Chapter 6: The Canadian junior IPO market and the Capital Pool Company program
Entrepreneurial firms are an important engine of growth in most developed economies, and fostering the development of smaller growth firms is an important economic objective. To develop their businesses, entrepreneurs need access to capital, and the debt market is often difficult to access since young firms lack the cash flows and collateral required by lenders. Thus, until a firm has grown to a certain size the entrepreneur must rely on equity capital, which is also difficult to attract due to the high costs of information asymmetry and the agency costs that exist between the entrepreneurs, management, and investors. A substantial body of academic research documents the important role that venture capital (VC) and private equity (PE) investors play in financing entrepreneurial firms. Since these formal investors are specialized investors, they can alleviate the information gaps and costs that are prevalent in the private market. Specifically, VC and PE investors use their expertise to screen, advise, and monitor the entrepreneurial firms. However, only a small fraction of firms can attract VC and PE financing, and some firms might be averse to the strict oversight that accompanies such investment.
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