I'm not sure if this somehow breaks the HN guidelines but needing to use flash to read this or even download the pdf if you want to is absurd.

--------------

The Adamou Rant
Venture Capital, Government Incentives and Research In Motion.

I had a copy of Rod McQueen’s biographic account of the development of Research In Motion, Blackberry: The Inside Story of Research in Motion delivered to me recently. I congratulate McQueen on his diligence and his behind the scenes access to the company. The events that conspired to make RIM a success are well worth the read.
This book is a must read for SME’s, governments, venture capitalists and investors alike; it is an excellent behind the scenes account of the struggles that RIM faced at the early stages of development within the Canadian financing environment. RIM raised seed money through founders shares, they raised money through the hiring process, they raised money through their employees, they raised money from strategic partners, they borrowed against working capital lines and against their mortgages – and all of this before they completed their first venture round of financing. Their perserverence, and their “do what needs to be done” attitude which can best be described as fearless, should prove to be an inspirational tale of confidence to every entrepreneur and CEO in this country.

This account also highlights the hybrid nature of the Canadian venture capital industry; RIM is the perfect example of the value that the public markets bring to smart, prepared and persistant entrepreneurs. Venture capitalists and portfolio managers should take note that the traditional rules of venture capital in Canada were broken to accommodate RIM’s needs. RIM was weeks away from a bank forced shut down of their business through a liquidation of their inventory, a struggle that far too many entrepreneurs and small business people suffer through every day. They turned to traditional VC’s and got nowhere fast. They survived only because they landed in the hands of the right investment banking boutique partnered with the right venture capitalist combined with a group of public equity mutual funds and an adequate system of securities rules. There was no doubt in my mind when I first looked at RIM in 1996 that they were on to something big, unfortunately the traditional VC oligarchy at the time suffered from the same “VC group think” that prevails today: rather than looking at the realizable potential of the business, the VC’s were looking to juice their returns by taking advantage of RIM’s financial difficulties and through the imposition of complicated and one sided agreements. The VC’s were looking to join together in order to bend RIM to their collective will – rather than to take a chance on a risky venture. They were willing to see it fail, rather than to change their documentation.

So why did this deal get done? Working Ventures – the fund that employed me at the time and that was funded wholly by retail investors via government tax credits, developed into a hybrid public/private equity venture fund. Most of Working Ventures’ employees had no background in the venture capital business because the senior management team, led by James W. Hall, decided to eschew the old school VC network for new blood with new ideas. I, as a twenty something year old at the time, was able to succesfully pitch and to receive approval from senior management for a “public markets team” whose role was to leverage our strengths as venture capitalists with the money of traditional mutual funds to create an avenue for younger companies to access greater pools of capital without the sometimes oppressive requirements of private equity venture funds. Through this process, we invested in a number of tremendously succesful publicly listed companies in the mid 1990’s, including SXC Health Solutions, MKS Inc., Enghouse Systems, Leitch Technologies, Dalsa Corp., Alarmforce Inc., Hemisphere GPS, Nuvo Networks Inc., Virtek Systems and many, many others at a time when venture capital was extremely tight. Working Ventures developed a reputation for making solid venture style investments into public equities, and our investment department as a group developed an expertise in making and syndicating this style of transaction.

GMP came to us first in the Research in Motion round because they knew that our lead order would provide a strong measure of credibility and comfort to the traditional public equity mutual funds that might be induced to co-invest in that round. They knew that we had the tools and the capacity to complete the “heavy duty due diligence” required for early stage investments and that we would be there to support GMP and RIM in their effort to take the company to the public markets in the subsequent round. The mutual funds took a measure of comfort in co-investing in a company with WV since they generally lacked the resources to conduct the ground level research that was required in order to support this type of transaction while we specialized in it and in effect, our money was our badge in terms of the viability of the business. I truly believe that it was this freedom that set the stage for RIM’s initial success in this key financing round. RIM raised $35MM in this first round, and over $90MM just one year later. Working Ventures participated in both rounds. It was the only venture capital fund to do so.

This story does not have a fully happy ending despite RIM’s tremendous success. Just over one year after our investment in Research in Motion was completed, the federal and provincial governments, lobbied I believe in part by traditional venture capital funds, decided that this hybrid private/public venture capital model was an inappropriate use of taxpayer money – and they placed some severe restrictions on our ability to invest in publicly listed companies, even if the government policy objectives relating to the size of the company, the number of employees and the use of the funds were otherwise met. The various governments, in their collective wisdom destroyed the elements that combined to finance the single most succesful investment in Canadian history. How smart is that? I left Working Ventures shortly thereafter.

Unfortunately, these restrictions are still in place. Venture capitalists from across the country continue to lobby their various governments to provide them with more money, more tax credits and more taxpayer assisted benefits – but the question of enabling these credits to all companies – public or private as was the case for Research in Motion, is rarely mentioned. The traditional venture capitalists see themselves as the founders of a “Silicon Valley North” and they follow the US trends, which unfortunately do not apply to our Canadian market. They seem to see themselves as avant garde investors in tomorrow’s technology companies, however they behave more like bankerss – preferring security and downside protection over opportunity. They are willing to give up tremendous potential upside on a transaction by insisting on placing unreasonable handcuffs on brilliant management teams in order to ensure, should the company fail, that they realize 15 cents on the dollar rather than 12. They will refuse to buy out some of the founders shares in order to ensure that these risk takers remain motivated. Unfortunately, this motivation leads to a lack of sleep and an aversion to risk - management is hardly motivated to swing for homeruns when failure implies personal bankruptcy and the loss of a home.

My message to the various levels of government that may be looking at policy alternatives for the venture capital industry is that less government regulation and involvement is better than more, and that lower taxes and less government is the best path forward. Unfortunately, there is a tremendous lobbying effort underway by the traditional venture capital funds looking for the government to manufacture an environment that is more hospitable to their investment style. To that, I have a few words of warning:

* Be cautious of the motivations behind the established funds and their lobbying efforts. They are typically highly targeted only to their existing model of doing business;

* Be cautious of the statistics that are presented to you by the CVCA and the other venture capital groups – these figures typically ignore money raised in the public equity markets and understate the level of activity by several magnitudes;

* Do not ignore the role of the public markets in financing venture stage companies thereby forcing them into the arms of the small group of funds that your tax credits favour. It shouldn’t make a difference from a policy perspective whether the company in question is private or public if it meets your over-all policy objectives;

* Be cautious of placing too many restrictions on the use of the funds that are raised or provided. Don’t look to provide sector specific tax incentives and let the market (private or public) determine where the best returns might be;

* Eliminate sector specific tax credits or write-offs to resource and energy companies – whatever the policy objectives that might be served, they are not being served and you are only sucking money away from operating companies in other sectors. Create an equal environment for all SME’s and allow them to compete based on the quality of their business

* Finally – provide a framework that will allow for new players to enter the venture capital arena which would thereby increase the level of competition in the industry. How great would it be if we were to see a dozen new funds funded and run by younger and more entreprenurial investors rather than by the same old players who have been at this for what appears to be forever?