Why Venture Capital is so Important

Greg Smith, president of Canada’s Venture Capital and Private Equity Association (CVCA), described the current landscape of Canadian entrepreneurship:

“Canada has an historic opportunity to become an innovation leader by making major investments that enable our best technology businesses to realize optimal growth and compete on a global stage,” he said in a statement. “However, in order to act decisively on this opportunity, we must first overcome challenges to supplying VC funds that, in turn, supply entrepreneurs.”

Without VC initiatives, small companies with big ideas are being caged by cash crunch – running low enough on cash so that it has a significant impact on operations. Exponential growth can also cause a company to be short on working capital. Business growth requires a steady cash flow, enabling the acquisition of equipment and personnel. Lacking VC, companies may be forced to unload assets or sell a part of the business to raise crucial funds.

The cheapest forms of financing are the sources taken for granted:

-Cash in bank account
-Revenue from sales
-Financing from tangible assets (accounts receivable factoring, purchase order factoring).

Aside from borrowing from friends and family, the next funding options come from cost-heavy debt or equity financing. Debt financing directs small businesses to traditional institutions, banks and credit unions, and many small businesses run into trouble meeting financing prerequisites. Equity financing or “share capital” – funding through selling common or preferred stock to individual or institutional investors – is dilutive in nature and requires loss of ownership and possibly control of the business.

In order to get to an operable stage, small businesses can also consider bridge financing and financing from intangible assets. Bridge financing is used to gain immediate cash flow while waiting for an expected inflow of cash. Basically bridge financing provides a forwarded payment for future sales or anticipated inflow of cash. Financing on intangible assets, such as SR&ED (Canada’s Scientific Research and Experimental Development credit program), is not often offered by the traditional institutions but is a non-dilutive form of bridge financing. North Innovation Fund (NIF) is one such source of funding, providing accrual SR&ED financing to support small business and entrepreneurs. NIF released their first Fund this month in response to the increasing demand of funding alternatives for start-up companies in Canada. SR&ED financing will bridge the funding gap for companies with R&D initiatives and new ideas to help make the leap to commercialization.

NIF offers a unique opportunity which includes support in identifying SR&ED activities and a friendly approach to funding. Initiatives like NIF will help push Canada to forefront of growth and innovation.

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