Venture Crisis

the Venture Crisis How overregulation in Canada is threatening the future of venture capital. FOR A FREE MARKET TO BE SUCCESSFUL, CAPITAL MUST BE ABLE TO FLOW TO NEW IDEAS AND ENDEAVOURS. New ventures can lead to massive wealth creation FACEBOOK WENT FR OM BEING WORTH $0 IN MARK ZUCKERBERG'S DORM ROOM facebook TO $100 BILLION IN LESS THAN 10 YEARS. It is estimated that Facebook's IPO made over 1,000 new millionaires. ELON MUSK STARTED HIS FIRST COMPANY with nothing more than $2,000 in the bank. Tesla AFTER ACHIEVING HIS FIRST ROUND OF venture capital financing, he was able to PARLAY IT INTO MANY SUCCESSFUL COMPANIES THAT WOULD CHANGE THE WORLD: Paypal, Tesla Motors, SpaceX, and SolarCity. A MODEST HIGH-GRADE COPPER DISCOVERY Teck BY NORMAN KEEVIL IN NORTHERN ONTARIO would form the backbone for Teck, ONE OF CANADA’S MOST SUCCESSFUL AND RESPECTED MINING COMPANIES NOW WORTH NEARLY $20 BILLION. THESE AMBITIOUS AND GAME-CHANGING ENTREPRENEURS ALL NEEDED LARGE AMOUNTS OF EARLY-STAGE INVESTMENT TO BE SUCCESSFUL. But... IF ACCESS TO CAPITAL IS LIMITED, THE NEXT BIG IDEA OR DISCOVERY MAY NEVER MAKE IT TO FRUITION. What is happening venture markets? to Canada's CANADA'S MOST IMPORTANT STOCK EXCHANGE FOR PUBLIC VENTURE COMPANIES, THE TSX VENTURE, IS IN TROUBLE. The problem is complicated, but it revolves around: OVERREGULATION BEING TOO COSTLY FOR SMALL PUBLIC COMPANIES OVERREGULATION HURTING INDEPENDENT BROKERAGE FIRMS OVERREGULATION LIMITING THE CAPITAL THAT CAN 3 BE RAISED FROM RETAIL INVESTORS FIRST, AN OVERVIEW 2% FINANCIAL SERVICES 2% REAL ESTATE 2% OTHER 3% LIFE SCIENCES THE TSX VENTURE COMPRISES 4% CLEAN TECH 2,195 5% DIVERSIFIED 5% TECHNOLOGY COMPANIES 6% CAPITAL POOL COMPANIES 59% MINING 12% OIL & GAS In the last year (YTD April 30, 2013), the TSX Venture was responsible for raising $525,629,946 in 456 financings, while the TSX raised $989,266,371 in 6o. 60 FINANCINGS TSX (278B) $989,266,371 456 FINANCINGS TSX $525,629,946 However, the TSX Venture only has a market value of $13 billion, VENTURE whereas the TSX $278 billion. (13B) 500M 1000M THE TSX VENTURE HAS DROPPED IN VALUE BY OVER 50% IN THE LAST COUPLE YEARS. 2,500 2,000 1,500 Though commodity prices are a part of this, risk capital has almost completely dried up. 1,000 500 2010 2011 2012 2013 THIS SUMMER, THE EXCHANGE $0.05 to $0.01 DROPPED THE REQUIREMENT FOR FINANCING FROM the Costs of Regulation To list a startup public venture with initial financing of LESS THAN $1 MILLION, PUBLIC VENTURE 40% OF CAPITAL goes to regulators, attorneys, and accountants before even getting a listing. IPO FINANCING ON TSX-V It's estimated that... there are over 2009 $90,299,582 (Recession) 700 2010 $332,572,254 COMPANIES 2011 $291,109,802 on the TSX Venture that do not have the capital requirements to make it through the next year. 2012 $149,928,084 2013 $70,552,713 (YTD) OM 50M 150M 250M 350M Regulation is pricing Independent out of the Market CANADA'S INDEPENDENT BROKERS - a major traditional source of funding for startups - ARE FACING UNPRECEDENTED CHAL- LENGES IN THE MARKETPLACE. Regulatory compliance now comprises between 30% to 50% of administration costs for independent brokers and advisors. It is now too expensive for independent brokers to serve small retail clients. Thus, small clients are forced to buy the wholesale products offered by the big banks. Speculators Losing Access are to the Market A MULTITUDE OF NEW RULES ARE PROHIBITING SPECULATORS FROM HAVING ACCESS TO THE VENTURE MARKETS. ONLY THE ELITE HAVE ACCESS More than 96% of Canadians do not get access to a special exemption that allows only the elite to get shares and warrants at a significant discount from the general public. OLD AGE limited I.D. The Investment Industry Regulatory Organization of Canada (IIROC) is pushing toward an age limit on Private Placements. These limits to be placed on a very wealthy segment of population will severely impact companies' ability to raise capital. CLIENT RELATIONSHIP MODEL The new Client Relationship Model “reforms", created by IIROC, forces brokers to act as asset gatherers rather than speculators. This prevents speculation in the market – and risk is necessary for venture capital. The Canadian Economy is at Stake TAKING RISKS IS CRUCIAL FOR COMPETITIVE. WHILE REGULATION IS NECESSARY FOR A FAIR MARKET - TOO MUCH REGULATION CAN MAKE IT DIFFICULT MODERN ECONOMY TO BE FOR SPECULATORS AND COMPANIES TO THRIVE. If new ventures are not able to capitalize, there are many potential repercussions: Thousands of jobs will be lost in Canada. Canada could lose its leadership position in mining. Right now, Canadians are responsible for 60% of global mineral exploration. Further, Canada is home to 50% of all mining exploration equity financing. CANADA USA Hundreds of companies will not be able to finance. This means they will not be renting offices, hiring lawyers, hiring accountants, or paying suppliers. The next big idea may have to be capitalized outside Canadian borders - preventing billions of dollars in Canadian wealth Millions of dollars in tax revenue will be lost to the from being created. government. Bottom Line OVERREGULATION IS INFRINGING ON THE RIGHTS OF CANADIANS CANADIANS CAN SPEND LIFE FORTUNES ON LOTTERY TICKETS OR SLOT MACHINES IN A CASINO. THEY CAN LOSE ALL OF THEIR MONEY INA MARKET CRASH SUCH AS 2008 BY INVESTING IN "BLUE CHIP STOCKS". MEANWHILE, OVERREGULATION PREVENTS CANADIANS FROM INVESTING IN PUBLIC STARTUPS. Elite CURRENTLY, ONLY 1 IN 25 CANADIANS ARE DEEMED "ELIGIBLE" TO PARTICIPATE IN PRIVATE PLACEMENTS. ONLY THE ELITE CAN PARTICIPATE. 65+ PEOPLE OVER 65 YEARS OLD ARE NOT ALLOWED TO INVEST "SPECULATIVE" COMPANIES. OVERREGULATION FORCES INDEPENDENT BROKERS OUT OF THE MARKET, WHICH LIMITS THE CHOICES OF CANADIANS AND FORCES THEM INTO COOKIE CUTTER BANK PRODUCTS. ONE WAY OVERREGULATION IS PREVENTING CANADIANS FROM MAKING CHOICES WWITH THEIR OWN MONEY! The public markets are no longer public. VCMÁ Venture Capital Markets Association LEARN MORE ABOUT THE VENTURE CRISIS AT: www.VENTURECRISIS.ORG VISUAL CAPITALIST Educating a new generation of investors on resource investing and management VISUAL CAPITALIST www.visualcapitalist.com