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Emerging companies in IT and biotechnology can now look to another source of funding to augment their funding from venture capitalists to help carry their businesses.

A new fund, the GATX/MM Venture Finance Partnership has been formed to provide debt financing, working capital loans, software and equipment leases to new companies in IT and biotechnology. The fund will be available to companies already backed by venture capital. This is the first time such a fund has been available in Canada.

The partnership of MM Venture Partners of Toronto and GATX Venture Finance Canada (a subsidiary of GATX Capital Corporation of San Francisco) has raised $50 million. To qualify for the fund, 'companies must have strong management teams, must already be receiving venture capital, be in good markets and doing at least $4 million to $5 million in business a year,' says Minhas Mohamed, managing partner of MM Venture Partners. MM Venture Partners will not get involved in the governance of a company as a venture capitalist would, but assistance will be given to companies looking to enter the U.S. market through MM Venture Partners' relationship with their San Francisco-based partner GATX.

'The fund will help emerging companies with long-term investment, working capital for equipment and growth,' says Mohamed. Investment will range from $1 million to $5 million, with the average transaction between $2 million and $3 million.

The fund was established to meet the needs of emerging companies that do not want to dilute their investment in their own fast growing companies. Mohamed has worked in the venture capital business for 14 years and always felt there was a need for fund like this one. In the U.S., Mohamed's partner GATX has helped finance successful companies including Ascend Communications, Human Genome Sciences, WebTV (bought by Microsoft), Exodus Communcations and Red Pepper (bought by PeopleSoft). 'It gives companies an opportunity to work with our partners in the U.S.,' says Mohamed.

GATX Corporation is a pretty solid company that's well known for its huge assets, says Peter Morand, biotech consultant and president and CEO of the Canadian Science and Technology Generation Fund. He sees this new initiative as an important one. 'I can't think of a fund that combines IT and biotechnology and that's where the convergence is going,' says Morand.

While Morand's fund covers different areas of science, it does not fund companies involved in clinical, health or human-use. As well, 'Our strategy is shorter term,' he says. The MM Venture Partners financing will assist biotech companies that require longer term financing. For many companies in biotech, where several years are often needed for R&D, this type of financing can be crucial to their survival.

Doron Opher of KPMG Corporation Finance Inc. says that new IT companies usually have no tangible assets for debt. The reality is that investors of new businesses don't see an opportunity, say, to achieve 100 times on their investment. Only about one in 10 investments are real winners. 'This is why we see new debt financing. It is relatively a strategic investment.' Opher says this type of financing can be applied to cash flow, and is good for a company that is still in the beta-testing phase before it brings a product to market. Although he sees this new fund as essentially a good idea, Opher warns that new companies should study all the details of the contract for its complexities and clauses.

About 15 companies have approached MM Venture Partners for financing since the fund was launched in early August. Ten of those companies are from the IT industry and five are biotech companies.

Mohamed would not reveal whom he is doing business with, because most of these deals are still being finalized. But, he says, 'We are open for business.'

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