By Michael
Volker
Budgets' Impact on Techs, VC Update, Capital
Pool Corps Update and VEF Events
Budgets' Impact on Techs
Both the B.C. and Federal governments brought
in new budgets last month which contained some good news - while still leaving
some unfulfilled wishes - for technology companies.
In the "Innovation and Learning"
category, Finance Minister John Manley called for Canada to be a
"Northern Tiger" - attracting talent and investment to build a
knowledge economy.
To its credit, our government is heavily
committed to post-secondary education and the development of our research
infrastructure. The awarding of research grants to some 2400+ projects and the
creation of 2,000 Canada Research Chairs will help build the foundation for a
knowledge-based economy.
Furthermore, the research ante (i.e. funding to
the research granting councils and hence to universities) has been upped by $125
million per year. And another $500 million has been committed to the Canada
Foundation for Innovation for infrastructure (i.e. funding for research
hospitals).
Substantial support is being given to students
at all levels - through improvements to the student loans program and grad
student scholarships as well as $41 million to help new Canadians in
contributing to the talent pool.
Having a strong education and research base is
essential for developing a knowledge-based economy. But, for that knowledge to
be transformed into products and services - hence increasing our GDP - requires
entrepreneurs and capital. It's in this latter category that we still have a
problem and in this regard the Feds still need to do more.
There was nothing new in the budget that gives
me any hope that more of the know-how developed at our universities and research
institutions can make it past the first stages of commercialization - i.e. the
pre-venture financing stages of company development.
There are a few, relatively small, positive
Federal announcements that bode well for business investment. These are the RRSP
contribution limit increase, the small business tax deduction limit increase,
elimination of the capital tax and more funding for seed investments.
The RRSP contribution limit will increase to
$18,000 (from $13,500) by the year 2006. This is good for entrepreneurs because
it will increase the flow of capital to them in building their businesses and
secondarily, it's good for them personally because they have to look after their
own retirement interests rather than relying on corporate pensions. When the
RRSP is stacked with other incentives (read on - as I discuss a great British
Columbia vehicle for doing exactly this), it can make a healthy difference.
Perhaps, though, what's really needed is more
investor education in the RRSP department. I can't believe how few Canadians
capitalize on this great perk. In 2001, 6.2 million Canadian tax filers
contributed just over $28.4 billion to their RRSPs. The median contribution in
2001 was $2,600. 83% of tax filers had "contribution room", i.e. they
could have contributed more if they wished to. In dollar terms, the $28.4
billion that was contributed is only 9% of the $316 billion that was available
to tax payers! In 1999, 55% of families had RRSPs, almost double the percentage
from 1984. In 1999, the median value of RRSPs was $20,000 whereas the average
size was $51,200. So there!
As for the small business tax rate, all
profitable small businesses (that leaves out many tech companies but
nonetheless is a goal that all aspire to achieve - and hence may be more of a
motivator than anything else). In any event, for more than 20 years, the Federal
tax rate for small business has been set at 12% - BUT only on the first $200,000
of profit. That has now been lifted to $300,000. Hey - every little bit helps!
More importantly, the capital tax has been
eliminated. This tax has hurt growing companies that need to raise capital to
expand. No longer.
The government is also investing directly in
small business through an investment of $190 million in equity capital managed
by the Business Development Bank. As long as the BDC figures out how to
invest this at early stages (without traditional VC-style guidelines and
criteria), it might be very useful.
What's missing in the budget, in my opinion, is
something to address the the early-stage financing gap. That's the one that
let's entrepreneurs mine the intellectual property at universities and produce
prototypes that will ultimately lead to VC-bankable deals. The best way to do
this is to let those who know (e.g. technology angels) how to do it take risks
more willingly. How? Easy - if I put $100K into a project and it fails after
several years, I get a $100K write-off. Well, why not assume that the project
will fail (c'mon - let's face it - most do!) and let me take the write-off
immediately (giving me an immediate and attractive re-capture). Then, on those
bets that do pay off I'll pay full tax on a zero-cost base investment. Neat,
huh?
Now, on to the B.C. budget introduced within a
few hours of the federal one, also on Feb 18th. Because of B.C.'s deficit,
spending obviously has to be restrained. This, coupled with the Liberals'
oft-stated aversion to "subsidize" industry left me unsurprised that
that there were no programs or initiatives to stimulate the commercialization
process such as seed or prototyping funding support as has flowed in the past to
organizations like the Science Council of B.C. and the B.C. Advanced
Systems Institute.
What B.C. did do, though, was to make a very
positive step towards stimulating private equity investments through an overhaul
of the Small Business Venture Capital Act - especially the Venture
Capital Company (VCC) plan under the Equity Capital Program.
Todd Tessier and his colleagues in the Ministry
of Competition, Science and Enterprise are doing some excellent missionary
work in improving and promoting this program.
Under the VCC program, investors can set up a
VCC holding company which would invest in a (or several) company. The investors
in the VCC would get a 30% refundable tax credit from the Province. Since
1985, more than $400M has been raised in this manner for 575 small enterprises
including successful companies such as ALI Technologies and Sierra
Wireless Inc.
The main problem with this program has been the
cost associated with setting up, and maintaining, a VCC corporation. There is
also a total tax credit limit imposed on the program ($15 million last year).
Although there are many fine points to this
program - which I won't go into here - there have been some substantial
improvements. These include an increase in the tax credit ceiling, less red
tape, and most importantly - allowing investors to invest directly in a company
without having to set up a special VCC - and still get the 30% tax credit.
A special $5M in credits has been reserved for
"New Media" companies - thereby encouraging investment in this
particular subsector.
Now, the total tax credits available to B.C.
investors add up to $20 million. This includes the $5 million New Media
allocation. These tax credits represent annual program investment capacity of
$67M per year. Details on this program can be found at the Ministry of
Competition, Science and Enterprise's web site at: http://www.bcinbusiness.gov.bc.ca.
Now here's a great deal for tech company
investors: Combine the Federal RRSP program with the Provincial VCC program and
you can invest 30-cent dollars in promising new startup enterprises. That's darn
good leverage if you ask me. Put $10K into a tech company and then put the tech
company shares into your RRSP. That'll give you $3K back from B.C. and about
$4K+ (depending on you marginal tax rate) from the Feds. Your exposure is only
$3K - not bad, eh?
There's only a minor glitch in doing this: A
small problem with self-administered RRSP plans is that the trustees of these
plans (brokerage firms, banks, trust companies, etc) are loathe to accept
private equity investments in individuals' plans. This is terrible. And those
that do, charge high fees for doing so. What's needed is a better way (hey - is
there an opportunity here?) for individual investors (eg family, friends, angels
for entrepreneurs) to put their startup portfolios into their self-administered
RRSPs.
Other than the VCC improvements, the B.C.
budget had little in the way of specific new tech sector benefits.
VC Update
In my last
column, I talked about financing sources and reviewed last year's activity
on the angel, Venture Capital, private equity and junior pubco financing fronts.
I didn't have all the final numbers on
institutional Venture Capital investing in B.C. In the meantime, Mary
MacDonald & Associates recently released the 2002 numbers. They report
that venture capital investment in Canada continued to fall last year from the
levels seen during the tech-market boom, dropping 35 per cent to $2.5-billion
from $3.8-billion in 2001.
The final number for B.C. was $251 million -
using their criteria which appear to have excluded certain financings such as
the approximately $150 million placement in Ballard at the end of the
year. This $251 figure is slightly higher than the $170 to $200 million that was
reported in the column.
At a seminar that I attended last week, this
number was being touted as "the total of all investments in B.C. tech
companies". CAUTION: That's simply not the case. Venture Capital
investment is only a portion of all investing activity. One must not forget
angel investing (a growing force), private equity capital, and public investors
who invest in junior pubcos. The V.C. total is LESS THAN HALF of the grand
total. I base this only on the visible and reported data that's readily
available. We also know that there's a lot of unreported investing activity -
numbers that aren't tracked anywhere.
Capital Pool Corporation (CPC) Comments and
Update
In this column, I keep track of
Capital Pool Corporation ("CPC") companies as defined by the TSX
Venture Exchange (the former CDNX) because they may provide funding and
management to, and in the process acquire, technology companies. They provide
companies with an alternative to traditional venture capital financing. It lets
the public investor get into the game. At the February Vancouver Enterprise
Forum presentation, the TSX Venture Exchange's president, Linda Hohol,
identified the CPC program as one of three routes by which an emerging company
could become a publicly listed company. The other two were the
conventional Initial Public Offering (IPO) and the Reverse-Take-Over of an
existing public "shell". In essence, a CPC deal is like an RTO but
usually "cleaner" and simpler.
Check our Capital
Pool Corporation chart (in .pdf format) for a complete list of the TSX-Venture
Exchange's CPC companies, thanks to
David Ing of Pacific International Securities. This list is updated on a regular
basis. It is now current to the end of February, 2003.
New additions to the list since the Dec, 2002 update
are: Arrabbiata Capital Corp.(from B.C.), Innovotech Inc. (from
Alberta), Ore-Leave Capital Inc. (from Ontario) and Vinson Biotech
Inc. (from Manitoba). It's nice to see other companies in other provinces
starting CPCs.
Since the previous update, the following four (4)
companies have come to trade: B52 Investments Inc., Emergence Resort Canada
Inc., Inter Energy Corp. and Rita Capital Corp.
The following 13 companies have been removed from the
list because they have completed their Qualifying Transactions making them
regular listed companies: Arbour Energy Inc., Begama Technologies Inc.,
Blueland Capital Inc., Cross Border Capital Inc., Crossroad Ventures Inc., Cyan
Corporation, Gateway Capital Corp., Integrated Enviro-Capital Inc., Marquette
Capital Corp., Smart Api Venture Capital Corporation, SVC Second Venture Capital
Corp., Typhoon Venture Capital Corporation, and Wrangler West Capital
Corp.
An introductory
article explaining CPCs may be found at http://www.bctechnology.com
VEF Events
The
Vancouver Enterprise Forum held a couple of weeks ago presented the ins
and outs of taking a company public on the junior stock exchange - the TSX-Venture
exchange. Two companies talked about their very positive experiences in
raising capital using the CPC route.
One
of these, Carmanah Technologies Corp (TSX-V:CMH, $0.85) CEO and serial
entrepreneur David Green noted that he had taken the Venture Capital
route with his previous company - NxtPhase Corporation. This time around,
he actually secured VC financing for Carmanah, but then had second thoughts and
gave the money back to the VC's. He showed an interesting slide which may have
explained why he did this. The slide showed (verbatim) some of the problems with
venture capital as being: "warrants, ranking/rights on dissolution,
dividends, retraction/redemption clauses, conversion rights, anti-dilution,
preemptive rights, co-sale rights, tag-along rights, drag along rights, rights
of first offer, right to sell in an IPO, remedies, demand rights, piggyback
registrations, voting rights". He noted that with VC financing, you
effectively lose control whereas with public investors, there are no large
control blocks and the entrepreneur effectively retains control of the company.
In
contrast, January's VEF topic was on Venture Capital financing and several
companies presented their very positive experiences in dealing with VC's. It
just shows that there's no one right way to raise money for a growing company.
It all boils down to the chemistry and fit between the players. It's also nice
to see that there are several options available to the technology entrepreneur.
Next month's VEF event scheduled for March 25th
is titled, "Selling Strategies". Not much detail is available yet - so
please check the VEF website soon.
A complete calendar of technology events can be
found on T-Net's
Events page.
Footnotes
If you're an entrepreneur looking for a place
to get your company started; there's some great space available at Harbour
Centre downtown. The New Media Innovation Centre (NewMIC) and SFU's
TIME Centre have teemed up to provide not only office space but also access
to various resources, e.g. tech advisors, access to capital, mentors, etc.
Worried about the high cost of being downtown? Well, not to worry - they'll even
reduce the fees and take some payment in the form of equity. Check www.sfu.ca/time
for contact info.
A reminder: SFU's TIME Centre is open for
business - business folks, that is. TIME is an acronym for Technology,
Innovation, Management, and Entrepreneurship. TIME supports the growth and
development of the tech industry in B.C. TIME features a "Business Centre"
(looks like an airport business lounge) which is open to technology
entrepreneurs and business people to use as a drop-in downtown office facility.
Need to plug-in? Make some calls? Do some work? Hold a meeting? There are some
great facilities for holding your company's AGM. Why hang out at MacDonald's
when you can work productively at the TIME Centre? Drop by and check it out! It
is located at SFU's downtown campus at 515 West Hastings St.
Michael Volker,
a technology entrepreneur, is Director of the University/Industry Liaison
Office at Simon Fraser University, Chair of the B.C. Advanced Systems
Institute, Chair of the Vancouver
Angel Network and past Chair of the Vancouver
Enterprise Forum. He owns shares in many of the companies he writes about. Copyright,
2003.
What
Do You Think? Talk Back To Mike Volker
Tech Futures is
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technology companies.
Contact: risktaker@volker.org
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