The importance of venture capital to growing companies and innovation

* Guillaume Légaré

With all of the increasingly unfamiliar challenges that are now being amplified by the pandemic, companies seeking to expand their business – or start-ups aiming for rapid growth, significant competitive advantage and international prominence – need to find innovative approaches and solutions suited to their level of risk and stage of growth.

Start-ups – which either originate in the so-called Innovation sector or have a business model that is, in itself, innovative – need strong investment and solid management as soon as they begin their journey. However, this is anything but easy in an environment of strong competition and windows of opportunity that open and close for companies that present greater risk to the investor. 

Venture capital funding comes from a variety of sources, including angel investors, private equity and, of course, venture capital exchanges such as the TSX Venture Exchange (TSXV), part of the Toronto Stock Exchange. Venture capital exchanges are a key component of this mix. They provide companies with start-up financing while offering investors access to companies in their early stages of growth, which gives them a better entry point and greater benefits.

Capital funding is vital if these growing businesses are to have the freedom they need to realize their potential. With debt-based options, the company assumes the risk balance directly. This can inhibit growth and, in extreme circumstances, can even render a company insolvent.

Some sources of capital funding may also carry higher growth risk. Closely-held stock can limit a company’s exposure to additional growth funds because of concerns about stock valuation or dilution.

Venture capital funding through an exchange, such as the TSXV, offers an alternative approach. Growing businesses get access to the funds they need without facing any of the above-mentioned disadvantages. This is made possible by a proven regulatory framework that protects both the company and the investor.

The TSXV is one of the few real venture capital exchanges in the world today. Many that began as venture capital exchanges, such as NASDAQ and AIM, have become prohibitively expensive for many start-ups, in part because of the costs and minimum size required to attract investor interest.

The cost factor is attributable to the large number of regulations, based on increased risk aversion, which impede the creation and proper operation of a venture capital exchange. Venture capital exchanges must have rules, however. Because of their nature, a pragmatic balance must be struck to protect the interests of investors without overburdening the participating company.

The TSXV has achieved this regulatory balance by assuming the burden and responsibility internally, thereby enabling the investee company to meet its reporting obligations to investors without losing the ability to use the resources for growth and meet the expectations of its investors.

The unique two-tier ecosystem of the TSX/TSXV allows a company to be listed on the TSXV and, once it reaches the right momentum to meet growing capital needs, to graduate to the flagship exchange, the TSX. Over 700 companies have been promoted from TSXV to TSX.

But what makes the TSX/TSXV more attractive to Brazilian innovation companies is its Capital Pool Company (CPC) program, Canada’s mini-SPAC, which is a unique listing vehicle that connects experienced investors with private companies. The program is a two-step alternative to the traditional IPO: the creation of the CPC public vehicle shell and the Qualifying Transaction (QT).

The CPC program has accounted for 50% of TSXV’s new listings over the past 10 years and, since its inception, over 2,600 CPCs have been listed and have gone on to make their qualifying transaction. Following the launch of CPC 2.0, CPC IPOs on TSXV jumped 131% in the first half of 2021 compared with the same period in 2020.

The TSX/TSXV set several records in first half of 2021, together surpassing the C$4 trillion mark in market capitalization for the first time. The innovation and technology sectors were major contributors. The TSX Venture Exchange alone reached C$100 billion in market capitalization, with the innovation sector accounting for over C$500 billion in capitalization. The technology sector also performed well in 2021, with funding totalling C$13.8 billion – C$12 billion on the TSX and C$1.8 billion on TSXV. 

* Guillaume Légaré, Head, Latin America, Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSVX)