Challenges facing start-up businesses in Western Canada

Following up from the previous article about the importance of small business to our economy, I want to capture some of the observations made by panellists at Capital Ideas 2010.

Andrew Rae, President and CEO of iCO Therapeutics and Hans Knapp, partner and general counsel for Yaletown Venture Partners, commented on the fact that many of the funds available, both for the private and public markets, have dried up over the last couple of years. Large institutional investors, who became much more risk averse after the 2008 market crash, have reduced, if not eliminated, their investments in small business start-ups.

This has serious implications for job creating “gazelles” that BC economist Jock Finlayson described in his opening remarks.

Hans Knapp commented, “The net amount of fresh capital that is being deployed today is one quarter of what it was” several years ago. This presents a challenge for western Canadian entrepreneurs.

Another panellist, Darrin Hopkins, Vice President, Macquarie Private Wealth, talked about the differences between the US and Canada. He quoted some statistics that point to the reason. The top 10 per cent of wealthy Americans represents about 70 per cent of the wealth in the US, whereas in Canada the top 10 per cent represents 50 per cent. He noted that one Los Angeles-based venture capital association alone has over $2 billion in funds. Wealthy Americans invest in the $1 million range, while in Canada it’s the $25,000 to $200,000 range.

We learned that raising capital is less of a problem for resource companies. Darren pointed out that there is a cycle of capital for Vancouver’s mining sector and Calgary’s oil and gas sector. Hopkins points out that “most people invest with their earned capital as opposed to their earned income.” So once, for example, a junior oil and gas company has gone public or been acquired, the investor takes that money and recycles it into another project.

He went on to say that BC, Alberta and Quebec have much more vibrant markets for investing in resources while “Ontario is the odd man out.”

Andrew noted that, unlike resource companies, technology and biotech companies face major challenges in raising money in Canada. They often have to go to the US where angel investors have more expertise in this sector.

All of this points to the necessity in western Canada to be able to raise money privately, through what we call the “exempt” market. The topic of my next article.