LOUD AND CLEAR by Denzil Doyle

The main problem with smaller LSVCCs is that they cost too much to manage.

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Better to fix what we have than send it to the delete file
From SCAN's Print Edition

When it comes to venture capital, various governments at both the federal and provincial levels have tried just about everything under the sun during the past thirty years or so to create pools of capital that could be accessed by entrepreneurs who have little or no tangible assets to be offered as security to investors. About fifteen years ago, the federal government played a leadership role in the creation of Labour Sponsored Venture Capital Corporations (LSVCCs), which were vehicles in which the general public could participate. Individuals were given a 30% tax credit (15% from the federal government and 15% from a participating provincial government) for investments up to $5,000.The program raised a lot of money and acted as a catalyst in the flow of funds from conventional VCs. However, it is no longer in the good graces of either level of government. The Ontario government recently announced that it was supporting a curtailed version of its program that would lead to its elimination three years from now.

Even though the LSVCCs appear to be headed for the same “delete” file that contains so many earlier plans, a strong case can be made for fixing them rather than killing them. Their main problem is that they cost too much to manage ─ at least the small ones. Raising a pool of $75 million (which was our target at Capital Alliance Ventures Inc.) in batches of $5,000 or less means that you end up with at least 15,000 shareholders (we had over 25,000). Even though the brokers who sold the units were supposed to do the after-sale support (for which they charged handsome “trailer fees”), a lot of our time was spent answering questions from individual shareholders. And of course a general mailing could cost as much as $30,000. We also spent a lot of time communicating with various government agencies. This was money and time that should have been spent looking for investment opportunities and managing the resulting portfolio.
My recommendation would be to aim the LSVCCs more at high net worth individuals rather than the public at large. The minimum investment should be $5,000 and if a maximum is necessary, it should be $100,000. I would even increase the tax credit to 50% beyond $50,000. With serious money on the table, such people would take the time to do proper due diligence on the quality of the team that is managing the investments and some of them would serve on the boards of directors of the LSVCCs.
I would also drop the requirement that such funds be sponsored by labour unions. This simply adds to their cost and complexity and does nothing to improve the quality of the investments. It is a wrinkle that was carried over from the early Quebec funds. Their positions on the boards of directors of the funds would be taken over by investors.
Above all, they must be allowed to operate under rules that apply to the venture capital industry in general. For example, when the founding shareholders of Med-Eng Systems wanted to sell their shares, CAVI was not allowed to buy them because we were limited to buying treasury shares. Had we been able to do so, CAVI (now GrowthWorks) would have taken over $250 million off the table instead of the $85 million they did get. Instead, CAVI spent a lot of time and effort recruiting buyers for the shares of the original investors and they walked away with far more than CAVI did.
The timing is right for governments to take measures to fix the LSVCC program because the flow of funds into conventional pools of venture capital has been drying up rather dramatically in recent years. They would be better off to fix it than to try and invent yet another program.
Guru in one guise, angel in another, Denzil Doyle is a member of the Order of Canada, a professional engineer, founder and former CEO of Digital Equipment Corp. in Canada, company director, mentor, consultant, investor and author of the best-selling ‘Making Technology Happen’. He can be reached at ddoyle@doyletechcorp.com.

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