C HAPTER 7: C REATING I NVESTMENT O PPORTUNITIES T HROUGH T HE SDTC
MARKET RISK
At the same time, market risk increases as concerns arise over whether there is a ready market for the product and whether there is sufficient marketing infrastructure to support it. While the individual risks vary at each stage, the overall risk declines as the product approaches market readiness. At each stage of the process, there are key players who get involved, depending on the level of risks involved. In the early stages, when overall risk is highest, public funding for basic research is provided by federal and provincial government agencies to universities and colleges. As the technology progresses from bench-scale tests to larger-scale prototype tests and demonstration, overall risk continues to decline but financial risk increases. Early private equity - in the form of seed venture capital or individual angel investors - is a source of finance for fledgling companies prior to the venture capital stage. Formal financing through venture capital typically picks up at the seed capital stage where products have been prototyped and demonstrated, but are not manufactured in volume, and certainly not generating revenue. Venture capitalists fund individual companies through these commercialization stages and frequently exit when banks become involved or as the company reaches the IPO stage. Industry, often in the form of manufacturers or major technology users, will invest through the venture and market-entry stage, as their individual interests and economic ability allow. Individual industrial companies typically invest in their own form of technology innovation, usually to meet individual market needs or increase corporate competitiveness. Consequently, they cannot be relied upon as a consistent source of funding in this stage. Finally, large financial institutions take over as the technology enters the market. Public fund placements through pension funds are important players who generally invest in known companies or technologies already in the marketplace. FUNDING GAPS Throughout the process, it is clear that there are some distinct gaps in the funding cycle. The dotted line, Funding Intensity , shows the continuum of financial investment through the various stages of development (see Figure 3). The gaps in funding intensity are evident and are the result of a lack of product maturity, risk aversion within the financial sector and a fragmentation and lack of communication among key players in Canada. The first gap is referred to as the “ pre-VC gap ” and typically occurs between the latter portion of government investment stage and early part of the private investment stage. This gap is perhaps the single-largest barrier to companies and entrepreneurs trying to bring their innovations to market. With the recent decline in activity among venture capitalists, there has been an even greater withdrawal of capital placements from the pre-VC stage, as venture capitalists continue to hold portfolios in cash or fund existing initiatives and work with organizations they are comfortable with. This has increased the pre-VC gap, as money has become increasingly scarce. The second gap, referred to as the “ pre-IPO gap, ” occurs just prior to the product going to a market offering and large-scale investment. These two gaps are an excellent illustration of how the lack of integration can cause substantial breaks in the development chain.
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