By Peter Vanderlee

Arizona's innovation sector has long been constrained by limited venture capital (VC) investment, a situation now further eroded by a recession that has stifled fund raising efforts through the past two years.

In the first nine months of this year, venture capitalists raised just $8 billion across 83 funds, down from the $18.9 billion raised by 141 funds through the same period last year, according to a report issued last month by Dow Jones Private Equity Analyst. And while VCs invested $3.7 billion during this year's second quarter, Arizona, which historically trails other states in venture capital activity, saw just three companies receive $64 million, according to the most recent figures available from PriceWaterhouseCoopers and the National Venture Capital Association.

So if you're a growing company in Arizona with an innovative product or service that's market ready, but are cash constrained and have limited prospects for raising traditional venture capital in the near future, what are you going to do to survive, much less grow?

One solution – look north across the border to a public venture funding program that has been fueling the growth of resource, technology and innovation companies in Canada since 1987, and is available to Arizona companies.

"Like Arizona, Canada has long had limited access to traditional venture capital, in spite of vibrant resource, technology and life sciences sectors that badly needed to find a sustainable way of sourcing seed and early stage growth capital for emerging companies showing strong market promise," said Glenn Williamson, a Phoenix-based investment banker who moved from Canada to Arizona more than 20 years ago, and is also founder and CEO of the Canada Arizona Business Council. "That's what led to the development of the Capital Pool Company (CPC) program offered through the TSX Venture Exchange (TSX-V)."

The program allows 3 to 5 founder/directors to collectively invest between $100,000 and $1.8 million into a capital pool company that issues a prospectus offering, and upon completion of that offering, receives a public listing on the TSX-V. That company, essentially a public venture vehicle, then has 24 months to complete a qualifying transaction – identifying, disclosing and acquiring a target growth company. At the time of the qualifying transaction, another private placement is usually completed, typically raising an additional $2 million to $4 million, or more, depending on the operating needs of the acquired growth company and its market appeal.

Since the inception of the CPC Program, 2,021 companies have been listed (134 are U.S.-based, 5 are from Arizona), 80% have successfully completed their qualifying transaction, and have an average market capitalization of $13.6 million. Some have gone on to even greater success, with 247 former capital pool companies currently trading on the TSX, which requires that a minimum company market capitalization of $30 million be maintained.

The TSX-V, serving the public venture equity market, and the Toronto Stock Exchange (TSX), serving the senior equity market, are Canada's two national exchanges, both operated by the TMX Group Inc., ranked second in the world by number of listed companies.

There is a special connection growing between Arizona and the TSX and TSX-V that started in 2006. It was then, during an unrelated business discussion, that Williamson learned from Toronto Stock Exchange officials that they wanted to grow listings from U.S.-based companies, but were limiting their focus to the northeast and Atlantic coast states. He quickly realized that the Capital Pool Program, especially, would be a good fit for Arizona and began work to point their attention south. In 2007 he helped arrange for Governor Janet Napolitano to open a session of the Toronto Stock Exchange as part of her trade delegation's visit to Canada, and also, through the Canada Arizona Business Council, hosted a day-long TSX and TSX-V market education seminar at the Arizona Biltmore that drew more than 200 business owners and executives, and their financial and legal advisors, from across the state.

Since then, the education sessions have become an annual event in Phoenix, this year piggybacking on the Arizona Association for Corporate Growth Capital Connection conference held in late October at the Westin Kierland Resort & Spa in Scottsdale.

As a result there are a growing number of legal, accounting and financial advisory firms in Arizona who have become knowledgeable about how the TSX-V and its capital pool program works. In turn they have developed strong relationships with the Exchange as well as with Canadian securities brokers, lawyers, accountants and investor relations specialists who can ensure that a successful TSX-V financing and continuing growth strategy can be executed on behalf of Arizona companies.

Phoenix-based attorney Bob Rogers, of Rogers Law, Ltd., who specializes in business and finance and has been involved in numerous private and public offerings, is convinced the TSX-V capital pool program is a financing alternative many Arizona growth companies should consider.

"It's not for every company, but this is a reputable, proven program that provides an efficient and affordable route to public financing that is a lot less onerous than what is currently available in the U.S.," said Rogers. "For example, a new, clean capital pool company has none of the hidden costs and liability of a ‘shell' with a previous operating history."

Lowell Thomas, a Tucson-based partner with Snell & Wilmer LLP, who also specializes in business and finance with an emphasis in cross-border U.S. and Canada transactions, including several deals involving TSX and TSX-V companies, concurs.

"There are a number of things you have to have in order to make a deal successful – Canadian board members with capital market experience that can work with your management team, a strong broker champion who believes you have something unique to the market and can execute your growth plan, good advisors who can help you plan ahead for cross-border tax and legal considerations, and a focused and sustainable investor relations program – but with that in place you have a clear route to a listing that is internationally recognized," said Thomas.

One reason for that recognition, Thomas points out, is that both the TSX and TSX-V conduct a due diligence process that's at least equal, and probably more rigorous, than what traditional venture capitalists would put a company through. Extensive background checks – more than 7,000 annually – are run on prospective company directors and officers.

"Bottom line though," said Thomas, "for the right Arizona companies, executed the right way, this is a program that can work and provide a sound platform for sustainable financing."