In the News...

Business in Vancouver
 - Mar 4, 2003

Glenn Drexhage

VCCs get weapons in fundraising battles, but firms seeking cash must be cautious

But young companies also need to be aware of risk capital's downside.

The changes aim to cut red tape, streamline legislation and offer more funding opportunities for small firms.

The move comes at an opportune time -- lack of early-stage backing has been a chronic concern voiced by many high-tech start-ups, for example.

"I think anything that unlocks additional capital in B.C. is a great thing," said Richard Osborn, a partner at Vancouver's Greenstone Venture Partners.

"It's going to benefit entrepreneurs around the province."

Amendments to the Small Business Venture Capital Act recently announced as part of the provincial budget include various measures that help venture capital corporations.

The act governs the equity capital program, which provides a 30-per-cent tax credit to encourage investment in small companies through VCCs.

Some changes include:

allowing VCC investors to claim tax credits in the calendar year, or 60 days after the calendar year-end. Funds from self-directed RRSPs can be used for investments;

increased flexibility for eligible investments that VCCs can acquire, including investing in public companies and limited partnerships that can then invest in small businesses;

removal of arbitrary maximum limits on the amount of equity capital VCCs can raise; and

allowing VCCs at least two years to complete small business investment requirements for proper due diligence.

The amount a small business can receive from a VCC has also been upped to $5 million, and the employee limit for an initial VCC investment has been increased to 100 workers.

Other changes have been made allowing direct investment in eligible early stage companies (for more information, see www.cse.gov.bc.ca and click on "Investment Capital").

In a related development, the provincial government also plans to allow a third labour-sponsored venture capital fund to operate in B.C.

However, Greenstone's Osborn is restrained about the addition of another labour-sponsored fund.

"How do you increase the capital in the hands of sophisticated, experienced investors who have a track record of building tech companies?

"I don't think those rules necessarily do that," he said, adding that any newcomer should have proven expertise.

Greenstone, which has about $40 million under management, isn't currently interested in managing the third labour-sponsored fund, Osborn said.

And access to capital doesn't necessarily translate into success -- just ask Chris Hale. He's the owner and president of the Bug Factory in Nanoose Bay on Vancouver Island. The company, which offers services such as raising insects for pest control, was previously known as Nature's Alternative Insectary.

In July 2001, that firm raised about $1 million through the Bugs & Bees Holdings (VCC) Ltd.

However, its plans soon wilted.

Hale said he and his wife lost control of the company to a board of directors largely linked to the VCC.

The company ended up going bankrupt.

"We ended up giving up too much of the company," he said.

"And this happened shortly after the VCC got involved, and we never really gained any of that back."

However, the duo managed to buy the assets back. Now, the staff and the sales are smaller, but Hale seems content. "[It's] a lot less people and less headaches as well," he said. Would he venture down the VCC path again?

"I don't think the same way. I might, but I don't have the same expectations as I did back then."

Hale agreed it would be a good if the latest changes end up cutting red tape.

"So much of your energy goes into the actual financing and setting up of these venture capital companies that you really lose your focus as a company."