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Venture exchanges are a critical part of the funding mix for growth business

The following article was written by Graham Dallas, head of business development EMEA for the TSX and TSX Venture Exchange

Venture exchanges are a critical part of the funding mix for growth business

Without suitable access to venture funds, the next generation of growth companies is being put at risk. Venture funding comes from multiple sources, including angel investors, private equity and of course venture exchanges, like the TSXV.  Within this mix, venture exchanges are key.  They provide business with early-stage finance while offering investors access to early-stage growth companies, creating potentially a better entry point and upside.

Equity funding is central to giving these growth companies the freedom they need to develop their potential. With alternative debt-based options, the balance of risk is placed squarely on the shoulders of the company.  That can be a stranglehold on growth and, in extreme circumstances, can even force the business into insolvency.

Some sources of equity funding also come with greater growth risk.  Equity investors with too much control may limit a business’ exposure to additional growth funds, based on concerns over valuation or equity dilution. By taking too much of the pie or driving too hard a bargain, these investors may well also disincentive management to drive the business to reach its potential.

Venture funding via an equity exchange, such as the TSXV, is different. Growth companies gain access to the funds they need but face none of the downsides outlined above.  This is also achieved within a tried and tested regulatory framework that protects both the company and investor.

One of the few real venture exchanges left

Despite the obvious benefit of venture funding via an exchange, the TSXV is one of only a few real venture exchanges left anywhere in the world.  Many of those that started as venture exchanges, including the NASDAQ and AIM, have now become prohibitively challenging for many growth companies. This is due to a combination of factors, including cost and the minimum size requirement to attract investor interest.

The cost element is being driven by increased regulation, based on ever greater risk aversion. This is counterintuitive to the creation and running of a properly functioning venture exchange.  While no one is suggesting venture exchanges should be unregulated, by their very nature, regulations need to be a practical and pragmatic balance of protecting investor interests, without overburdening the investee Company. 

The TSXV has managed to achieve this regulatory balance by taking the onus and responsibility in-house. In doing this, the process is dramatically simplified, making it more efficient and less costly. Lines of communication, decisions and actions are clear, limiting the need for third-party involvement and fees, enabling the investee company to meet its reporting obligations to investors, while not stifling its ability to use those funds to grow and meet its investor expectations.

Getting this regulatory balance right is crucial. It is not something that just emerges but is based on years of understanding venture focused businesses and balancing that with realistic layers of protection. It is about understanding the different pressures, business models and international jurisdictions place on a business while being strong enough to resist pressure to overly tighten rules. It is also about creating the structures that make listing quicker, easier and more accessible.

Capital Pool Programme

The Capital Pool Programme (CPC) for companies listing on the TSXV provides a good example of well-balanced regulation. In short, it is akin to a SPAC designed specifically for smaller, often venture-based businesses. It is unique to the Canadian market and offers a cost-effective method of listing that has been tried and tested over many years. Much of the onus is on the CPC during listing, allowing management in the investee company to focus on business delivery and returns post listing, making the process of accessing public venture or growth capital quicker and less risky for a private business.

CPCs have been a hallmark of the TSXV for decades. Unlike SPACs, they are part of the fabric of the exchange, with over 2,600 companies using CPCs to list on the TSXV, raising over $75bn. Of those, over 600 have graduated to the senior exchange including some that are now constituents of the TSX60 blue-chip index.

Recent rule changes make CPCs much easier for international companies, in Europe and further afield, to take advantage of. These rule changes ease the process of forming CPCs for founders outside Canada, making this a viable and highly attractive route for European and international companies to access and take advantage of the growth funds they need.

The functioning of an exchange is also dependent on an effective support network of related businesses, including accountants, lawyers and IR professional, among others. The development of these institutions takes experience, expertise and ultimately time.  The TSXV has been consistently supporting business with venture funding for decades; in keeping with that, a uniquely strong network of support business and expertise has been developed. This network is nationwide across Canada, giving business the optionality and flexibility of a well-functioning market that drives the best outcome at the most competitive price.

Knowing the market 

The final bit of the puzzle is a deep pool of investors that understand the venture market, have the mandate to invest, appreciate the risks and returns and can attribute fair and realistic valuations to the business in which they invest. Again, creating this is not something that happens overnight. It takes years of building up trusted sources of capital. By virtue of the sheer amount of time the TSXV has stuck to delivering capital for growth business, companies are now able to access a unique pool of Canadian and international investors, that can meet their needs.

A clear demonstration of this is the pioneering nature of TSXV and the investors that back business through it. In the early noughties, the focus was on early-stage resource companies, seeking backing after the decentralisation of resource interests around the world. More recently, that focus has shifted to the cannabis sector, with over 60 companies having listed (on TSX and TSXV), and we are seeing early signs of that shifting again into pioneering pharma, tech and most recently, psychedelics. 

In short, venture exchanges are a critical part of the funding mix for growth business, which in turn form the bedrock of future GDP growth, job creation and prosperity. Unlike other forms of growth funding, they offer access to capital that truly supports the ambitions of the investee business, whilst also offering early-stage access that so many investors want, in a pragmatic and effective risk-managed framework.

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