Already a common form of financing in the US,
VC firms like MM Venture Partners are introducing debt financing to the Canadian investment landscape. Though hardly glamorous, debt financing is an alternative to equity financing for fast-growth companies to raise capital and the method does have some advantages.
"The cost of capital in a high-growth company is usually the highest
cost (dilution). Debt financing complements other forms of venture capital or
financing," explains Minhas Mohamed, founder and Managing Partner. "It
is a very novel way of financing technology companies that has not been done
in a dedicated way in Canada. We're the first dedicated fund that uses debt
with warrants to finance growth."
Although the stakes may seem high to companies taking the risk, debt financing
can be cheaper than traditional venture capital, especially for companies that
have already completed one or more rounds of VC investment. If a company experiences
high ROI, it repays the loan without having to further dilute ownership in the
company. The downside is that if the venture fails, the loan still needs to
Debt financing is not a first choice for most start-ups, especially since capital
infusions from traditional VCs are on the rise. However, debt can help a company's
capital equation. And in what is still a very long fundraising cycle in Canada,
it can complement traditional venture capital and give a company more firepower.
It is also less intrusive.
Unlike traditional VC investments, MM Venture Partners play a hands-off role
in its investee companies. In the 3-4 million dollar range, its loans are substantial
as far as Canadian investments go. The upside is that the value-add of traditional
VCs is still there. Investee companies can access Mohamed and his partners'
North American network of contacts. Mohamed, a VC veteran, was formerly a senior
partner with Quorum Funding Corporation and Schroders PLC during the years when
MM Venture Partners generally looks for companies that have already secured
initial rounds of funding. Its debt financing is intended as strategic capital
to take an emerging company to the next level. The VC is currently on the lookout
for emerging companies in the areas of e-commerce, Internet infrastructure,
and network management solutions.
Mohamed, like all Canadian VCs, believes there is a need for more pre-seed funding
to get many of Canada's great technology ideas off the ground. He also believes
that in the near future, that void will likely be filled by US capital. MM Venture
Partners' fund is indicative of a growing acceptance of alternative financing
options, however, the local VC community still has a long way to go.
"I think there needs to be more support from larger Canadian institutions.
The second generation of VC companies is doing some interesting things backed
by US partners, but our Canadian capital pool needs to also have an alternative
investment strategy. In the US, a lot of the large US pension funds have a dedicated
alternative investment strategy which they stick with for a long time frame,
and they allocate as much as 7 percent of their total funds for alternate investments."