TIA Monitor Magazine, Jul/Aug 1999.

The Investment Continuum  by Michael C Volker

Financing a growing technology venture is a never-ending task. Depending on its stage of development, there are several options available to a company for raising capital.

There is no shortage of capital. The challenge facing entrepreneurs is that of identifying and selecting the appropriate funding sources as the enterprise evolves. One of the key points in raising capital is to understand the investment criteria of capital providers. For example, a government subsidy or grant may be given to a company which has the potential to create jobs in a new sector whereas an early stage angel investor may simply be looking for an exciting new opportunity. Often, the founders of a company are so enamoured with their own technology and products that they neglect to understand this. Capital comes in three basic colors: green,yellow, and red.

Green money comes from patient, equity-oriented investors including both individual, institutional and public investors. It is green because it allows companies to grow and prosper with the potential for lush, green payouts.

The first source of green funding must come from the founders, i.e. a combination of sweat equity and personal borrowings. This can then be supplemented by some "love money" from friends and relatives. The first external providers of green cash ($500K give or take a bit) are likely to be business angels (e.g. Vancouver Enterprise Forum's Angel Network) and/or seed capital funds (e.g. Western Technology Seed Investment Fund). The next $1 million or more can be found by approaching local venture capital funds such as Ventures West, the Working Opportunity Fund, and Discovery Capital. An alternative to these venture capital funds, which are too few in number, may be a junior public offering (e.g. listing on Canada's new junior stock exchange -  the amalgamation of the Vancouver and Alberta Exchanges). Once public, subsequent equity rounds can be raised more easily (because investors have liquidity) in the form of private placements (big investors) or small public offerings (e.g. the VSE's unique small financing exemption - good for up to $1 million). Companies that are well funded with good  growth prospects may go public on a senior stock exchange (Toronto and/or NASDAQ) raising $50 million or more in the process.

Although green is best, it is also the most expensive form of financing because it means selling a piece of the business - the earlier, the bigger the slice. That's why a continuous progression, in sync with the development of the business, is the optimal approach.

Yellow money comes from government and quasi-government organizations which are part of the infra-structure support system paid for by our tax dollars. Usually this money comes in the form of grants, interest-free loans, and other forms of assistance. Yellow money is as good as gold.

We are fortunate in having many golden sources in B.C. These would include the B.C. Advanced Systems Institute (with shades of green), the Science Council of B.C., the National Research Council, and Revenue Canada's refundable tax credits (known as SRED), to name a few. The biggest of these is the SRED program which provides $1.3 billion in annual funding to technology firms.

Red money comes from debt-oriented lenders. This includes banks, factoring houses, leasing companies, and other lenders. It is red because it is onerous and too much of it may cause you to stop in your tracks. The Business Development Bank (BDC) offers some creative early stage red cash to entrepreneurs as well as access to the green variety. Our chartered banks will all gladly lend money if it is secured and if your cash flow can cover the interest payments. However, banks are showing more enthusiasm towards technology ventures and many have set up early stage equity-style funds such as Primaxis and Milestone Medica to augment their traditional venture capital subsidiaries (e.g. Royal Bank Capital).

Funding a company is an exercise in packaging. There should always be a nice rainbow of colors in the corporate finance strategy. For example, even if you could satisfy your capital requirements with equity investment, why short-change yourself by not taking advantage of various government programs? Your competitors will if you don't!

The funding mix of sources will vary over time as a company evolves. The chart (see inset) shows how the ratios of the various sources change over the investment continuum from the startup stages to the time a company becomes more mature. When starting out, a technology company may be funded by grants and subsidies (>40% of total funding) leveraged by some startup (green) capital and personally-secured debt. As cash-flow improves and turns positive, equity funding will take the lead role (>60% of total funding).

For a summary chart with contact information and web links, the reader is directed to the Vancouver Enterprise Forum's "Money Links" website at http://www.vef.org. If you have a solid business opportunity, you'll find all the capital you need right here.

Michael Volker is the Director of the University/Industry Liaison Office at Simon Fraser University, Chairman of the Vancouver Enterprise Forum, and a technology entrepreneur. He owns shares in many of the companies he writes about. Contact: mike@risktaker.com.