Caseridge Capital Corporation

Caseridge Capital Corporation

1 First Canadian Place,

100 King Street West, Suite 5700
Toronto, Ontario M5X 1C7
T 416-915-4142 F 416-915-3177

www.caseridge.com

TECHNOLOGY & SPECIAL SITUATIONS REVIEW: MARCH 9, 2010

 The Adamou Rant
Venture Capital, Government Incentives and Research In Motion.

I had a copy of Rod McQueen’s biographic account of the development of Research In Motion,
Blackberry: The Inside Story of Research in Motion delivered to me recently. I congratulate McQueen on
his diligence and his behind the scenes access to the company. The events that conspired to make RIM a
success are well worth the read.

This book is a must read for SME’s, governments, venture capitalists and investors alike; it is an excellent
behind the scenes account of the struggles that RIM faced at the early stages of development within the
Canadian financing environment. RIM raised seed money through founders shares, they raised money
through the hiring process, they raised money through their employees, they raised money from strategic
partners, they borrowed against working capital lines and against their mortgages – and all of this before
they completed their first venture round of financing. Their perserverence, and their “do what needs to
be done” attitude which can best be described as fearless, should prove to be an inspirational tale of
confidence to every entrepreneur and CEO in this country.

This account also highlights the hybrid nature of the Canadian venture capital industry; RIM is the
perfect example of the value that the public markets bring to smart, prepared and persistant
entrepreneurs. Venture capitalists and portfolio managers should take note that the traditional rules of
venture capital in Canada were broken to accommodate RIM’s needs. RIM was weeks away from a bank
forced shut down of their business through a liquidation of their inventory, a struggle that far too many
entrepreneurs and small business people suffer through every day. They turned to traditional VC’s and
got nowhere fast. They survived only because they landed in the hands of the right investment banking
boutique partnered with the right venture capitalist combined with a group of public equity mutual
funds and an adequate system of securities rules. There was no doubt in my mind when I first looked at
RIM in 1996 that they were on to something big, unfortunately the traditional VC oligarchy at the time
suffered from the same “VC group think” that prevails today: rather than looking at the realizable
potential of the business, the VC’s were looking to juice their returns by taking advantage of RIM’s
financial difficulties and through the imposition of complicated and one sided agreements. The VC’s
were looking to join together in order to bend RIM to their collective will – rather than to take a chance on
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a risky venture. They were willing to see it fail, rather than to change their documentation.

So why did this deal get done? Working Ventures – the fund that employed me at the time and that was
funded wholly by retail investors via government tax credits, developed into a hybrid public/private
equity venture fund. Most of Working Ventures’ employees had no background in the venture capital
business because the senior management team, led by James W. Hall, decided to eschew the old school
VC network for new blood with new ideas. I, as a twenty something year old at the time, was able to
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succesfully pitch and to receive approval from senior management for a “public markets team” whose
role was to leverage our strengths as venture capitalists with the money of traditional mutual funds to
create an avenue for younger companies to access greater pools of capital without the sometimes
oppressive requirements of private equity venture funds. Through this process, we invested in a number
of tremendously succesful publicly listed companies in the mid 1990’s, including SXC Health Solutions,
MKS Inc., Enghouse Systems, Leitch Technologies, Dalsa Corp., Alarmforce Inc., Hemisphere GPS, Nuvo
Networks Inc., Virtek Systems and many, many others at a time when venture capital was extremely
tight. Working Ventures developed a reputation for making solid venture style investments into public

Caseridge Capital Corporation 100 King Street West, Suite 5700, Toronto, M5X 1C7
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equities, and our investment department as a group developed an expertise in making and syndicating
this style of transaction.

GMP came to us first in the Research in Motion round because they knew that our lead order would
provide a strong measure of credibility and comfort to the traditional public equity mutual funds that
might be induced to co-invest in that round. They knew that we had the tools and the capacity to
complete the “heavy duty due diligence” required for early stage investments and that we would be
there to support GMP and RIM in their effort to take the company to the public markets in the
subsequent round. The mutual funds took a measure of comfort in co-investing in a company with WV
since they generally lacked the resources to conduct the ground level research that was required in order
to support this type of transaction while we specialized in it and in effect, our money was our badge in
terms of the viability of the business. I truly believe that it was this freedom that set the stage for RIM’s
initial success in this key financing round. RIM raised $35MM in this first round, and over $90MM just
one year later. Working Ventures participated in both rounds. It was the only venture capital fund to do

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so.

This story does not have a fully happy ending despite RIM’s tremendous success. Just over one year after
our investment in Research in Motion was completed, the federal and provincial governments, lobbied I
believe in part by traditional venture capital funds, decided that this hybrid private/public venture
capital model was an inappropriate use of taxpayer money – and they placed some severe restrictions on
our ability to invest in publicly listed companies, even if the government policy objectives relating to the
size of the company, the number of employees and the use of the funds were otherwise met. The various
governments, in their collective wisdom destroyed the elements that combined to finance the single most

F: 416-915-3177
succesful investment in Canadian history. How smart is that? I left Working Ventures shortly thereafter.

Unfortunately, these restrictions are still in place. Venture capitalists from across the country continue to
lobby their various governments to provide them with more money, more tax credits and more taxpayer
assisted benefits – but the question of enabling these credits to all companies – public or private as was
the case for Research in Motion, is rarely mentioned. The traditional venture capitalists see themselves as
the founders of a “Silicon Valley North” and they follow the US trends, which unfortunately do not apply
to our Canadian market. They seem to see themselves as avant garde investors in tomorrow’s technology

P: 416-915-4142
companies, however they behave more like bankerss – preferring security and downside protection over
opportunity. They are willing to give up tremendous potential upside on a transaction by insisting on
placing unreasonable handcuffs on brilliant management teams in order to ensure, should the company
fail, that they realize 15 cents on the dollar rather than 12. They will refuse to buy out some of the
founders shares in order to ensure that these risk takers remain motivated. Unfortunately, this
motivation leads to a lack of sleep and an aversion to risk - management is hardly motivated to swing for
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homeruns when failure implies personal bankruptcy and the loss of a home.

My message to the various levels of government that may be looking at policy alternatives for the venture
capital industry is that less government regulation and involvement is better than more, and that lower
taxes and less government is the best path forward. Unfortunately, there is a tremendous lobbying effort
underway by the traditional venture capital funds looking for the government to manufacture an
environment that is more hospitable to their investment style. To that, I have a few words of warning:

 Be cautious of the motivations behind the established funds and their lobbying efforts. They are
typically highly targeted only to their existing model of doing business;

adamou@caseridge.com P: 416-915-4142 F: 416-915-3177 2

  Be cautious of the statistics that are presented to you by the CVCA and the other venture capital
groups – these figures typically ignore money raised in the public equity markets and understate
the level of activity by several magnitudes;
 Do not ignore the role of the public markets in financing venture stage companies thereby forcing
them into the arms of the small group of funds that your tax credits favour. It shouldn’t make a
difference from a policy perspective whether the company in question is private or public if it
meets your over-all policy objectives;
 Be cautious of placing too many restrictions on the use of the funds that are raised or provided.
Don’t look to provide sector specific tax incentives and let the market (private or public)
determine where the best returns might be;
 Eliminate sector specific tax credits or write-offs to resource and energy companies – whatever
the policy objectives that might be served, they are not being served and you are only sucking
money away from operating companies in other sectors. Create an equal environment for all
SME’s and allow them to compete based on the quality of their business plan;
 Finally – provide a framework that will allow for new players to enter the venture capital arena
which would thereby increase the level of competition in the industry. How great would it be if
we were to see a dozen new funds funded and run by younger and more entreprenurial investors
rather than by the same old players who have been at this for what appears to be forever?

I’m available at 416-915-4142 if you want to talk.

Adam E. Adamou
adamou@caseridge.com

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Network on LinkedIn. Since going “live” the Caseridge TechSys DealBook Network has grown to one of
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April 28, 2010

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Caseridge Capital Corporation 100 King Street West, Suite 5700, Toronto, M5X 1C7
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Note that the opinions in this report are solely those of the author. The information in this report is gathered from various information
provides that we believe to be reliable. Material errors or omissions are unintentional, and corrections may be forwarded to the author for

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correction in a subsequent report. This report is intended only for sophisticated and accredited investors, the recommendations made should
not be acted upon by investors without proper advice and consultation with their investment advisor. Caseridge is not a member of the
Investment Industry Regulatory Organization of Canada (IIROC) or of the Toronto Stock Exchange. Caseridge is registered as an Exempt
Market Dealer in Ontario.

This message and any attached or linked material, is for information purposes only, and does not constitute an opinion, advice or a
recommendation regarding any securities referred to therein. Information in this message or any attached or linked material relating to an
offering of securities should be read in conjunction with the prospectus or other offering document for those securities. Caseridge Capital
provides corporate finance advisory services in the areas of new issues, private placements, mergers, acquisitions, valuations and strategic
advisory services.

Caseridge does not directly or indirectly own shares in the companies named in this report, however independently managed mutual funds or
other investment vehicles that may be owned by the author or by Caseridge employees may take positions in companies named in this
report.

F: 416-915-3177
P: 416-915-4142
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adamou@caseridge.com P: 416-915-4142 F: 416-915-3177 4