More support needed for Canada’s small cap companies, TSX Venture says

“Simply put, companies cannot rely on the same channels and investor relations tools they used ten years ago.”

– Tim Babcock, Vice-President and Head of TSX Venture Exchange

The TMX Group has launched a new stakeholder engagement initiative aimed at strengthening Canada’s public venture capital market, an ecosystem that needs updating, says the TSX Venture Exchange, if Canada is going to remain competitive on the global economic stage. 

The “Venture Forward” campaign has started with a white paper and an open call for participants to help with the program, with the aim being to gather feedback on how to reduce barriers for small and medium-sized enterprises (SMEs) gaining access to venture capital and to expand the global base on investors and capital, all in aid of growing an ecosystem which raised over $11 billion in equity capital in 2021 alone for SMEs.

Cantech Letter spoke with Tim Babcock, Vice-President and Head of the TSX Venture Exchange, about the new program which launched last week, with Babcock calling it a community-driven campaign which hopes to engage in conversation with the full ecosystem of entrepreneurs, investors, financiers, lawyers, advisors industry professionals and regulators. 

Babcock said the aim is to identify challenges, obstacles and opportunities and to develop a comprehensive action plan for the way forward, and he stressed the important role that public markets play in supporting Canadian technology companies who are in their early stages and in need of capital to grow their businesses. As for tech companies, Babcock said their impact is growing and he pointed out that in 2010 about 13 per cent of companies listed on the TSX Venture were tech and innovation companies while now in 2022 they’re at 19 per cent.

“Our ecosystem has helped support a number of Canada’s tech companies through their foundational stages,” Babcock said. “Last year, tech companies on TSXV raised $1.8 billion in equity capital funding through more than 176 financings by small and medium-sized public companies. These are issuers that will lead innovation across industries, contribute to the development of Canada’s technology industry and further enable Canada to compete on the global economic stage.” 

The Venture white paper speaks of roadblocks faced by public SMEs as one area to focus efforts, singling out government supports to which SMEs lose access once they go public. Babcock pointed as examples to refundable scientific research and experimental development (SR&ED) credits which are available to larger private companies but denied to smaller public ones because the program has been designed so that status as a private company has been equated with ‘small business,’ which is definitely not always the case. Babcock called this a flaw in a critically important program, one which the federal government’s 2022 budget has committed to overhauling.

“Our message on this and on other policies the federal government is actively developing is to not fall into the same old trap of only allowing private companies to qualify for small business support. Instead, if you want to support SMEs, you should use another metric like a size/revenue test. Any company falling below that should be equally eligible for the benefit,” Babcock said.

The white paper also points to the changing investment landscape as an area of concern, where retail investors armed with self-serve trading accounts are playing a bigger role in the markets. 

The problem is this class of investor often has less access to quality research and correct information on public companies, especially those of the SME variety. That has to change, Babcock said, since small cap companies depend more heavily than large caps on retail investors. 

“The challenge that companies face in this environment is how to effectively communicate with and engage with these investors and this becomes even more interesting as the profile of retail investors changes, for example, to a younger demographic,” Babcock said.

“Simply put, companies cannot rely on the same channels and investor relations tools they used ten years ago. The world of investor relations is evolving and companies need to adapt,” he said. “The good news is that there are lots of resources available to help guide companies through the changing landscape.”