Public venture capital
Money to burn
So, what about the banks?
After spending five years developing improved technology for breast-cancer screening, Z-Tech Inc. has one more major hurdle: clinical trials in more than a dozen hospitals across North America. Until recently, however, there were three million things standing between the Toronto-based company and completing those tests — each of them a shiny coin bearing the picture of a loon.
Just to get to this stage, Z-Tech had raised more than $14 million from its owners, their friends and family, early-stage “seed” investors and venture capitalists. Vice-president of finance Ron Baker says those rounds yielded satisfactory results, but to speed things up, this time he chased a new funding source. In January, Z-Tech borrowed $3 million from MMV Financial Inc., a boutique Toronto lender specializing in venture debt — a high-interest loan to fledgling firms that also gives the lender shares in the borrower. Sounds pricey, but it gives high-growth firms short-term cash without the expense and hassle of a full-scale share offering. A venture capitalist might have spent four or five months on due diligence before investing in a firm with virtually no revenue. Yet, Baker says the $3-million loan came together in four weeks, with minimal disruption to management or outside shareholders.
Z-Tech faces an interest rate of almost 13%, plus an undisclosed equity kicker. But, Baker maintains the three-year loan cost Z-Tech’s owners much less than raising more capital, which would have further eroded their precious equity. “You always keep your options open,” he says. “But venture debt fills a real gap in the marketplace.”
Across Canada, entrepreneurial firms such as Z-Tech are eagerly searching for new solutions to financing growth. After years in the wilderness, they enjoy a surfeit of choices. Long lambasted as insular and conservative, Canada’s lenders and venture investors are flush with money, looking for deals and continually innovating. As private-equity consultant Sean Wise points out, “There are absolutely more options now than ever before.” Things aren’t perfect: many bankers remain reluctant lenders (see “So, what about the banks?“), and new equity products often come with the label “For overachieving tech companies only.” Still, these days, most firms will find new products, attitudes and price points that will make their search for funding less painful — and much more rewarding.
Here’s a look at what’s new and hot in SME financing — as well as a few traditional sources sometimes overlooked in a brave new world of venture debt, capital-pool companies and other head-spinning innovations.