torontostar.com
Plenty ventured, plenty gained
High-tech investment is soaring in Canada, but we still dangerously trail the United States
By Dana Flavelle
Toronto Star Business Writer
Thar's gold in that thar . . . Internet?
Veteran mining executive Franco Boulle - whose brother, Jean-Raymond, co-discovered the massive Voisey's Bay nickel field in Labrador - has seen the future and it's on the desktop, not in the ground.
So, two years ago, he took his junior mining company with its listing on the former Vancouver Stock Exchange and went shopping for a hot new Internet-based technology.
``Mining was going down,' Boulle explains during an interview in Toronto last week. ``We had to find a different direction. I looked around for a field where we could invest with high potential rewards. I wanted to create a $1 billion company and get in on the ground floor.'
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`Too many pension funds and life insurers are still waiting for the mining sector to come back'
- Harry Jaako,
Discovery Capital
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He found it in Boston, at a large health-care management firm that had, as a sideline, acquired the intellectual property rights to a method of transmitting x-rays and other patient records over the Net.
Boulle's research told him the future value of the market for technology that cut the health-care industry's clinical costs would be worth the equivalent of about $150 billion. So, he jumped in.
Last summer, his company paid $4.9 million to acquire a 60 per cent stake in Worldcare Technologies Inc. from its parent company, Worldcare Ltd.
Since then, Boulle's company, United America Enterprises Ltd., has seen its stock price jump five-fold. Its market valuation on the new Canadian Venture Exchange - what Boulle and some others refer to as Nasdaq North - is now $33 million.
While not exactly in the same category as some of the stratospheric Nasdaq valuations given the latest dot.com success stories, it's not bad for a company that had sales of just $2 million last year.
It's also one of the many recent examples of the sea change occurring in Canada's venture-capital markets.
Where risky, high-tech ventures used to find it difficult, if not impossible, to raise money in Canada, even the most conservative pension and insurance funds, not to mention ordinary Canadians, are now hopping on the Internet bandwagon.
Barely a week goes by now that another dot.com venture doesn't announce a wildly successful financing, or another group of seasoned entrepreneurs doesn't form a high-tech venture capital pool.
Last week, Ventures West Capital Ltd. became the latest privately funded group to announce that it's awash in cash earmarked for early-stage Canadian Internet, software and biotech firms.
The Toronto-based fund said its new $200-million capital pool, Ventures West 7, is the largest of its kind in Canada.
Perhaps even more significantly, it has the backing of normally cautious financial and pension institutions, including the Ontario Municipal Employees Retirement Board, Clarica Life Insurance Co., Bank of Montreal Capital Corp. and the Ontario Teachers' Pension Plan Board.
The new fund joins a growing list of high-tech incubators, including:
Itemus Inc., the former mining firm Vengold Inc., which set up shop two weeks ago with $70 million in capital to spend on high-tech startups.
EcomPark Inc., with interests in online pet supplier Petopia.com and online music retailer SamsCD.com, which is in the midst of raising $50 million.
And Brightspark, co-founded in November by former Delrina Inc. partners Mark Skapinker and Tony Davis, which launched an e-commerce venture with one of Canada's largest shopping-mall owners, RioCan Real Estate Investment Trust.
And that's just a partial list. Other sources of venture capital for high-tech firms include several labour-sponsored funds, the Royal Bank of Canada and BCE Emergis Inc.
Ordinary Canadians, through publicly traded shares, are also stepping up to the plate. The Canadian Venture Exchange, which accounts for roughly 5 to 10 per cent of all junior high-tech financings in Canada, is soaring.
In the three months since the junior stock exchange opened for business, high-tech firms have been responsible for raising more than a third of the $270 million in new money. Last month, high-tech stocks accounted for more than half the value of shares traded, while the exchange's main index doubled to just over 4,000 points.
Altogether, the venture capital pool in Canada grew by estimated $2 billion last year to its highest-ever level, according to the Canadian Venture Capital Association.
Financings for the first nine months of last year were up 30 per cent over the previous year, the group said in its third-quarter report for 1999. Year-end results are due out shortly.
In the last two years, in British Columbia alone, where Boulle's company is based, the top 20 high-tech companies have seen their market valuation jump from $6 billion to $75 billion, says Harry Jaako, head of one of Canada's first high-tech incubators, Discovery Capital.
``That's how rapidly they're developing,' Jaako says. ``And that's just the tip of the iceberg.'
Still, Jaako warns that it's nowhere near enough. ``I'd say we're falling further and further behind as a percentage of what's being invested in the U.S.'
He notes that institutional investors in Canada have been slow to get on board: ``Too many pension funds and life insurers are still waiting for the mining sector to come back.'
Mary Macdonald of Macdonald & Associates Ltd., which tracks venture financing in Canada, expresses the same mix of optimism and concern about Canada's high-tech future.
While the number and size of venture financings in Canada has reached an all-time high, she writes in a recent report, the gap with the U.S. is actually widening.
Canada's pension funds spend disproportionately less on high-risk ventures than their U.S. counterparts, she notes. While U.S. pension funds commit $15 billion a year to venture deals of all kinds, Canadian pension funds commit just $200 million, Macdonald warns.
Entrepreneurs, like Boulle, agree it may not be enough to keep them in Canada.
Since he first began looking for a ``new-economy' project, Boulle says he has seen the sea change in Canada's venture-capital markets.
Until a few months ago, he says, he thought his company's share price was heavily discounted because it had listed on a non-U.S. exchange. ``Suddenly, the market in Canada woke up to the Internet.'
But Boulle is keeping his options open.
He'll go wherever he can maximize his shareholders' value, whether that means selling out to a larger company, seeking a Nasdaq listing or staying on Canada's junior venture exchange as it grows.
In some ways, Boulle notes, investing in junior high-tech companies isn't all that different from investing in mining exploration outfits. After all, it's all about buying stuff you can't really see.
``I think what I bought was Mark's vision,' Boulle says, referring to Mark Gillett, the product developer at Worldcare Technologies.
By combining that with a strong management team that has experience in running technology companies, he believes he's backing one of the winners.
Or as Gillett puts it: ``We're poised on the edge of that cliff. As long as we're running fast enough when we jump off, we'll fly.'
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