell your shares, unlike angels’ illiquid holdings. With the TSXV’s growing clout, says Wise, “there’s been a huge perceptual change. People now see the Venture Exchange as legit, not a last resort.”
While manufacturing, service and resource firms all use the CPC program, the most successful players are tech companies. Those completing qualifying transactions last year included Time Industrial, an Edmonton-based developer of cost-tracking systems founded by Evan Chrapko (co-founder of the 1999 high-tech darling, DocSpace Co.), and Kaboose.com, a Toronto-based online media company. Kaboose CEO Jason DeZwirek says the program will help his firm raise more capital without having to turn to VCs, who he says want preferential treatment and too much equity.
Cowan says more than 1,300 companies have completed a qualifying transaction since the program started 20 years ago. Of these, 200 have graduated to the TSX itself-a success rate comparable with companies backed by VCs.