By Richard Chu
Regulators and policy-makers should focus on developing capital markets to help B.C.’s small and medium-sized businesses grow and provide the province’s jobs and long-term economic growth. That was one of the key messages at this year’s BC Securities Commission (BCSC) annual conference at the Four Seasons Hotel.
Jock Finlayson, executive vice-president of policy for the Business Council of BC, noted that fast-growing innovative companies provide the bulk of the job opportunities in an economy and need the capital to make it happen.
In the U.S., a study found that the top 5% of the fastest growing companies created two-thirds of the country’s jobs. Industry Canada studies have also found that the fastest-growing companies in Canada accounted for virtually all of the growth in new jobs. These “gazelles” not only need angel funding or bank loans, but also external financing to expand their business.
“This is where you get the bang for the buck in the economy,” said Finlayson. “B.C. is a hotbed for rapidly growing, innovative firms.”
Finlayson noted that most companies don’t grow faster than inflation. They stay at the same levels for years and even decades. The selected few he called “superstars” are the ones that drive economic progress. He said they’re more likely to be relatively young, focus on the export market and depend on external financing.
According to BIV research for this year’s list of the fastest-growing companies in B.C. (issues 1090 – September 14-20 – and 1091 – September 21-27), B.C. employment in the top 210 companies rose 22.1% to more than 53,000 in 2009 from 43,000 in 2005.
While the tech sector contains many of these rapidly growing companies, Finlayson noted that innovative firms are found in sectors ranging from resources and services to retailers and exporters. As such, he said, “The fundamental challenge for public policy is to ask not just what is good for small business, but what conditions and infrastructure is needed to increase the odds that innovative small and medium-sized businesses will take root here.”
While B.C. has traditionally been a net importer of private capital, Hans Knapp, partner at Yaletown Venture Partners, said it’s now more difficult to raise new venture capital funds than a decade ago because many large institutional investors have left the market as an asset class. That’s led to entrepreneurs curtailing or delaying company growth plans as they rely more on customer funding and advance payments or defer large capital expenditures until they have the cash flow to support growth.
“The sad reality is many companies have viable products, but their growth gets constrained if they don’t get the capital to get to the stage that they’re bankable.”
Gaining financing for venture companies is not without its own risks and challenges. Darrin Hopkins, vice-president of the public venture capital division at Macquarie Private Wealth, noted there is a significant cost of capital for junior companies in Canada that’s atop the regulatory burden and transaction costs. “When you start getting into 20%, 25% cost of capital, that’s a big hit. That means a company needs to get a 20% to 25% return just to break even.”
Martin Eady, the BCSC’s director of corporate finance, noted that regulators have started exploring the options of transforming the regulatory burden for junior companies, recognizing the different needs and requirements for smaller public companies. However, he said if regulators streamline regulation it must be done in a way that does not give the impression they’re reducing regulation.
“There is a concern that there might be unintended damage to the reputation of the capital markets if we’re not careful with the proposed changes we make,” said Eady.
“We heard that from more people in Vancouver than anywhere else. They said we should make sure that people don’t perceive it as being light regulation but right regulation.”
- $3 billion: mining
- $1 billion: private financing and investment
- $1 billion: reinvested in B.C.