Capital markets shy away from funding innovators who lack management know-how
OTTAWA--New Canadian businesses seeking financing from outside sources need an estimated $3 billion in debt and $2.5 billion in equity to adequately fund their innovations every year, The Conference Board of Canada estimates in an analysis by its Centre for Business Innovation. But these start-ups often fail to obtain financing because they don't demonstrate the management expertise needed to successfully take their products to market.
Matching innovative new firms with the financing needed to grow and expand is a "needle in a haystack" process of finding excellent innovators with good business models and managers. According to the report, Start Me Up: Funding Canada's Emerging Innovators, Canada has many talented entrepreneurs who aren't averse to risk-taking. However, they often fail to obtain the financing they need because they do not demonstrate managerial competence in two areas—sales and marketing, and business processes.
"The evidence suggests that Canada has many enterprising individuals but not that many who truly understand how to commercialize their innovations. Although entrepreneurs and their advocates often point to a lack of finance for innovative firms, capital tends to flow to those that truly demonstrate they can commercialize their ideas," said Michael Bloom, Vice-President, Industry and Business Strategy. "And it is the start-up's ability to create a profitable market niche for its innovation and to grow the business that will determine whether risk capital is provided to them."
•New businesses need more than $5.5 billion per year from outside sources to fund their innovations but potential funders in capital markets are wary.
•Few Canadian entrepreneurs fully understand how to commercialize their innovations and bring them to market.
•The structure of Canada's capital markets makes the process of matching financiers and entrepreneurs difficult.
Having the management skills, know-how and competency to commercialize innovations is the key for entrepreneurs to find financing. The new Centre for Business Innovation report, Skills for Business Innovation Success: It's People Who Innovate, identifies the skills that are needed to commercialize knowledge. However, if a company cannot market its product, increase the scale of production, and satisfy customers, then it will be of little interest to financiers. A previous Centre for Business Innovation report, Metrics for Firm-Level Business Innovation in Canada, concluded that investing in innovation is not productive unless the activities undertaken are properly managed and measured.
Canada has enough institutional funders and high-net-worth individuals to improve the depth and breadth of Canada's risk capital. However, the industry's track record for selecting deals and earning returns needs to improve. The investment community needs to broaden its own competencies and strategies for uncovering innovative companies with the capacity to grow.
Canada's specialized forms of risk capital finance—such as angel investment and early-stage venture capital—remain underdeveloped. Angel investors are not always well organized, the venture capital market is relatively underdeveloped and the public small cap marketplace is focused on natural resources.
The Government of Canada has begun to take action through its Venture Capital Action Plan. The Northleaf Venture Catalyst Fund, announced in January 2014, is the latest step in the VCAP, a $400 million strategy launched in January 2013 to help increase private sector investments in early-stage risk capital. This action is welcomed by the Centre for Business Innovation is a five-year initiative launched in 2012 to help bring about major improvements in firm-level business innovation in Canada.