A New "Old" Funding Idea A monthly column focusing on new and emerging BC publicly listed technology companies     Technology Futures:     July 30th, 2004 By Michael Volker A New “Old” Funding Idea It drives me nuts! Almost daily I get a call from someone with another great idea looking for a little cash to get the idea materialized. The reason that these calls are frustrating is because of the great enthusiasm and energy behind these ideas that might just warrant support – support that’s just not there. You never know which of these ideas might just be the next big thing. It seems that there’s no shortage of people who are keen to pursue an entrepreneurial dream. Access to capital, especially at the early stages of business development, is a real problem. To advance Canada’s innovation agenda, the Prime Minister’s Advisory Council on Science and Technology (PACST), is challenged with figuring out how to better commercialize research. This resulted in a proposal calling for a Government investment of $305 million in a public/private partnership with VC funds. The Ontario government recently announced that, as part of its commercialization strategy, it will invest $63 million, a large part of which will be used by institutions to establish pools of seed capital. Here in B.C. we have an excellent, albeit very limited, venture capital tax credit program that encourages investors to stick their necks out a little more in support of emerging companies. Several organizations across the country have made proposals involving grants or tax credits to bolster capital formation at the nascent stages of business development. These all seem to involve handouts of some form. We’re all good at coming up with suggestions as to how to use grants more effectively. Are government subsidies the only solution – for entrepreneurs and taxpayers? I really doubt that any of these proposals, if implemented, would actually go so far as to invest in the pre-company “idea stage”. Last week, I heard an impressive speech by US Presidential candidate John Kerry in which he talked about his government providing substantially increased support to small business in the form of loans. This struck a cord. Back in the seventies when there was almost no venture capital, I recall that Business Development Bank of Canada, (then called the Federal Business Development Bank) played the role of “lender of last resort”. That’s how I first accessed capital for my company. The terms “angel investor” and “venture capitalist” had not been coined. If you need money, you go to the bank because that’s where you’ll find it. Perhaps we should re-invent debt financing through loans – not to the entrepreneurial venture – but rather, to the entrepreneur herself. That’s not a new idea. Even though a loan might be made to a business, the banks would typically require the personal guarantees of the owners of the company. So, in essence, they were effectively banking the individual and it was the individual – not the bank or the company that was at risk. Debt financing has many attractive features: it defers the valuation question at startup and putting in more than sweat equity bolsters any valuation negotiation; it appeals to other investors because the entrepreneur also has some cash at risk; it may foster a more frugal spending style but most importantly, it demonstrates the entrepreneur’s commitment. Too often, I see startups getting even modest sums from other people only to run out and buy fancy furnishings or computers when egg crates and used equipment would still get the job done. I recall one startup in which the founders had to meet some important clients in their offices with hardly any chairs to sit on. They went out an bought some from IKEA and after the meeting returned the goods! Another benefit of government-backed debt financing is that governments are not put in the position of picking winners, as one does when evaluating “investments”. And, unlike other loans such as those made through programs such as Technology Partnerships Canada(TPC), these personal loans should not be forgivable – much better for taxpayers! In the case of the TPC program, more than $2 billion has been invested and less than $100 million has been repaid! For  budding venture starters, I would suggest a personal credit line (at prime interest rate) up to $500K, secured by the entrepreneur’s assets (even if there aren’t any), including his shares in the company with no “out” other than a personal bankruptcy. The downside? In the event of a total failure, the entrepreneur would be able to at least get some business loss write-offs against future income. How to administer such a program? Why not let the banks handle it with appropriate loan guarantees provided by government? That’s how BDC used to handle it. They charged an extra point or two for providing the guarantee and for doing the corporate due diligence. But since this is a personal loan, only the type of due diligence that banks presently conduct on individuals would be necessary. In normal lending, only two conditions must be satisfied given that an individual checks out (ie. no criminal record, etc): the borrower must have collateral to cover a default and he must have the cash flow to service the interest cost. That’s where the guarantee comes in with the government taking the risk by collateralizing the loan. However, that’s still better for taxpayers than outright subsidies and I suspect that the real costs through defaults will be substantially less. So, what’s wrong with this idea? Well, there might be abuses. However, to a large extent, it would be self-policing. If there is no forgiveness provision, most individuals will not stick their necks out too far, i.e. now they can stand in the cautious investor’s shoes! They might even conclude that their great idea really isn’t that hot after all and not worth taking the risk. Another problem could arise by providing cash to naïve entrepreneurs. This could be the main challenge in formulating such a program. Perhaps a mandatory bootcamp course, mentorship and a business plan review could mitigate this. This would also address another commercialization impediment: the skills gap that’s often mentioned as a commercialization impediment. Entrepreneurs ought to know that debt financing, next to government handouts, is the least expensive form of financing. Given a choice, it’s better to borrow a half a million dollars at prime rather that give up a third of the company. I spent a fair amount of time in Taiwan in the mid-80’s doing some outsourcing there. I was amazed at the number of small, young companies. When I asked how they got their capital I was told about a practice (the name of which I can’t recall) whereby successful business people -angels, I suppose - would provide pools of capital and make loans to their proteges. These were simple debt deals at rates a little higher than bank rates. Through mentoring and the “saving face” culture, this seemed to work quite well. The bottom line: an innovative debt financing program could go a long way towards addressing the “access to capital” problem by giving true entrepreneurs the means to invest in themselves! If they’re not keen on this, how could they expect someone else to be? Business Centre for non-downtowners If you don't have a Vancouver "office" but find yourself downtown occasionally without a "home", you are invited to use SFU's TIME Business Centre. TIME is an acronym for Technology, Innovation, Management, and Entrepreneurship. The Business Centre (looks like an airport business lounge) 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. You won't believe the price!  If you're an entrepreneur looking for a place to get your company started, there's some great office space available at the TIME Centre. There's also access to various resources, e.g. tech advisors, access to capital (e.g the VANTEC Angel Network), mentors, etc. Worried about the high cost of being downtown? Well, not to worry - some payments can be in the form of equity. Check www.sfu.ca/time for contact info. WUTIF...you wanted to invest in a tech startup? The Western Universities Technology Innovation Fund (WUTIF), is an "angel fund" catering to tech startups based in BC (not limited only to universities). WUTIF Capital is a VCC that offers investors a 30% BC refundable tax credit. Due to the limitations on the VCC program, WUTIF expects to use up the tax credits available to it by mid-2004. So, if you're keen to co-invest with angels in up and coming companies, this is a good way to get started. Check www.wutif.ca for details. Pooling and risk-sharing is the way to go!   Michael Volker, a technology entrepreneur, is Director of the University/Industry Liaison Office at Simon Fraser University, past 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, 2004. What Do You Think? Talk Back To Mike Volker Tech Futures is a bi-weekly column that focuses attention on new and emerging BC publicly listed technology companies.  Contact: risktaker@volker.org Tech Futures Archive T-Net 20 High Tech Stock Index B.C. High Tech Links