Report recommendations aim at improving start-up financing environment

A new report examining the strengths and weaknesses in Canada's financial system for innovative start-ups says a lack of true innovators and a reticent funding community is holding back many promising firms as they seek support for product development and marketing. What's required is industry-led, government-supported funds of funds and intermediaries that help to foster the skill sets required by start-up firms.

Entitled START ME UP: Funding Canada's Emerging Innovators, the report was researched and written by Michael Grant, director of capital markets research at the Conference Board of Canada's Centre for Business Innovation with support from a wide range of corporations, research agencies and individual donors.

"Our research shows that Canada does not have a risk aversion problem; nor does it lack entrepreneurs. Canada has an innovative entrepreneur competency issue and a risk capital underdevelopment issue," states the report. "Canada has many enterprising individuals but not that many innovators who truly understand how to commercialize their innovations."

The report argues the more start-ups that successfully de-risk their innovations, the more likely they are to attract sufficient risk capital. But the funding type most applicable to start-ups is angel investment, which currently funds only a fraction of firms requiring such assistance. Venture capital tends to be more risk averse than angels and can only be persuaded to support start-ups if more of them are able to de-risk their innovations and execute scalable business models.

"Risk capital is interested in a growth "sweet spot." This is the phase when a company has a sufficient track record to demonstrate that it has a product that people like and some managerial capacity to reliably deliver and service the product," states the report. "External investors … attach a higher discount rate to the investment than the founder does. This difference in risk assessment effectively creates a "funding gap" from the entrepreneur's perspective."

The report says government is on the right track in supporting large funds of funds, which will help draw in private risk capital and attract high-quality foreign VC to Canada. The report can be found at www.conferenceboard.ca.

R$