CLMPC research shows that enterprises facing barriers to sufficient, affordable capital form the client base of labour-sponsored investment funds, as they do for most venture capital institutions. Such companies tend to be described as coming from the small business sector since size is a pervasive characteristic of underfinanced concerns, though obstacles may exist due to other factors, such as the innovative or technical nature of products and production, location in a disadvantaged region, or the gender of owners.
Small and medium-sized companies are often defined according to work force size (i.e. 50 employees or less and 500 employees or less, respectively). The investee firms of the leading funds fit this definition. For instance, only a handful of all of the investee firms of the Fonds de solidarité are larger employers. Also, enterprises employing no more than 50 persons currently constitute roughly one-half of the investments of Working Ventures.
A 1994-95 survey of close to 1,500 small and medium-sized firms completed by the CLMPC and the Canadian Chamber of Commerce confirms the ongoing requirements of this sector about access to capital. More than one-half of survey respondents said their financing circumstances were only somewhat adequate or were not adequate. The CLMPC - Chamber report concluded that a major financing gap was the minor role occupied by external equity sources in filling commercial demand in Canada.Endnote 20
Finding solutions to capital availability problems is one of the main rationales of public policy assistance of labour-sponsored funds. The funds are intended to fulfill this by providing for entrepreneurs in Canadian industry in one of two ways.
First, a fund can act independently to finance an enterprise in need. In this case, it offers a viable equity alternative to dependence on collateralized debt. In the past, this alternative has been resisted by those seeking external capital because it implies some loss of control by owners/managers, however temporary this situation may be. On the other hand, many owners/managers turn to labour-sponsored funds in recognition of the value-added yielded by such collaboration as a firm passes through development stages and moves towards new organizational goals (e.g., public offering, reliance on retained earnings).
The second way a fund can offer support is through leverage of various supplementary financing sources. In this case, it may act as the first-in supplier of equity capital that, in turn, attracts co-investment from a wide gamut of private and public sector financial institutions, including lending institutions. It was mentioned earlier that co-investment is a key element in market activity as it produces benefits to both investors, such as reduced cost and risk through diversification, and investee firms, such as flexibility and capital strength. Such syndication also unites institutional players with different, but complementary, qualities relevant to specific projects.