Funding SME’s – How do we overome the risk?

by Joseph Batty, CPA, CA

The first part of this series outlined several common beliefs and issues that plague and hinder investments into local small and medium enterprises (SME’s). ABCtech has joined a Joint Venture with an Alberta Credit Union and an Alberta private corporation to create TechInvest Alberta Inc.

TechInvest’s mandate is to first create, and then manage a large Technology Development Fund (TDF).

As mentioned, TechInvest has assembled a team of skilled and experienced people to implement this mandate.

Now that we have determined there is no shortage of investment money available (Part 1 of this series), there are 2 overriding issues that TechInvest must resolve in order to ask for your support for this plan:

  1. “How” will TechInvest overcome the hurdles of “risk” and “size” of an investment into early stage small and medium enterprises (SME’s).
  2. “Why” is such a plan so important for Alberta and Albertans.

This particular article will deal with “how” TechInvest will resolve the 2 issues identified.

With over 40 years of experience in finance and accounting, Mr. Batty demonstrates a proven track record of helping business – large and small – set up financial systems in support of their strategic goals and objectives.  The work Joe has done over the past many years has made him an authority on the identification, evaluation, valuation and (where appropriate) capitalization of “Intangible Assets”. His specialty is quite unique and rare. Every financial manager today needs to know and understand these principles: the success of their businesses depends on it.  Joe currently sits on the board for TechInvest Alberta.

 

There are a number of principles that must be adopted in order to resolve these hurdles:

  1. The TDF strategy is to raise a fund of $100 million to $200 million. A fund of this size will dominate the Alberta SME market.
    • The TDF is targeting an investment pool of investors of at least 15,000 and possibly as many as 25,000 investors.
    • Each investor will be asked to place between $5,000 and $10,000 from their TFSA/RRSP into the fund.
    • ABCtech has 20,000+ active contacts and the credit unions have 45,000 members. Considering each of these subscribers and members may influence 3 to 5 other friends and family to consider the TDF, the pool of possible investors from this “inside group” is well over 100,000. (When Premier Manning asked Albertans to support the Great Canadian Oil Sands project, over 125,000 Albertans placed a small amount in that project).
  1. We must raise this investment capital
    • Extensive due diligence will be completed before the TDF places any investment capital into a project.
    • Since we know the most predominant cause of failures (risk) in SME’s is shortage of capital, and since we have raised the capital first, we will eliminate this risk of insufficient capital.
    • To ensure this, at any one time, TDF will always have more than 30% of the fund uncommitted.
  1. TechInvest and the TDF expect to have 15 to 20 investment projects in progress at any one time.
    • Any investment made from TDF will be diversified across these 15 to 20 projects. That means only a small portion of each investors $5,000 to $10,000 capital will be used for any one project.
    • We fully expect that some of these projects (possibly up to 1/3rd of them) may fail, as maturing from early stage to commercially viable is almost impossible for 100% of the time.
    • By diversifying the TDF investments over 15 to 20 projects, the projects that are successful will cover the costs of the failed projects, plus provide significant profits beyond these costs.
    • By example, a common maturing need is to prove a product that is developed in a “lab” environment can be successful in the real world (this is often referred to as “scale-up”). If the cost of this scale-up is $1 million, a loss write-off spread over a few founder/owners can be disastrous. If such a loss write-off is charged to TDF and spread over 15,000 investors, the cost to each investor will be less than $100.00.
  1. TechInvest and the TDF expect to have 15 to 20 investment projects in progress at any one time.
    • The TechInvest team has developed a much disciplined system to test and then mature an early stage project.
    • As noted the TDF will have the capital available to pay the costs of maturing a project, then assembling a team of professionals to enter the product/service into the commercial marketplace.
    • At that point of maturing, each project will be transferred into a new corporation, (together with the management team). Most of these new corporations will need a second (and direct) investment to finalize this entry into the commercial environment.
    • Members of the TDF will be shown each of these projects, from the inside, and will be given priority to make a direct investment into the new corporations of their choice.
    • All of these direct investments will also be TFSA/RRSP eligible
Visit the TechInvest Alberta website now!