Cashing in with venture capital.

Your typical venture capital investor gets a little panicky if he can't look out from the upper floor of the nearest metropolitan financial tower to literally see his money at work. Investors in Canadian early stage companies avoid that sweaty, nervous feeling by seeding their money almost exclusively in close proximity to Toronto, Montreal, and to a lesser extent, Vancouver.

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This tendency spins even the most lucrative resource-based economy out of the loop. Every year well over 90 per cent of this country's venture capital is allocated to firms in Ontario, Quebec and British Columbia. The bright economic lights shining from provinces such as Saskatchewan and Alberta have been distant flickers to private equity investors in the nation's financial capitals.

"Investors tend to invest in deals they can physically get to and from by the end of the day," confirms Janet Wightman, president and CEO of Victoria Park Capital (VPC), the Regina-based venture capital and private equity management company borne from Investment Saskatchewan.

Wightman is up to the challenge of attracting private capital from outside sources to deals typically in the $5-million to $7-million range. With a minimum threshold of $3 million in total equity or near-equity financing, VPC has recently involved seven out-of-province investors in Saskatchewan projects.

Grant Kook, a director with the CVCA, Canada's Venture Capital and Private Equity Association, says it wasn't long ago that Saskatchewan's share of the nation's venture capital pool was less than one per cent. The sector for Saskatchewan is still very much a cottage industry, he says, but it has come a long way.

"We can take it where we want," says Kook, who is also the CEO of Golden Opportunities Fund, Saskatchewan's largest labour-sponsored investment fund. "The more credibility our venture capital community gains, the more outside capital will come in to syndicate with local capital."

When traveling in international circles, Kook used to spend a good bit of his time giving potential investors geography lessons. Today, anyone with investment cash can find Saskatchewan on a map and they know what the province offers.

Randy Beattie, president and CEO of PFM Capital Inc., agrees with Kook's assessment that Saskatchewan has barely begun tapping its potential from an economic standpoint. The resource side will draw increasing amounts of venture capital from outside the province, Beattie believes, particularly to those sectors where foreign money is familiar and comfortable with Saskatchewan's primary industries.

"With Saskatchewan's land base and the new uses being found for that land, the whole agriculture side has tremendous opportunity," Beattie uses as an example, noting most funds can't get enough agriculture into their portfolios right now. Oil and gas, mining and manufacturing will remain strong and the infrastructure development needed to support those industries will be big business.

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"We have companies on the service side to assist industrial expansion, but those companies need capital to grow," Beattie says. He has seen the venture capital climate change as the provincial economy expands.

"Intuitively speaking, the accumulation of wealth in the province has, I think, changed attitudes," Beattie says. "The demographics are now working in our favour. Traditionally in Saskatchewan, the venture capital or private equity markets have not been top of mind for people who thought they were only for the ultra-high net worth investor. Those myths are being erased as they see the kinds of companies involved and as investors are better understanding of the true level of risk."

A newfound willingness to invest in homegrown companies is the biggest change Kook has seen in Saskatchewan over the last five years.

"No longer do we believe that expertise grows proportionally to the distance you move away from here," Kook says. "It's an attitude change. Plus, people are becoming more sophisticated in their investment strategies and they are more engaged with what is going on in our economy. And from what they see today, the fundamentals of our economy are very strong."

Another difference, Kook says, is that five years ago the government took the lead as the main source of capital for the province's economic pool. The private sector is moving to the forefront, he says, and must work in partnership with the provincial government to attract additional capital into the venture capital sector.

Ideally, says Wightman, every venture capital company will be privately financed in the long term. Yet, even in capital-rich Ontario, government money is spent sustaining early stage businesses.

"Clearly, private capital is not meeting the needs of these companies and there has to be some level of government investment," Wightman says. "If you look at the one per cent Saskatchewan receives of the private equity dollars invested nationally and you take out the government portion, you end up with a very small amount; all you're primarily left with is labour-sponsored funds."

Private equity investors like to partner their capital with other investors, especially if they are geographically removed from the venture. They want the partner to be their eyes and ears on the ground, Wightman says, plus they want to bring in another perspective and share the financial risk.

Some investors will look at any project, regardless of location or industry, and investors can be any size including the large pension funds that invest a small portion of their capital in private equity funds. The board and shareholders of those large pension funds like to be perceived as active in the economy and they like to make deals, as long as the potential return is in line with what they could get on the stock market.

Venture capital and private equity management companies look for businesses that have a current demand and a forecast increase for their product or service. Once you're assured of growth potential, Wightman says, you look at the management team.

"You want a strong team that can not only plan, but also execute, a growth strategy," Wightman says. "We conduct interview after interview, we have in-depth discussions, and we do thorough background checks on the entire management team. Combine that with the technical examinations we do and you can see how the due diligence can take a fair bit of time."

The management company's due diligence also extends back into the investor group, particularly when multiple investors are on board. Before she takes a proposal to a prospective client, Wightman needs to know that everyone around the table has a similar investment philosophy.

The third stage is to bring investor and early-stage company together, a matchmaking process that ensures interests are aligned. Companies typically want to know if their investor will back them through thick and thin, while investors want assurances management is committed to the venture.

"They want to see some skin in the game," Wightman says. "They want to see that management owns shares or has in some way bought into the company. Otherwise, we've got two very different levels of risk."

A challenge for the venture capital community, says Ben Voss, CEO of the Entrepreneurial Foundation of Saskatchewan, is to maximize potential in this marketplace. Even in a booming economy with additional capital moving in, emerging ventures with gaps in their business plans and a lot of fixing to do will not gain attention. Earlier stage companies with a longer time frame to generate returns are not getting the same attention as established ventures.

"Nobody's interested in investing money without some sort of financial return," Voss says. "But if you've got a good business plan and the essentials are in place, you should have multiple offers from investors."

Voss agrees there has been an increase in wealth like never before seen in the province, yet the challenges remain the same for entrepreneurs. Investors don't see a need to get into venture capital when they can get good returns in real estate and natural resources, and there is always competition for the investment dollar.

"A booming economy is a double-edged sword for entrepreneurs," Voss says. With an abundance of opportunities in established companies, people ask themselves: "Do I really want to give up a great job for a chance to start my own business where I might struggle for three years with no pay?"

True entrepreneurs take that chance, have the wherewithal to meet the economic challenges, and can figure out how to run a successful business.

"The biggest advice I always give is 'You need to focus on your people,'" Voss says. "If someone feels they're lacking in a certain area, they need to make sure they're surrounding themselves with the right kind of people."