Culture of Risk

I've written about it before, and it is a common topic around Ottawa: the lack of early-stage venture capital for technology start-ups. It's a shame since without these companies having access to funding much of the future of the local technology industry is doomed. Entrepreneurs will have to either leave the city or simply give up.

On markets, it is said, bottoms come when despair reaches a crescendo. No one buys, and even the sellers have given up. Despair isn't as visible in the private equity market, yet it is out there. It's a shame really, since this could be the best time to invest, the argument being that the only direction left to go is up. Except when you're cowering at the bottom of a deep dark hole you rarely see the positives about the situation.

So, how to get the funding machinery working again? Except during the height of the dot-com boom nearly a decade ago, VC was never at the same level in Ottawa as in the US. This may be the more conservative nature of Canadians; Americans are more likely to embrace risk than we are. This drive in the face of risk can create some enormous and cutting-edge corporations, while also fomenting disasters such as the current financially-driven crisis. Is it comforting that our banks, being more conservative and more-strongly regulated, are doing better? Is the lack of risk-taking in Canadian business an acceptable by-product of this behaviour? I don't think so.

Absent VC and angel funding, there are alternatives. It's nice to see some local activity to put forward proposals that could increase the pool from which funding is available. This is a double-edged sword since looking toward small investors is necessarily involving less-sophisticated investors. Our governments, in keeping with our tendency to over-protect ourselves, currently prevent what they define as "unsuitable" individuals from investing in this type of venture.

I would also hope that the proposed initiative permits venture funding up to at least $1 million. With the moribund VC situation, companies need some runway to get through the present drought. If you are only permitted to raise $100,000 to $250,000 using this mechanism, you will likely need another round of funding before becoming cash-flow positive. This is typical of product development ventures which require substantial investment before there is revenue. Yet if the VC market has not opened up when that small amount capital is consumed, the company risks failure. We need a complete funding eco-system, not just one piece of it.

Apart from the private market we also have a public market for venture financing - the TSX Venture Exchange. While this can work, and since it's public it is open to everyone, it has its problems. The market tends to be illiquid and opaque, and places an administrative burden on the company. If government regulations put fewer barriers in the way of individual investors there would be less need for a market like this. Nevertheless, it is being used by local companies such as Counterpath.

It is encouraging to see ideas being presented and promoted, yet I have to wonder if it can get traction, and get it soon enough to be of use - the problem that needs solving exists now. Our cultural ambivalence toward risk may well be reflected in the Ontario government's response to this initiative. The promoters are all risk takers, so their action is no surprise. If they plant the seed there will be a lot of work required to ensure the crop thrives.