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

 Caseridge TechSys Commentary
An Adamou Rant: The Venture Capital Industry and the Role of Governments

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 reading about and I’m surprised that it took this long for a book on one of the
greatest Canadian success stories of all time to be published. I congratulate Rod on his diligence in
putting together an excellent account of “How Research in Motion Did It!” – and for noting my small
contribution to this success.

For small companies this book is important in that it is the most accurate 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 be described as fearless, should prove to be an inspirational tale of confidence over security to every
entrepreneur and CEO in this country.

Second, this book 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 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. They talked to traditional VC’s
about raising private equity and got nowhere. 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, they were looking to juice their returns by taking advantage of
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RIM’s financial difficulties through complicated and one sided agreements. They were looking, as they
typically do, to join together and to bend RIM to their collective will – rather than to take a chance on a
risky venture.

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
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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
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 companies in the early to mid 1990’s, including SXC Health Solutions, Mortice
Kern Systems, Leitch Technologies, Dalsa Corp., Alarmforce, Hemisphere GPS, Nuvo Networks and

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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 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 investing in a company that we were
involved with because they lacked the resources to complete the research 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

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Ventures participated in both rounds. It was the only venture capital fund to do so.

This story does not have a happy ending despite RIM’s tremendous success however. 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 put 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 met. The
various governments, in their collective wisdom destroyed the elements that combined to finance the

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single most 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

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to our Canadian market. They seem to see themselves as avant garde investors in tomorrow’s technology
companies, however they behave more like banks – preferring security and downside protection over
opportunity. They are willing to give up huge potential upside on a transaction and they insist 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
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motivation leads to a lack of sleep and an aversion to risk - management is hardly motivated to swing for
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 this:

Be cautious of the motivations behind the established funds and their lobbying efforts. 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. Be careful of placing too many restrictions on the use of the funds that you might provide.

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

 Don’t ignore the public markets as viable venture financing vehicles. Don’t look to provide sector
specific tax incentives, let the market determine where the best returns might be. Finally, please 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.

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

Adam E. Adamou
adamou@caseridge.com

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April 28, 2010

Historical Equity Pricing Data supplied by Capital IQ is licensed by FTSE International Limited to publish the FTSE
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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
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 Capital Corporation 100 King Street West, Suite 5700, Toronto, M5X 1C7
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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.

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