What is “Venture Capital”?

       Venture Capital refers to the funds provided by investors (also known as the venture capitalists) to start-up companies and small businesses with the potential for long-term growth. Venture Capital provides the financial resources to start-ups which may not have the access to capital markets otherwise. Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships. Venture Capital helps solve the problems for entrepreneurs who have difficulties raising funds by issuing debt. What entrepreneurs need to keep in mind is that venture capitalists usually have a say in company decisions on top of holding a portion of the company’s equity.

      

           The loans Venture Capital makes to start-up companies are often high in rates with the possibility of an annual return rate up to 50 percent. However, unlike banks and other lenders, venture capitalists can take equity position, which means that you can give a portion of your or other owner’s interest in the company to the venture capitalists instead of paying out cash in the form of interest and principal instalments. 

   
Companies that venture capitalists are most interested in are those who have:

     1. Rapid, steady sales growth;

     2. A new technology or dominant position in an emerging market;

     3. A sound management team;

     4. The potential for being acquired by a larger company or getting publicly listed in the stock market.

    
 There are three different types of venture capital:

  
 1. Private venture capital partnerships are perhaps the largest source of risk capital and generally look for businesses that have the capability to generate a 30 percent return on investment each year. They like to actively participate in the planning and management of the businesses they finance and have very large capital bases--up to $500 million--to invest at all stages.

     

      2. Industrial venture capital pools usually focus on funding firms that have a high likelihood of success, like high-tech firms or companies using state-of-the-art technology in a unique manner.

     

      3. Investment banking firms traditionally provide expansion capital by selling a company's stock to public and private equity investors. Some also have formed their own venture capital divisions to provide risk capital for expansion and early-stage financing.

The way to contact venture capitalists is through an introduction from another business owner, banker, lawyer, or other professional who knows you and the venture capitalist well enough to approach them with the proposition.

The Tax-Free Savings Account (TFSA) not quite so simple for some

As you may know, the The Tax-Free Savings Account allows you to contribute up to $5,000 of after-tax funds to a tax-free savings account, invest in anything you want, and the income or gains accrue tax-free for life and can be withdrawn tax-free at any time, for any reason. However, several rules need to be followed - Today, I would like to share an excellent article written by Jamie Golombek from CIBC and published in the National Post. &&&& When it was first announced, it seemed so simple. You contribute up to $5,000 of after-tax funds to a tax-free savings account, invest in anything you want, and the income or gains accrue tax-free for life and can be withdrawn tax-free at any time, for any reason. Miss a year? No problem because the $5,000 annual contribution limit automatically carries forward for life. Need to withdraw funds? Piece of cake — you can recontribute them beginning the following year. Sounds like a walk in the park, right? You would think so, but in 2009, the inaugural year of the TFSA, of 4.8 million Canadians who opened a TFSA, 72,786 (1.5%) received a letter in 2010 from the Canada Revenue Agency about possible excess contributions. This was the subject of new special report titled Knowing the Rules issued this week by the Taxpayers’ Ombudsman. The role of the ombudsman includes conducting “impartial and independent reviews of service-related complaints about the CRA,” as well as identifying and reviewing “systemic and emerging service-related issues within the CRA that have a negative impact on taxpayers.” The special report, subtitled Confusion about the rules governing the TFSA, was prompted in part by numerous media reports (several by yours truly) on the difficulties experienced by taxpayers who found themselves in a TFSA overcontribution situation, facing penalties of 1% per month of overcontribution, many through no apparent fault of their own. The issue was a lack of awareness of when a TFSA withdrawal can be recontributed. The ombudsman received complaints from taxpayers who had received letters from the CRA advising that they were being penalized for overcontributing to a TFSA and who complained that “TFSA rules regarding withdrawals and overcontributions were confusing.” The ombudsman’s office began its review in June 2010, but delayed issuing a report until now since the CRA was reacting to complaints by continually updating information on its website and training its staff on the TFSA. The conclusion was that while the CRA has already taken steps to address the issues surrounding TFSA contributions, and continues to do so, it “should have been more proactive in informing Canadians about the tax consequences of the TFSA.” It recommended that the CRA take steps to make Canadians more aware of the information it provides about the TFSA and be proactive in informing Canadians about how to find the tax rules governing the TFSA as well as to continue to work with the financial-services sector to ensure the CRA’s information about the TFSA is widely available. The CRA, in response to the report, issued a news release welcoming the report as an opportunity to improve services to Canadians and developed an action plan to address the recommendations which includes updated TFSA web pages, the issuance of relevant tax tips, community newspaper articles, and communications to financial institutions. Taxpayers who are still uncertain of how TFSAs work should also seek the advice of a reputable financial advisor well versed in the apparent intricacies of what first appeared to be a simple, new savings option for Canadians. **** Jamie Golombek is the managing director, tax & estate planning with CIBC Private Wealth Management in Toronto.

Ten habits of successful executive investors

Every entrepreneurs hope to turn a profit every year and therefore try to invest their money wisely hoping to double and triple their initial investment... My good friend Benoit Poliquin, VP & Portefolio Manager of Pallas Athena Investment Counsel wrote an excellent article regarding this topic, I would like to share it with you:

Ten habits of successful executive investors

Unless you're returning from a holiday on Mars, you have surely heard by now that the financial markets have had significant pullback over the winter months.

How bad has it been? For those of you with investments in stocks, you know the answer – severe. The S&P 500 was down over 20 per cent from peak (in October 2007) to trough (in March of this year), while the S&P/TSX Composite Index was down 18 per cent from its peak (in November 2007) to its recent bottom (reached in January).

Even worse – or better – is that the markets have bounced back since then. The S&P 500 in the U.S. is up 11 per cent from its bottom, while the S&P/TSX Composite Index here in Canada is up 16 per cent from the January trough. This kind of volatility is, if nothing else, enough to pull your hair out.

It is during turbulent times like these that your success in investing will be determined. So what is an executive to do? After working for many years managing investments on behalf of executives, I have observed 10 habits that have greatly influenced their investment success.

1) What's the game plan?
As an executive, surely you have an up-to-date business plan. Well then, why shouldn't you have an investment plan? We can refer to your plan as your decision-making framework.

2) Establish and review your goals
You have a set of business goals, and if you don't, you should. Your investments should be considered an extension of your business, and so you should set rational and measurable goals.

3) Be honest with yourself
Can you live with the volatility? Does your mood follow the markets? You must avoid making emotional decisions, which usually entail a version of selling low after buying high.

4) Stop thinking like an executive
No matter how much coaching, mind space or pressure you have devoted to your investments, once the purchase is made, you have lost a great deal of control over the outcome.

5) Stay calm but be decisive
There will be investment mistakes. How you deal with these mistakes has a significant impact on your success. Storms always pass; you must use them to your advantage.

6) Do your homework
You need to understand what you are investing in. If you can't devote the time, or don't have the knowledge to do it properly, find someone who will. Investing on "gut" instinct doesn't work!

7) Quality always wins
An investment in stocks is in fact a partial ownership of a company. Make sure your investment demonstrates the quality you strive for in your own business. Consider the management, core competencies, competition and customers of the company you are considering.

8) Cash is king (or queen)
Avoid investments funded by borrowings. Losing your own money is one thing. Losing somebody else's is extremely harmful to your financial health.

9) Where's the income?
As an executive, you know that cash flow and net income are the lifelines of your business. Why should it be any different for your investments? Net income is great insurance in turbulent times.

10) Pay the tax
If you have taxes to pay on your investments, it means you have been successful. However, it doesn't follow that you should not look for ways to minimize your tax bill. Simply do not let tax questions drive your investment decision process.
The secret to turning volatile markets into fertile markets is to adopt these 10 habits. Volatile markets are a great time to "upgrade" your portfolio, as everything is on sale. As Warren Buffett once said: "Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well."