Friday, October 31, 2008

The New Funding Gap for Canadian Entrepreneurs

The newly-renamed National Angel Capital Association has announced its first Co-Investment Summit for November 19 (was there really any confusion about what the National Angel Organization did? I asked my brother the priest, and he said his people were clear on the matter). The event is designed "to bridge even more of the funding gap faced by seed- and early-stage enterprises in Canada."

Two points here: first, the NCAO is looking for some companies to pitch - go check the site if you are interested. Second - and I'm seguing away from the NCAO to another matter altogether - it's time we stopped attaching the phrase "funding gap" to early stage ventures.

In a relative world, the funding gap for research and commericalization is a teeny tiny little thing. Like the gap between Madonna's front teeth, it's not as charming as her publicists might want you to believe, but it's not as hideous as the gap you'll see in any hockey player's mouth, either.

It seems to me that, of the available government capital, most of it has been allocated to research and commercialization. If we're going to accurately speak of funding gaps and the need for urgent action, then public discourse in Canada needs to turn to later stage ventures.

We've all seen the "Valley of Death" charts that many advocates for government funding used to great effect 4 years ago. Now, however, those charts look much different. The new occupants of the Valley of Death are companies that angels and VCs have funded, that now find themselves with increasingly limited access to anything other than small bridge $$ from their current investors.

What's the likely size of this gap? According to the CVCA, in Canada 412 companies received VC funding in 2007. If you apply the "angels do 30-40% more deals than VCs" maxim, that means approximately 1200 received angel funding during the same period. Applying the 18-24 month cash runway rule of investing, that means that most of these are now seeking follow-on funding in a cash desert.

I wish Paul Kedrosky was here – he could draw me a nifty graph to illustrate the point.

Here are the questions we need to ask ourselves: Why is there no government policy that focuses on job retention/creation for this sector? What good is an innovation strategy that feeds academic researchers while it starves the current generation of entrepreneurs?

Disclaimer: Let's not get sidetracked by the debate over whether government support is the right way to foster innovation and entrepreneurship. The reality is that it is, in the near term, the predominant support available. Shouldn't some of that near-term support be directed to entrepreneurs who have proven they can commericalize a product and build a start-up?