BC Business Financing: Show Me the Money
Almost two years ago, QuestAir Technologies Inc., a Burnaby-based alternative-energy company, ran into a financing wall. There simply wasn’t a mechanism in the province for the type of financing the company needed.
It initially launched in 1996 to explore fuel-cell technology but changed direction and, in 2004, landed a potentially lucrative contract with ExxonMobile Research and Engineering Co. to develop large purification and recovery systems for oil-refining and petrochemical markets. Exxon provided some partner financing, but QuestAir needed many millions more if it was to build the systems and fulfill the contract. When it looked around B.C. for the money, it came up dry.
The traditional financing track for most businesses is to start with their own money and funding from friends and family (this includes maxing out the credit cards and taking a second mortgage). The next step is to solicit the help of angels – people with deep pockets who invest privately in a business at its early stages. You then move to venture capital, larger funds that aim to invest in early-stage – often high-risk – companies. (Typically, the venture capitalists running these funds also sit on the boards of the companies they’re investing in and provide advice and direction.)
Next, companies may tap funds from the private-equity investing arms of merchant banks, which usually take a company public. At this point, the company enters what’s known as late-stage financing – it’s operating and pocketing revenues and is ready to move to the public markets with an IPO.
The whole system is more suited to a traditional, mid-sized manufacturing economy such as Ontario’s, but B.C.’s economy is different. According to 2005 figures from BC Stats, 98 per cent of B.C. companies are considered small businesses because they have fewer than 50 employees; 81 per cent of all businesses are “micro” businesses with fewer than five employees. Service businesses, most of them knowledge-based or in construction, account for three-quarters of all businesses in the province. The problem with this economic makeup is that these sectors often have to finance themselves through cash flow, instead of traditional expansion-capital mechanisms, because they have little in the way of tangible assets as security. They rarely have factories that can be seized by lenders or investors to offer up as collateral.
B.C. has always had an economy that featured a few large resource-based companies, dozens of start-up mining ventures and many little retail and service businesses. This economy had systems in place to finance business growth: the big resource companies listed on the Toronto Stock Exchange (TSX) and the smaller ones listed on the Vancouver Stock Exchange, now the TSX Venture Exchange. Little service businesses borrowed from a bank, usually by putting up the owner’s personal assets as collateral – Jim Pattison’s oft-told story of how he began his car-retailing empire is that he had to put up his life-insurance policy to borrow $40,000 from a bank. But over the past two decades, entirely new economic sectors have blossomed that are harder to finance using the traditional system. For the most part, they involve intangible knowledge products and services, which are less predictable, and therefore riskier, from a financing viewpoint.
B.C. companies have been hitting a financing wall after tapping out family and friends, early investors and small lenders. When it comes time to raise that late-stage cash needed to graduate to the public arena, there are few local financing options available.
Some knowledge-based companies in B.C. try to snag late-stage financing within the traditional system, but it involves deft manoeuvring, according to Terry McDonald, an investor-relations specialist with the public-relations firm James Hoggan & Associates Inc. Some companies, especially those in the biotech or pharmaceutical sectors where development periods are very long, will often jump right from angel financing to public listings. “When you’re an early-stage biotechnology company, it can take years to develop your product and convince the equity markets that you can do the job,” he says. “So a public listing is often the only way to raise the amount of capital you need to sustain yourself. Also, public listing puts a value on your company.” But there’s a downside to going public, McDonald adds. It can be difficult for senior managers of science-based companies with long development timelines to understand the short-term nature of the public markets, and dealing with investors can take away their focus from their business tasks.
“We’re unique in having so many knowledge businesses as part of our economy, and they’re growing rapidly,” notes Jock Finlayson, executive VP of policy with the Business Council of B.C. “Financing hasn’t kept pace with this growth. There’s a trend where the mid-market [financial] supplier is disappearing. Even at a good time for capital – and there’s a lot washing around North America right now – there is still a risk profile.” This trend, he adds, applies more to the tech sector and knowledge businesses (professional or financial services) than industries such as mining, which have easier access to traditional financing.
Between 1997 and 2003, QuestAir had already exhausted common financing routes, raising more than $60 million from private investors and venture-capital companies. It had already gone through a series of financing rounds: A (early stage, involving family and friends), B (larger, follow-up financing involving angels or venture capitalists) and C (even larger financing rounds involving traditional financiers such as banks).
But when it came time for a round D to raise more than $10 million in expansion capital, QuestAir was stymied. After the tech-induced market crash of 2001, which sent every financier in North America running for cover, there wasn’t much appetite in B.C. for large financings, and there certainly wasn’t one for an alternative-energy company that was still in the development stage. QuestAir’s newly developed clean-air systems practically screamed, “Danger! Danger! High risk!” to stockbrokers and investors still licking their wounds from the crash and wary of anything smacking of technology.
At the same time, the conventional route for larger fundraising was narrowing. The Public Company Accounting Reform and Investor Protection Act of 2002 (less formally known as Sarbanes-Oxley, or SOX) imposed stringent compliance, reporting and governance requirements on all companies listed on U.S. stock exchanges. Canadian stock markets followed suit, which substantially increased costs and effectively restricted the IPO route to fewer companies.
If it wanted to go public, QuestAir had to be creative. It found AIM, the London Stock Exchange’s Alternative Investments Market. AIM was launched in 1995 to provide flexibility to Europe’s smaller and newer companies, most of which were involved in new knowledge-based businesses such as alternative energy and other technologies. AIM is far more flexible in its regulatory and reporting requirements than most traditional stock exchanges (such as its parent), but was still considered a reputable market – unlike the Over the Counter Bulletin Board, a Wild-West-style North American exchange with a reputation for being populated with dubious companies and stock scams. In Canada, the TSX operates the former Vancouver and Alberta stock exchanges as the TSX Venture Exchange, but it tends to be aimed more at retail investors who like to play the penny stocks, rather than at institutions with big cash hordes.
So in December 2004, QuestAir became the first Canadian company to achieve a dual listing on both the AIM and the TSX and raised about $15 million initially on the two exchanges. Last year, it raised another $20 million. Andrew Hall, QuestAir’s director of corporate development and external communications says the company would have avoided the TSX completely if it could have because of the costly reporting required by the exchange. But many of its 75 employees receive shares as part of their pay and preferred something closer to home than the AIM. Even though being listed on the TSX added to the paperwork burden and didn’t offer much attraction to investors at the time, QuestAir undertook the more rigorous requirements to do it, says Hall.
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“Show mw the money?”
Submitted by Madeline (not verified) on Sun, 2009-12-27 23:09.