If you’ve ever funded a startup or early stage company or you’re trying to fund one right now, you know that it’s tough raising money.
It doesn’t matter how great your company is, how big your market opportunity is, or how much experience your management team has. Unless you’re a proven entrepreneur with an exit under your belt or you’re raising money from family it’s the hardest part of starting and growing a business—and you may not like what you get if Uncle David invests in your company.
Of course, there’s the startup funding ecosystem of tech angels and venture capitalists, and crowdfunding is now a possibility too. But let's call a spade a spade: angels are only good for so much capital—likely not enough to build your business—and they expect you to bring in new, larger investors who can lead them to an exit. Unless you’ve attracted A-list angels who introduce you to their private investor and VC contacts, you may find yourself needing more capital and too far down the path to attract new startup tech angels. You may also find that your investors are not willing or able to invest again or could demand terms you really don’t like. To make matters worse, if you haven’t attracted the attention of the small handful of VC’s in Canada by this point the odds of doing so have gone down appreciably.
So now what? Are there any other sources of capital? What about the stock market and stock market investors? What about stockbrokers? Actually, come to think about it, where did they go? Didn’t they raise a lot of money for tech companies back in the good old dotcom days? What happened?
Well you could say that, since 2001, most of them left for the “old Canada” they grew up with. This is Canada, after all, where we’ve been digging things up and chopping them down for hundreds of years, and investors and the stock markets have done quite well, thank you very much. In fact over the last 10 or so years, while a bull market drove the prices of pretty much every commodity a lot higher, the Toronto Stock Exchange became the world’s largest source of mining investment.
Why would anyone invest in tech companies when they could make easy money speculating on mining and oil stocks? The answer is they didn’t, and here’s some scary statistics that prove it.
At the top of the market in 2001, the weighting of tech companies as a percentage of the value of the TSX was around 28%. By mid 2012 it was as low as 1.6%. Yes, Nortel exaggerated the weighting in 2001. So what? Investment in tech still fell off a cliff as Canadian financial markets focused on resource companies and the commodities bull market.
Fast forward 10 years and like anything that’s too good to last, the commodities bull market came to an end—or, if you want to take the optimistic view, entered into a prolonged "correction." The result is that mining investment has pretty much stopped cold. Mining stocks have fallen out of favour to the point where share prices are down over 80% in many cases and there are hundreds of junior public companies in Canada flat broke and out of business.
So with the mining bull market over and resource stocks in the basement, Canadian investors started looking at tech again last year. The result has been that tech stocks in general have outperformed the rest of the market in Canada by a wide margin.
Stockbrokers, being a resilient and industrial lot, are paying attention: many are now actively—some might say desperately—searching for quality tech companies large and small who have a strong story, need capital, and may be interested in going public eventually.
Tech companies need to do their homework on who they’re dealing with—and be prepared to talk to people who were investing in mining companies a year ago—but the shift has begun and a forgotten source of capital is once again starting to become available.