Posts Tagged ‘startup’

Options for Early Stage Technology Companies to Finance Growth

The dilutive nature of early stage equity financing (i.e., giving up ownership) makes it the most expensive way to finance growth.  When a start-up does not have enough cash in the bank or cash flow to support their growth (hire more employees, fund working capital, etc.), the company is faced with a significant funding barrier that quite often results in tepid acceleration or worse, either bankruptcy or a fire sale.

When seeking various financing options, it always makes sense to start off with the cheapest form of capital until the threshold is met at which point, you would go to the next tranche of financing – for example (in the order of least to most expensive):

-          Cash on hand and internally generated cash flows;
-          Traditional bank debt;
-          Loans from friends and family;
-          Alternative debt financing (subordinated/mezzanine debt or factoring); and
-          Equity financing.

At the end of the day, all types of financing are based on one of two things: cash flow or hard (tangible) assets.  However, by leveraging its vast knowledge and experience in the SR&ED program, North Innovation Fund (NIF) focuses on an intangible asset – SR&ED accruals.  NIF is a provider of SR&ED accrual debt financing, which is timely, flexible and more importantly non-dilutive. What differentiates NIF’s SR&ED financing from other SR&ED financiers is the fact that NIF advances funds before the SR&ED claim is filed (i.e., beginning of the fiscal year). This type of funding plays a critical role in an early stage company’s capital structure by providing the runway to a future round of equity investment or a bridge to the next level of growth.

FedDev leads $20M funding round for 8 Toronto startups

The Federal Economic Development Agency for Southern Ontario (FedDev) put up $4.85 million into young startups, in order to leverage an additional $15.2 million from venture capital and angel investment groups.  The companies to receive funding are as follows:

Trillium Therapeutics Inc.
Total funding: $2.97-million
Sources: $965,000 from FedDev and $2-million from Covington Capital, GrowthWorks, and BDC Venture Capital.
Purpose: The biotechnology company wants to conduct clinical testing of a new therapy to threat a chronic bladder disease affecting millions of North American women.

Profound Medical Inc.
Total funding: $16.2-million
Sources: $867,000 from FedDev and $7.5-million from Genesys Ventures, BDC Venture Capital, MaRS Investment Accelerator Fund, and Tri-Color Venture Fund.
Purpose: Company has developed a non-surgical treatment method for prostate cancer and needs the money to fund the regulatory approval process.

Axela Inc.
Total funding: $2.8-million
Sources: $708,333 from FedDev and $2.125-million from VenGrowth Capital.
Purpose: The company is hoping to continue developing its protein analysis tools to provide more detailed medical diagnoses.

Field ID Inc.
Total funding: $2.23-million
Sources: $575,000 from FedDev, $500,000 from the BDC and $1.15-million from the IntelliVest Angel Group.
Purpose: To enhance the delivery platform of its automatic corporate inspection and safety software to large oil, gas, mining and utilities companies.

StickerYou Inc.
Total funding: $2.04-million
Sources: $539,305 from FedDev, $500,000 from an unnamed venture capital firm and $1-million from IntelliVest.
Purpose: Customized sticker and label maker wants to optimize its online platform with new features such as home printing and also launch a mobile application.

Futurestate IT
Total funding: $1.5-million
Sources: $500,000 from FedDev, $1-million from the MaRS Investment Accelerator Fund and angel investment from members Maple Leaf Angels.
Purpose: To further develop software solutions allowing companies to migrate software and data from old operating systems to newer ones.

Fuse Powered Inc.
Total funding: $1.5-million
Sources: $500,000 from FedDev, $1-million from BlackBerry Partners Fund
Purpose: Digital mobile game publisher behind Fuseboxx will continue developing the Fuseboxx mobile gaming technology platform.

Shiny Inc.
Total funding: $592,500
Sources: $197,500 from FedDev, $395,000 from York Angel Investors and Maple Leaf Angels.
Purpose: Advertising technology company wants to commercialize its self-service online advertising platform.

 More about Canadian small business financing

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Direct Government Funding – Benefits and Detriments

SR&ED and NRC IRAP are both substantial business support programs offered by the Canadian federal government.  However, one of the major differences between the 2 programs is that NRC IRAP endorses direct up-front funding, whereas SR&ED is a tax credit for expenses that have already been incurred.

In light of the recent Jenkins report, there has been significant discussion over the benefits and drawbacks of direct funding.  Direct funding allows the government to “pick winners” and scrutinize where funding is allocated, according to government policy.  Because companies who receive direct funding have to present a business case for each and every funding application, it allows the government to put “checks and balances” in place to ensure that the funding will be utilized for its intended purpose.  Direct funding mechanisms were pivotal in building capabilities in what became leading sectors in Ontario.

However, the downside of direct funding models, is that, according to a research paper by Nelson and Langlois (1983), the practice of “picking winners” by the government was the least successful form of government support.  Direct funding generally creates a larger administrative burden, especially to smaller enterprises and start-up ventures, who can ill afford to have an in-house grant writing team.  A Canadian firm intent on bringing its technology to market will likely be deterred from seeing assistance through direct funding because the lengthy approval process can delay the onset of time-sensitive work.

Secondly, a move towards direct funding could threaten the global competitiveness of Canadian enterprises.  International trade agreements, such as the World Trade Organization Agreement on subsidies and Countervailing Measures, cap direct subsidies to business.  For example, the controversial US-Canada lumber dispute revolved around Canadian stumpage fees being too low, making the fees de facto subsidies.

Finally, under a direct funding model, there is no legal process to appeal or obtain redress for disagreements between the administrators and the applicants for the funding.  A direct funding approach has no legislative support, and applicants can easily be discriminated upon if their objective does not directly advance government policy.  On the other hand, the tax credit system provides legislated rules so that any dispute about eligibility or payment can be heard by the courts.

There are arguments to be made for both tax credits and direct funding.  However, at the end of the day, it is important to keep in mind that entrepreneurs (and the start-up ventures they create) are the backbone and future of our economy.  It is paramount that these start-up ventures obtain the upfront capital necessary in order to undertake risky ventures, some of which will evolve and transform the economic landscape both in our country, and around the world.  Will the next RIM please stand up?

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