Venture capital is a powerful tool for both wealth creation and technological development. However, without suitable access to venture funds, the next generation of growth companies may find it hard to realise their potential, and without access to the right companies, investors may find it hard to achieve their desired returns. Venture funding comes from multiple sources; typically, these include angel investors, specialist VC funds, family offices and HNWIs. The business of introducing private companies to potential sources of venture capital is complex and time-consuming for companies and requires high levels of due diligence from the sources of capital. This process is not very efficient.
This inefficiency is well known and recognised, and stock exchanges around the world have tried to establish platforms where growth companies can list at a comparatively early stage of their lifecycle and access equity capital more efficiently and from a wider range of investors. There are many examples, but by far the most successful is Canada’s TSX Venture Exchange (TSXV), which has more than 1,600 listed issuers.
Venture funding via an equity exchange, such as TSXV, is different from the private model. Growth companies have to go through a tested and transparent regulatory process in order to be listed; in return, they gain far more efficient and ongoing potential access to the funds they need, without the downsides outlined above. For investors, the knowledge that the companies have to satisfy a transparent and consistent set of initial and ongoing requirements provides a certain level of comfort; of course, investors still need to research and understand the specifics of the individual companies. However, they are not starting from zero, and they have additional advantages: they can assess a company in the context of a similar listed peer group, and they have access to a liquid secondary market.
Despite the obvious benefit of venture funding via an exchange, TSXV is one of only a few real venture exchanges left anywhere in the world. Other growth markets in Europe, Asia, North and South America have not achieved the requisite and useful balance between recognising the financing needs of small, early stage companies in their
high growth phase and being able to offer sufficient levels of regulatory oversight to satisfy investors. Some of those that started as venture exchanges have now become inaccessible for many growth companies due to a combination of factors, including cost and the minimum size requirement to attract investor interest. Others have failed to build critical mass or to nurture true success stories.
TSX Venture Exchange has managed to achieve this balance. It is cost-effective for small companies to raise capital (the average financing size is C$6 million)\*. There are numerous successful growth stories – over 700 TSXV companies have graduated to the senior Toronto Stock Exchange, and many of these are now constituents of major benchmark indices. During 2021, each month has seen an average of C$900 million raised by TSXV companies. By any standard the market is flourishing.
TSXV companies are supported at the exchange level and by a complete ecosystem of professional advisers, specialist investors and market participants, not just in Toronto but across Canada. Additionally, there is a continual investment in the quality and accessibility of the market. For example, TSXV has, for the last two years, partnered with Global Partnership Family Office to give exposure to interesting investment opportunities offered by TSX Venture companies. Another example is the relaunch of the Capital Pool Company™ (CPC™) Program at the beginning of 2021 to make it more attractive for international issuers and sponsors.
In concept, a CPC resembles a SPAC. However, unlike SPACs, they are not new. CPCs have been a feature of TSXV for decades; over 2,600 companies have used this way of going public and many of them have grown and graduated to the senior exchange, Toronto Stock Exchange. In fact, two companies that began their listed life via a CPC are now in the blue chip S&P/TSX 60 Index\*. This is not the place to go into detail, but the recent rule changes make CPCs much easier for international companies, in Europe and further afield, to take advantage of. They also ease the process of forming CPCs for founders outside Canada, making this a viable and highly attractive route for growth companies from Europe and beyond to access and take advantage of the growth funds they need. International companies in high-growth sectors such as pharmaceuticals and plant-based nutrition are increasingly using this route to market.
Innovative companies hungry for venture capital are an alluring asset class for investors. They can provide the opportunity for excellent returns, but they can also
be hard to find and identify. TSX Venture Exchange provides a transparent, liquid platform for such companies, and an efficient way for investors to participate in their growth.
