Toronto-based Spin Master, a children’s entertainment giant, partnered with the Business Development Bank of Canada and the Canadian Youth Business Foundation (CYBF) to launch the Spin Master Innovation Fund. This fund provides up to 10 Canadian entrepreneurs, between the ages of 18 and 39, with $50,000 in financing to fund their growth, plus a paid trip to Toronto to attend a two-day innovation workshop.
Spin Master CEO Ronnen Harary explained that “It’s loans based on character, and not loans based on collateral.”
The 8 successful 2011 recipients of the Spin Master Innovation fund were: Battlecraft Games, Domo Enterprises, GCS Medical, Goosechase Adventures, Hygienna, Jellyfish Marketing, Monumental Technologies, and Notewagon.
Successful recipients of this funding spend one day with top executives at Spin Master, and another day focusing on team building and business planning. The next round of funding is set to begin in March of 2013.
Canada has had a problem developing, incubating, and commercializing the type of products that create new economies and new jobs. According to Richard Remillard, executive director of the Canadian Venture Capital Association, while the Canadian population is 1/10 the size of the US market, our venture capital industry is only 1/12 of that in the United States. Thus, after startups are bootstrapped in Canada, they are starved for cash, and unable to find sufficient rounds of investment to commercialize their product, forcing them to consider relocation outside of Canada.
POSH View Media, for example, is a company that develops interactive touch-screen surfaces. POSH is trying hard to remain Canadian, but the investors they have solicited have primarily been American, including Apple and Microsoft.
The reason why Research in Motion succeeded in Canada, is because of early Canadian government adoption of the Blackberry. It has been recommended that the government should revise procurement practices to help commercialize Canadian innovations (similar to the policies adopted by the UK). But according to Bruce Good, executive director of the Conference Board of Canada, governments procurement departments in Canada have steered clear of risk.
The existing Scientific Research and Development (SR&ED) program offers substantial refundable tax credits for startups; however, many startups lack the expertise to successfully access these credits. A small number of firms have begun to offer SR&ED financing to assist high-tech startups to extend their project runaways. However, more support needs to come from the government. Although the latest federal budget has set aside $400 million to boost venture capital funds, further investment will be needed in order to spearhead a new Canadian economy.
Pebble’s Eric Migicovsky jump-started his company by selling 85,000 pre-sold watches and generating $10 million in advance revenue through Kickstarter. Unfortunately, Kickstarter isn’t readily accessible to Canadian companies. Migicovsky’s initial company was based in Waterloo (part of University of Waterloo’s Velocity incubator), and was bootstrapped by SR&ED tax credits. The opportunity to obtain financing was so lucrative, that he was forced to found a US corporation, and move all of his assets out of Canada.
Crowdfunding (or crowd financing) is defined as the collective cooperation of a network of individuals to pool their resources together, in order to support (or finance) the efforts initiated by other people or organizations. Websites like Kickstarter have created crowdfunding platforms over the Internet. According to an industry report released Tuesday by Massolution, just under $1.5 billion USD was raised in 2011 by crowdfunding platforms around the world.
According to the Globe and Mail, the “Jumpstart Our Business Startups Act” in the United States has rewritten securities law to allow business owners to seek capital from unaccredited investors, which legalizes the use of crowdfunding to sell shares to the public. Nick Bhargava, co-founder of North Carolina-based Motaavi (who is originally from Edmonton), explains that no such act exists in Canada, and without a national regulator, an entrepreneur would have to seek rule changes in each of the 13 provinces and territories in order to gain unencumbered access to the entire country, in order to make crowdfunding viable.
Crowdfunding sites are paid by commissions, and the smaller population of Canada makes crowdfunding websites in Canada less attractive buisiness opportunities. For entrepreneurs, the smaller investor base also means that small angel projects would raise thousands of dollars in Canada, when compared to the potential millions in the United States.
To follow are an incomplete list of some of the crowdfunding websites in Canada:
The Globe and Mail recently addressed the fact that in recent years, the relative impact of self-employment across Canada has been waning. Self-employment has always been an important feature of the Canadian economy; the OECD lists Canada as one of the highest concentrations of entrepreneurs within a working population. However in recent years, the ratio of self-employed persons to those working for someone else has dropped back.
Statistics Canada’s Labour Force Survey (ratio of self-employment to those employed by someone else):
- 13.8 per 100 in 1976
- 21.0 per 100 in 1998
- 18.2 per 100 in 2011
What might be some of the causes for this recent decrease?
Some obvious contributors may be the decline of self-employment due to (1) the retirement of baby boomers, and (2) business failures caused by the last recession. If this is the case, then it is even more paramount for the Canadian government to support new business startups. How can we effectively create new startups to displace the ones that have disappeared?
One of the issues that deters entrepreneurship is the current gap that exists between innovation and commercialization. Our best ideas are often acquired by US-backed firms because we may not be effectively funding business commercialization. Private venture capital is lacking in Canada, so without a doubt, the largest contributor to startup commercialization in Canada is the Scientific Research and Experimental Development (SR&ED) program. The SR&ED program provides refundable tax credits to start-up companies, for expenses that have already been incurred. However, it often takes 1-2 years for companies to see these refunds! This is definitely an area that requires improvement if we to remove the commercialization gap. It should be noted that innovative companies such as the North Innovation Fund have recently begun to offer SR&ED financing on unfiled SR&ED claims.
Changes to the SR&ED program are rumoured in the next federal budget. It goes without saying that the SR&ED program is critical to the survival of many small starts-up. Reducing or removing SR&ED will further decrease the likelihood that these startups will be able to commercialize their innovations, and create new jobs. Instead of cutting back funding to startups, we need to invest in startups, and encourage entrepreneurship in Canada in order to create future employment.
Waterloo and Toronto, February 15, 2012 - North Innovation Fund (NIF), a privately-held alternative financing firm providing ongoing SR&ED accrual loans to early stage Canadian companies in a variety of technology-based sectors, today announced the launch of its first Fund.
The Fund was created to identify high growth and innovative companies that are in need of non-dilutive growth capital to accelerate their transition from early stage to commercialization. NIF’s objective is to play a role in Canada’s ecosystem through ongoing SR&ED accrual debt financing. The SR&ED program, a federal tax incentive program that encourages research and development activities in Canada, has long been the primary source of funding for early stage companies in Canada.
According to Thompson Reuters Canada, between 2000 and 2010, venture capital investment decreased by more than 80 percent from approximately $5.9 billion to $1.1 billion. During the same period, the number of companies receiving venture capital decreased by more than 64 per cent from 1007 to only 357 during that same period.
“We have identified an important gap in the early stage capital markets ecosystem. There needs to be more non-equity (i.e., non-dilutive) funding sources to bridge the funding gap. The SR&ED program in Canada works and provides much needed funding to early stage companies – the only problem I see, is the fact that they have to wait over 12 months to receive their cash”, explained James Ro, Managing Director of North Innovation Fund. “We want to play a role in helping Canadian technology companies reach their next level of growth by financing ongoing SR&ED accruals in advance so that they can use the proceeds to hire more staff, fund working capital needs and execute their growth plan”.
For more information regarding North Innovation Fund and to contact the Fund regarding SR&ED financing or SRED financing opportunities, please visit www.northinnovationfund.com.
