Where are Canada’s startups? ‘Scrounging up’ funding

Limited funds and the complex process of obtaining them are one of the key obstacles making it difficult for Canada’s technology startups to grow and remain in Canada, experts and tech entrepreneurs say. One of the biggest and most common challenges facing Canada’s tech startups is financing, Roberta Fox, chair and chief innovation officer at consulting firm Fox Group, said in a phone interview. Many tech startups don’t have an initial, material product to show investors, making them wary of putting money on the table. “If it’s a traditional type of business, like retail or a store, or a dentist, something that has been around for a long time, the banks seem to understand it,” Fox said. “If it’s something that’s new and not as tried and true, like personal trainers, or consulting, or software apps or something that is a little more intangible, banks and secondary financing don’t know how to finance it, so they don’t.” Based on her own experience, Canada’s tech startups are often forced to turn to family members or friends for funding, and many will take out second mortgages on their homes, she said. “Even if you’ve got contracts and you’ve got orders, and you’ve got revenue, if it’s a sort of emerging kind of service or product like software or consulting, then they say no,” Fox said. Helene Joncas, vice-president of business development for the Eastern region at commercialization centre Wavefront, said in a phone interview that most Canadian startups consist of less than 10 people. She said they face key challenges related to funding, exposure and talent because they compete with larger companies. “Tools, talent, capital, customers, and training, those are the points of friction for a company that can hold them back,” Joncas said. Fox said startups can turn to angel investors or venture capitalists for funding, but the company equity that they are required to give up in return is high. Sometimes it means handing over the company ownership. “You have to give up 40 or 50 per cent for a very low amount of money, and small startups aren’t willing to do that,” she said. The Canada Revenue Agency offers the Scientific Research and Experimental Development (SR&ED) Tax Incentive Program and the National Research Council (NRC) offers the Industrial Research Assistance Program (IRAP). Industry Canada also runs the Canada Small Business Financing Program, which has assisted more than 120,000 businesses since 1999 with loans totalling about $1 billion each year, the Industry Canada website says. The Federal Economic Development Agency of Southern Ontario (FedDev) runs several programs such as the Eastern Ontario Development Program and the Investing in Business Innovation Program, intended to boost private sector investment in startups. According to FedDev’s website, the business innovation program helps to accelerate the development of new products and services and assists angel investor networks attract investment. Several provinces, including Ontario, British Columbia, Nova Scotia and Quebec, also administer funding programs for digital media projects. Still, many entrepreneurs find the processes for applying for government funding and tax credits too complex and cumbersome. John Philip Green, chief executive “dad” at online startup CareGuide.com, which matches families with prospective caregivers, said in an interview that funding from government initiatives is hard to obtain. The most popular programs with startups are not the ones with the most funding but the ones where it is easiest to obtain, he said. Fox agreed, saying it often “takes more time than is worth the money” for startups seeking to tap into government funding. Green said the SR&ED initiative is the most popular among startups because, though onerous, firms can be hired to conduct the application process on behalf of the startup. Still, small companies should not have to hire firms to process their applications, he added. “There’s a number of companies out there, and all they do is file SR&ED tax credits on behalf of other companies,” Green said. “The government sets up this program, and it’s so onerous to do, that small companies hire these larger companies that would then take 30 per cent of the return … It’s horrible.” Chris Adams, co-founder of tech marketing startup gShifts Labs in Barrie, Ont., said in an interview that there is never a perfect time to launch a startup, and company founders typically have to “scrounge up” their own savings. “There’s always going to be financial consequences for the startup founders,” he said. Adams said incubator and commercialization programs like Toronto’s Mars Discovery District or York Region’s VentureLab are a valuable resource for startups short on cash, where they can turn for expertise and funding. They are also good for the tech ecosystem, fostering startup hubs, he said. Adams said incubators can either help foster an idea, or shut it down. If the idea won’t work in practice, the entrepreneur can avoid spending a large amount of money and wasting their time. “At least you’re not carrying forth an idea that just won’t go,” he said. Entrepreneurs are also turning to crowdfunding as a tool for funding, where project creators use social networks to appeal for small funding donations from a mass number of people. A report commissioned by the Canada Media Fund last year, carried out by consulting firm Nordicity Group Ltd., said crowdfunding is an attractive model for smaller Canadian content producers. “Producers of all sizes have increased their access to financing, contributing to the democratization of content production,” said the report. “Increasingly, new entrants have the potential to be recognized and rewarded for their craft, where they may not have conventionally been able to secure funding or distribution for their projects due to traditional value chain barriers.” Canadian supporters of the crowdfunding model told The Wire Report last year that the Canadian Securities Administrators (CSA), an umbrella organization of Canada’s provincial and territorial securities regulators, should review possible changes to the securities rules so that they could permit crowdfunding for private companies. Adams said startups should approach investors of all kinds strategically, waiting until their product has gained some momentum before seeking funds. “If you ask for money too soon, you’re probably going to get a lot of doors slammed on you that say, ‘Prove your technology,’” Adams said. Green agreed, saying it is helpful to demonstrate a product and show there is consumer support for it. He said investors want to see that people are engaging with the startup's product. “Not only have you built something, but people have started to use it,” Green said. “If it’s a game, it’s actually sitting there and people aren’t playing it for one minute, but are getting addicted to it.” Green said he has experience over the years sitting on both sides of the table, as investor and entrepreneur. “We’ll fund any good-looking company,” he said. One thing that will set a startup apart is the company’s idea and its team, Green said, adding that there is a difference between a startup made up of high school dropouts and one of successful professionals. “If someone has a great idea, they should really partner with somebody that understands business,” Adams added. “That would be the right tapestry. It’s hard to do it on your own for a smaller company.” Good ideas, Green said, should not have too much trouble attracting money. Canada’s tech startups were successful in 2012, he said, pointing to Google Inc.‘s acquisition of Kitchener, Ont.-based startup BufferBox in November for an undisclosed amount. The company provides a service in which customers shop online and pick up their parcels from a local, green BufferBox. The two-year-old company, run by a group of University of Waterloo grads, said in a release Nov. 30 that it was excited to be acquired by Google. The company had been through the Y Combinator accelerator program in Silicon Valley, and at the time of its acquisition was a tenant at the Communitech Hub incubation centre in Kitchener, Ont. “It was a very young team and it’s a remarkable success because the company only barely got started,” Green said. —With reporting by Danika Grenier at dgrenier@thewirereport.ca and editing by Simon Doyle at sdoyle@thewirereport.ca. This is the first of a three-part series on Canada’s tech startups. Look for the next part, on takeovers, in the days to come. news@thewirereport.ca

Where are Canada’s startups? ‘Scrounging up’ funding

Broadcast | January 11, 2013

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