Silicon Valley North #40                                       February, 2002


The Way I See It… by Michael C. Volker


Why a vibrant junior capital market is needed


Starting a company takes money. For most technology entrepreneurs, especially the first-timers, raising equity capital is the first and usually toughest challenge in their career.   


As companies grow and mature, the task of accessing capital becomes easier once they have satisfied customers and steady cash flow. The uncertainty as to the feasibility and viability of the venture is then greatly diminished.


At the outset, the risks are enormous. The people, the products, the business strategy, and the market’s response are all unknown factors. Early stage investors are gambling on long shots.


There are only two types of investors: individuals and organizations. Individuals are the founders themselves, people they know and arms-length investors such as angels (successful entrepreneurs betting their own money). Organizations range from groups of individuals (e.g. partnerships, capital pools, clubs) to venture capital companies, investment bankers and banks.


There’s a very important philosophical difference between these two categories of investors. Individuals such as angels are accountable only to themselves and when assessing an opportunity they tend to look for reasons why they should invest. Venture capitalists are risking other people’s money and it is their duty to think of all the reasons why they should not invest. It’s their job to take only very calculated risks on behalf of their investors.


This is why it is so difficult for startup companies to get any form of institutional investment. In contrast, angels have a completely different mindset. They will invest based on their instincts about the founders, their own industry knowledge and because they can experience vicarious entrepreneurship.


Finding wealthy angel type investors is difficult enough let alone getting them to buy in. I think it was one of our politicians who once said that in Canada we have an acute shortage of wealthy people. Securities regulations, depending on which province you live in, preclude modestly wealthy almost-millionaires from investing small amounts of capital, say $10K to $100K. Only the wealthy are really allowed to invest and when they do, they’ve had to, by law, invest much larger amounts (usually over $100K).


On the other hand, anyone may invest (or speculate) any amount in the shares of a publicly traded company – regardless of its size and maturity. Shares can be bought and sold almost instantly without much fanfare and without investor restrictions. Although the risks are enormous, so are the rewards. There are many examples of successful technology companies - QLT Inc., Westport Innovations Inc, ALI Technologies and StressGen Biotechnologies  to name a few - that all got started on the Canadian Venture Exchange (CDNX) and who received their early financing from the not-so-rich.


This is exactly why there’s a need for a stock exchange that allows young, unproven companies to offer their shares to many small speculators in the public at large.


In the past decade, our disparate provincially regulated securities commissions have emphasized investor protection over business development. This appears to be changing with the B.C. and Alberta Securities Commissions leading the way by adopting a caveat emptor approach through adequate corporate disclosure.


High overhead costs, the time, the legalities and administrative burden associated with public offerings have kept companies out of the market. Investors have retreated from the public markets in general but the junior markets in particular have suffered because of the absence of new deals. Liquidity in this market has dried up.


Even the brokers have retreated from the junior markets. The banks and larger dealers have gobbled up the junior brokerages. They now focus on mutual funds and large cap companies. The juniors have been orphaned. The CDNX must open its doors to new players – boutique dealers, financiers and angels and allow them to bring in new listings, relaxing the traditional sponsorship rules.  It must also promote itself a lot more as financing alternative by talking up its own successes.


The way I see it, a junior equity exchange such as the CDNX is the only way to spread risk among many investors and give entrepreneurs access to risk capital. But to make this really work, we need to increase deal-flow and encourage junior brokers, deal-makers and market players back into the game.


Michael Volker is a high technology entrepreneur and director of Simon Fraser U's University/Industry Liaison Office. He runs Vancouver’s Angel Technology Network and is a director of the BC Advanced Systems Institute and the Vancouver Enterprise Forum. He may be reached at