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Hard currency: how to raise money for a good business.

Money. To start a business you've got to have it. If you haven't got assets, the bank isn't a good place to shop.

Bankers want tangible assets, something to secure a debt in case of failure. But businesses of the future have few assets. Their prized possession might simply be intellectual property. This is the dilemma for bankers; how to judge the worth of an idea, estimate its market potential value.

Enter venture capitalists. With the money they offer they take an active part in the company -- advising management, trouble-shooting. Typically a venture capitalist stays with a firm for three to seven years, gambling that when it's time to cash out the shares will produce decent financial returns. Risk doesn't come cheap. Most venture capital firms are looking for compounded rates of return of at least 20 per cent on their investments.

The only pure venture capital pool in Manitoba is Vision Capital Fund which started in 1987 with just $2.5 million. Today the Fund manages $21 million in capital; three-quarters of which came from the provincial government in the form of a loan in 1990. Currently just under $9 million is invested in 12 companies in various sectors, from high tech to heavy manufacturing.

Although the managing partners of the Fund, Jim Oborne and Bill McCance, see 100 business plans every year, few make it through the eye of the needle. About six plans annually are viewed seriously. Just three or four get money. Oborne says, "We like to say 'yes', we're in business to say 'yes', but it's an occupational hazard that in trying to say 'yes', we say 'no' a lot of times."

Vision is also in the business of occasionally losing money, especially since it operates at the scary end of the vencap sector -- new business start-ups. Oborne says the fund lost $250,000 on a business start-up four years ago. "Overall the winners have to pay for the losers if you're going to give business a chance," he says. This balancing act comes during the due diligence process, which is what happens between the initial reading of a promising business plan and the cutting of a cheque.

Here's what to expect from Vision during due diligence. The partners don't like to be rushed; the process can take up to five months. Give them lots of time. Send them a business plan first; if they like it they'll call you. Both partners insist they invest in people and they want to see management that is honest, hard-driving, fully committed, with personal wealth or a reputation or assets on the line -- they don't like the principals to have too many trap doors.

Oborne says, "Be prepared to talk with complete frankness about the business, the problems it faces as well as the opportunities."

McCance says, "Concentrate on pre-planning and put as much detail and strategic thinking into the business plan as possible. That's the base document and it's an important tool in assessing management. We're looking for a guy who knows the marketplace."

Mark Smerchanski, president of International Fibreboard Inc., proved to Vision last year that he knew his market. He bought the firm in October 1992, after it had been closed for a year. After six months of updating equipment, the company re-opened in April and has since been operating at full speed. The plant runs around the clock, seven days a week and by the end of the year the 56 employees will have made 48,000 tons of fibreboard, chalking up sales of $3.25 million -- half of that in the U.S.

Smerchanski first approached Vision in February 1992 and was told to come back with a business plan. The 36-year-old, who has a marketing and manufacturing background, delivered a plan, but after a tremendous amount of homework. He studied fibreboard market reviews, spoke with 150 potential customers and spent over a month with an accountant putting together a five-year business plan. They compiled a realistic estimate of balance sheets, income statements and cash flow projections -- on a monthly basis -- for the first half decade of the company.

Once they got Smerchanski's plan, Oborne and McCance took a month to do due diligence. They checked every fact contained in the document, spoke with the same potential customers, and stretched the figures to see if they would snap. "They go through the plan with you and ask questions," says Smerchanski. "They're trying to get a feel for whether it came from an accountant's desk or you actually know what's in there. You're not only selling the business plan, you're selling yourself."

Although the goal of many vencap firms, especially those backed by governments, is to encourage the new knowledge-based industries, we're not nearly as successful at it in Canada as they are in the U.S. Americans have 65 per cent of their venture capital invested in high technology; here it's just 30 per cent. The reason, says Oborne, is the small Canadian economy which is simply not big enough for specialization, especially so in Manitoba. "Like most funds in Canada, we're generalists," he says. "We try to learn about a business as fast as we can."

That willingness to consider more than just the high technology field is part of what attracted Smerchanski to Vision. "I was impressed with their ability to grasp grassroots concepts," he says. "They weren't locked into high tech."

The Canadian Maple Leaf Fund isn't locked into high tech either and it isn't in competition with Vision. Maple Leaf is looking to place debt and equity with mid-level firms that want to grow. Their minimum threshold is between $3 to $5 million; by comparison Vision has a minimum of $100,000 although the smallest deal to date has been $250,000. Vision's maximum is $1.5 to $2 million.

The Manitoba managers of Maple Leaf are both in their 30s and are aggressively seeking companies that want capital. They're in charge of $28 million looking for a home. It's money invested by foreigners, mostly from the Far East, who want to become Canadian citizens. The requirements of these investors means a high return on capital isn't as important as it is in most vencap funds. "We have a more conservative outlook," says Gary Lyons, managing director for Manitoba.

"We see ourselves as a financial partner," adds Adam Grossman, an investment advisor for the Fund. "They run the business and we provide financial expertise to get over the humps they otherwise couldn't achieve." In order to get to that stage, Maple Leaf first needs to see a business plan from prospective clients. Grossman has advice. "Spend time on doing a proper business plan." Lyons agrees, but says keep it brief. "A short, concise plan is much more effective than a kitchen sink type where everything goes into it."

Marc Raymond, 42, president of Westsun Winnipeg Inc., is a client of Maple Leaf. Three years ago his company was offered the chance to build and lease the sound and lighting system for the Phantom of the Opera. It was a huge project and Raymond had just one month to say if he would take on the job. To say "yes" he need $4 million.

He approached Maple Leaf and got his money. "I knew they considered riskier businesses, those with real potential and real cash flow as opposed to what security they could put up," says Raymond. "They were sensitive to the time-line." That deal has fuelled a big Westsun expansion. It's still leasing equipment to the Phantom, has landed the contract for Joseph and the Amazing Technicolor Dreamcoat -- both here and in the U.S. -- and Raymond is bidding on jobs in Los Angeles.

Although they're tough, venture capitalists are looking for someone to take their money and make it grow. The pundits may be dismayed at the small number of high tech deals cut in Manitoba, but both Vision and Maple Leaf are finding profit and creating jobs in sectors many tend to forget in their rush to the future.

Bramwell Ryan is a Winnipeg-based freelance writer.
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Title Annotation:Vision Capital Fund; Canadian Maple Leaf Fund
Author:Ryan, Bramwell
Publication:Manitoba Business
Date:Nov 1, 1993
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