Despite the fact that small business entrepreneurship has achieved near-celebrity status, the reality is that not every startup can rely on a Dragons’ Den windfall to take itsw business to the next level. The resources to take companies from the friends-and-family financing stages to the venture capital (VC) table are in increasingly short supply. And the inability to fund that transition is hampering Canada’s ability to compete over the long term.
For many proponents, equity crowdfunding could be a viable means to fill that gap and help entrepreneurs hold on long enough to capture the attention of VCs. A concept that has proven itself in the social orientation fundraising side of things in North America, equity crowdfunding is well on its way to being approved in the U.S., with hopes that Canadian governments will follow suit in short order.
Equity crowdfund investing combines technology and social media to raise small amounts of equity or debt financing from large numbers of online investors through designated, regulated portals. It’s a practice that has been approved in Australia and parts of Europe for several years.
The push to approve equity crowdfunding in North America can be attributed to the ongoing decline of venture capital funds for early stage companies, says Dr. Cindy Gordon, national chair of Invest CrowdFund Canada, a division of CATA (Canadian Advanced Technology Alliance), in Toronto. “If you look at private equity companies, they’ve gone upstream from seed players to Series A. They want to see $1-million in revenues. For early stage companies, access to capital is a big issue in this country.”
The VC front is definitely migrating out of the startup game, says Craig Asano, founder and executive director for the national Crowd Funding Association (NCFA) in Toronto. “In 2000, almost $6-billion was invested across 1,007 Canadian startups. Ten years later VCs invested only $1.1-billion in 357 Canadian firms. That’s an alarming trend.”
This does not bode well for Canada’s competitiveness when it comes to innovation and commercialization, he adds. “What I hate to hear from the tech community is someone who has gone through a great Canadian education, has great ideas, scraped some funds from friends, family members and angels, has got a prototype and applied for SR&ED credits, but they can’t get accepted into accelerator programs because there are simply not enough to go around. So their best ideas end up going to the U.S.”
Startups outside the confines of larger urban centres are even more hard pressed to take ideas to commercialization, since they typically don’t have the network to connect with angel groups. Crowdfunding portals for their part could allow those people to extend their reach to potential investors and enact transactions from coast to coast.
The power of equity crowdfunding has been demonstrated in in other jurisdictions around the world. The Australian Small Scale Offerings Board (AS-SOB) has raised more than $132-million in equity through crowdfunding since 2005, Mr. Asano reports. “Of the 186 companies it has helped, 86% are still in operation. I would say that’s a significant success. You also can’t help thinking about job creation when you look at those examples.”
Having more diverse funding options is absolutely critical given that innovation statistics are consistently falling down the ranks, he adds. “With 28% of Canada’s GDP coming from small business, if we can’t enable that system to be fluid and evolving and flourishing, confidence in the system will dry up. We need to create an environment that makes up for funding shortcomings and the gap that exists with the U.S. We’re not talking big bucks here. We’re talking the funding needed for startups to develop a business and survive.”
If Canada plays its cards right, and in a timely fashion, a crowdfunding channel could play a role in encouraging startups to stay home rather than going to U.S. resources such as Rockethub, Indiegogo and Kickstarter. As Ms. Gordon notes. “Over time, we’re going to be able to transact all over the place. A startup can just as easily plunk their invention in Silicon Valley as here. That’s the battle we’re fighting.”
”Bright minds will get it done one way or the other,” Mr. Asano says. “Our job is to give them the tools to benefit ourselves.”