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?
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?
posted by Suzanne Dingwall Williams at
10:27 AM
5 Comments:
Hey Suzie,
I'm sure if I worked for the government I'd point to the SRED program as the primary job creation and retention tool across all levels of startups, regardless of their funding level. I find that government $ beyond IRAP and SRED usually results in a slow-moving co-dependent startup.
I think you're bang on where the funding gap is (mid to later stage). Government will not and should not fill it though.
Mark
I don't disagree. But you should also then answer the question, why should government fill the gap in backing of venture capital funds by providing fund of funds support? And if government is going to fill that funding gap, why shouldn't they address our near-term gap directly, too?
I hear you. Its a complex topic. For the government it should be about finding the most efficient, non-intrusive ways to create jobs and promote innovation.
Fund of funds support works because they can target relatively few entities and yet still have impact across many end companies.
SRED works because it is horizontal - same rules across the board and you don't need to apply (so the government doesn't need to track companies and decide to back them or not).
IRAP works because its limited in scope and is about the science not the company.
When you start talking about supporting companies directly mid-stream that creates a bunch of implementation issues:
- How do you select them?
- IP issues on sale / exit of country?
- Support of existing investors?
- Valuation?
- etc, etc, etc.
Its messy and not scalable (in the way that fund of funds is).
Mark
I agree that the best way to scale Canadian businesses is to give out tax credits and tax breaks by the boatload. But we don't have that at the moment.
What we do have is a series of policy initiatives that support innovation by supporting the people that back it (VCs at one end and at the other, research institutions). In a healthy economy, the result should benefit those in the middle. But when there's a capital crunch, it does nothing. Good companies will not always get follow-on funding. They will shut down or waste away.
Economic darwinism is a perfectly valid approach if consistently applied. But government propping up the money side and the idea side of the infrastructure and leaving an unpleasant sag in the middle that puzzles me. They've given some money to the BDC for direct investment, but the lion's share has gone elsewhere. From where I sit, the worst thing we could lose as a nation is a generation of entrepreneur operators, but it seems to me they are at the highest risk near-term.
Of course, one could argue that entrepreneurs have let this happen by poor advocacy. And this is true - when it comes to lobbying government, entrepreneurs have not organized or been effective. Lots of good reasons for this. But should we really agree that waiting for fund of funds money to make its way into the economy is a great way to solve near term problems? Or should we discuss whether there should be a different dialogue about the right kind of public policy when there's a capital crisis?
I'm mostly asking the question here - I try not to think too much when I'm not getting paid. But I find it odd that, with all the blogs and events out there aimed at Canadian start-ups, there's no disalogue about how government policy can be shaped.
My gut reaction is to be hesitant of too much government involvement.
Propping up the money side should be a for profit thing (ie. the money side should actually deliver returns - a separate issue).
And funding research is all good. Once you're commercial, I think you need to stand on your own by raising $ or selling product.
Entrepreneurs should do more on the advocacy / lobbying front I suppose, but I'd hate to see us push for more government involvement. No Bombardiers here in startup land.
Post a Comment
Subscribe to Post Comments [Atom]
Links to this post:
Create a Link
<< Home