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Gauging the risks: Working in the venture capital field during an economic downturn may appear to be a daunting proposition, but VC firms like Quebec-based Pluri-Capital are still betting on entrepreneurs.

Sylvain Dube, CMA, is the investment manager at Pluri--Capital, a private company specializing in venture capital and business development. In addition to investing in start-up firms or expansion projects, Pluri-Capital manages funds under partnership agreements entered into with several financial entities such as the Caisse de depot et placement du Quebec (CDPQ, formerly known as the Quebec Deposit and Investment Fund). Dube's company cooperates with the CDPQ on larger, more capital-intensive start-up projects and with the Societe en commandite de creation d'entreprises (Soccrent) on investment projects that are specifically designed for the Saguenay-Lac Saint-Jean area.

The Soccrent funds were launched by a dozen or so large private companies from this area, such as Alcan, Abitibi-Price and Stone-Consolidated, in an effort to develop local entrepreneurship. As far as business development is concerned, Pluri-Capital promotes its own projects and manages all of the operations that it supports through to the funding stage.

The CDPQ is a paragovernmental corporation charged with managing the "nest egg" of all Quebecers, i.e. the pension fund of provincial government employees and the budget allowance of the Commission de la sante et de la securite du travail (CSST, formerly known as the Quebec Workmen's Compensation Commission) and of the Societe de l'assurance-automobile du Quebec (SAAQ, formerly known as the Quebec Motor Vehicle Bureau), which now total $125 billion.

Set up in 1965 to manage Quebec's public funds, the CDPQ has become a world-class player in financial circles. It is primarily active in the management of equity, bond and short-term instrument portfolios, as well as in real estate investments, negotiated investments in corporate capital and involvement in investment funds. It is also a member of the national and international business network of the Caisse de depot et placement, Capital d'Amerique.

As an agent of the CDPQ, Pluri-Capital manages a number of funds earmarked for start-up projects. "The CDPQ usually invests in market-listed companies or in large, well-capitalized firms," Dube explains. As he puts it, the CDPQ used to shy away from corporate start-ups because it lacked a management team with the capacity to handle that type of investment. Then along came Pluri-Capital, who convinced the CDPQ that it had a management team that was truly specialized in corporate start-ups, and hence was given the responsibility for these operations.

Daring to risk

Dube says that his employer has been banking on the potential success of target firms since 1986. However, he adds, "...even though we are in the venture capital field, we do not lend money to just anyone with a project." Whenever a decision has to be made, the first thing that he assesses is the quality of a firm's management. According to Dube, that is the key to any analysis -- and more crucial than asking if there is a market for the firm's product. He examines the vision of any given project with the entrepreneur, and if he is satisfied that he is dealing with someone who has a valid idea, he will give it some thought before turning to market research.

Dube and the entrepreneur must demonstrate that a project has sufficient business potential and that it is consistent with Pluri-Capital's investment objectives. "Although we are primarily interested in finance, I spend a lot of time checking market data, technologies, products, etc., and discussing matters with potential customers." Once a detailed assessment of the file has been completed, i.e. following an examination of all aspects of the firm, it is Dube's job to ensure that the project can generate a monetary return that is considered acceptable by all of the partners. HE is also committed to getting to know the people who are part of the firm's team to ensure that they know where they are going, that they have an in-depth knowledge of their industry and, above all, that they are proficient in terms of sales. "The key factor is getting the firm onto the market as fast as possible," Dube maintains. Accordingly, he spends a lot of time on non-financial aspects.

Once the parties are satisfied with all of these conditions, Pluri-Capital will take a stake in the firm's equity. Dube is quick to point out that he does not lend money to companies, but rather invests in them. By becoming a shareholder, Pluri-Capital is not required to ask for security or to personally guarantee a loan or a line of credit, as could be required by a bank for the purchase of equipment, for example. Usually banks will not lend money when the funds are intended for research and development, marketing and merchandising of a product, or for the launch of a business project. In such cases, the money must come from non-bank sources, as no guarantees can be provided for such activities.

"Because we require no security for our investments, we must cast an extremely critical eye over every project, since we become shareholders every time," Dube explains. It is therefore crucial that the firm have a solid management team before Pluri-Capital becomes involved. This is why risk assessment is such an important aspect of any investment.

CMAs and the concept of risk

Because of his CMA training, Dube feels very well prepared to understand both the economic dimensions of a project and the human aspect of any organization. "While a business consists of products and numbers, it is above all a group of men and women managing a situation."

According to Dube, the venture capital industry has been growing in Quebec for about a decade. In fact, over 50% of the risk capital available in Canada can be found in Quebec. "Most CMAs work in the industrial sector because their primary focus is on the analysis of financial data for management purposes." While there is a limited number of CMAs in his area, that number is increasing from year to year. When Dube began working in the venture capital industry in Quebec in the mid-80s, he was part of a handful of CMAs active in this field in the province. Although unable to provide an exact figure, he estimates that there are around 50 of them today.

As a facilitator in the CMA Professional Program for 12 years, Dube was asked to impart his knowledge to young graduates. Professors responsible for the Professional Program and for training new CMAs try to instil in future managers a capacity to integrate all of the aspects required to make sound business decisions. Basic training is complemented by various topics such as international business relations, the integration of new technologies, information systems, production, and change or quality management, which makes it possible for future CMAs to prepare themselves adequately for the venture capital sector.

This learning experience makes it easier for CMAs to perform the analytical work integrating all of a firm's various components, and to make informed decisions. "I find this knowledge very useful whenever I have to assess a new firm, since I have to deal with each and every one of these aspects," adds Dube.

Investing with caution

As part of his job, Dube must make investments throughout Quebec. For the time being, his expertise does not extend beyond the province's borders, although he can provide assistance to a Quebec-based firm wishing to export its products or to expand elsewhere. Accordingly, he must often travel abroad for business purposes. As a shareholder in several businesses, Pluri-Capital becomes a strategic partner for entrepreneurs; thus Dube, who is responsible for ensuring ongoing follow-up, is also called upon to accompany business owners when they meet with major customers or suppliers, purchase equipment, make investments or analyze potential foreign acquisitions. He is therefore very involved strategically, even though he leaves day-to-day operations to the entrepreneurs.

As soon as a business has reached a predetermined level of earnings or returns, it can request, at the shareholders' discretion, that Pluri-Capital withdraw its investment. The firm can then recover its capital and allow entrepreneurs who so desire to become the sole owners of their business once again. Pluri-Capital is ready and willing to withdraw from a firm as long as its financial return objectives have been met.

Pluri-Capital's investments are primarily targeted at industrial projects. Dube handles a few specific niches such as the metals and forest industries, wood processing and natural resources, but he also keeps his mind open to opportunities in other sectors of the economy.

The current economic slowdown, however, is having an impact on venture capital management. "With this type of capital, there is never a dull moment. When things are going well, projects abound; but when they begin to sour, we must carefully monitor each and every project in which we become involved." Because entrepreneurs are also buffeted by a changing economy, Dube must ensure that they are protected and that they manage to function properly despite their problems. He admits that there is always work in the venture capital market. After all, a weak economy never prevented anyone from having a good idea.

Dube goes so far as to say that hard times can generate a wide range of projects because some highly qualified people who lose their jobs often decide to venture out on their own in an effort to create new jobs for themselves. This spawns new opportunities.

According to Dube, generally speaking, venture capital in Quebec is in a very interesting position. "New financial tools have been developed and are now available for use." There is also a lot of money available for venture capital and Dube is convinced that this could make it possible for new small-and medium-sized businesses to make an impression. This is much different from the situation that prevailed early on in Dube's career, when funds were almost nonexistent.

One of the reasons for this increase in venture capital over the past ten years has been the expanding portfolio of the CDPQ, which has jumped from $20 billion to approximately $130 billion. The Societe generale de financement (SGF, formerly known as the General Investment Corporation of Quebec) and the Fonds de solidarite of the Federation des travailleurs du Quebec (FTQ, formerly known as the Quebec Federation of Labour) have also greatly contributed to this new dynamism. Dube is often required to work hand-in-hand with these two organizations, even though Pluri-Capital does not form partner-ships with them, as it does with the CDPQ. He has also realized that it is sometimes preferable to share a risk, which is what he does with the SGF or the Fonds de solidarite. Indeed, these three organizations are Quebec's leading players in the venture capital environment, controlling most of the available capital.

Risk is primarily related to a firm's management team, as the quality of management is among the major causes of the downfall of many companies. "Quite often, an organization's weaker aspects will prevent it from pulling through," says Dube. V/hen a project is assessed, he considers four criteria: management, market, management and more management. Entrepreneurs in Quebec and the rest of Canada have a wealth of ideas spinning around in their heads. Although not all of them are viable, it is Dube's job to determine which projects are most likely to succeed.

Julie Demers is associate French editor of CMA Management magazine.
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Author:Demers, Julie
Publication:CMA Management
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Geographic Code:1CANA
Date:Feb 1, 2002
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