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.'