Opinion: 'Startup croquet' a hard game to win

When I was seeking cash to fund a startup in 1999, I mentioned to an investor that “raising money for business is hard.” 

He turned to me and said, “It should be. It’s not your money – it’s mine.”

Most companies need access to money, through equity or debt transactions, to fuel their growth. All companies have risk associated with them, and investors hate risks they cannot monitor and manage. The type of financing available to companies and the cost of that money varies depending on the type of business and the company’s stage of development.

Over the past few years, I have had the pleasure of speaking with entrepreneurs from across Canada. Some of their startups have a talented team, a great idea whose time has come and a huge global market potential for their products or services. 

These companies are called “gazelles” because they move fast and can outrun everything else. Shopify is a great local example. 

But gazelles make up fewer than five per cent of all startups. The rest might have great ideas, talented employers or plenty of market potential, but they aren’t able to put all those elements together, often due to a lack of money. 

Entrepreneurs ask me all the time where to find capital to fund their startups. Unfortunately, there is no easy answer. 

Canada has a large number of government programs that support startups with grants and loans. There are also angel investors for early-stage companies, venture capitalists for growth-stage enterprises, private equity for massive-growth firms and, finally, banks for when your business is up and running. 

Angel investors tend to have the highest risk tolerance for investing, while banks generally have the lowest. Anyone who has ever run or owned a business knows banks are not the first place to ask for money.

Over the past 20 years, various levels of government have studied and analyzed how they can assist startups, and Canada now has dozens of government programs aimed at supporting entrepreneurs. 

These include early-stage initiatives such as the National Research Council’s Industrial Research Assistance Program; provincial and federal agencies that support collaborative research and development such as the Ontario Centres of Excellence; programs from the Business Development Bank of Canada that provide convertible loans and financing to startups; and the federal finance department’s Canada Accelerator and Incubator Program, which has invested in commercialization centres across Canada.

Others include Industry Canada’s Futurpreneur program that offers loans and mentors for youth businesses, and Export Development Canada’s resources to help small businesses expand internationally. The Department of Foreign Affairs, Trade and Development runs accelerator programs for Canadian companies in the United States and Europe, while FedDev Ontario offers financing to companies once they have been profitable for 18 to 24 months. This is just a sample of the government programs and grants available to startups. 

The problem is, none of these programs are co-ordinated together. Instead, they are just a hodgepodge of names that most entrepreneurs have never heard of. Even if startups do happen to know about them, they often don’t know where to find them.  

Every company has to search for, apply to and report on each program separately. I call this “startup croquet,” after the lawn game where players navigate a ball through a series of wickets that are not aligned. Competitors can knock the ball out of the field of play, forcing opponents to start all over again. 

Startups face a similar challenge when trying to access the myriad of government-sponsored assistance initiatives. Each requires entrepreneurs to navigate a different set of obstacles to reach their goal. Being successful at one program might not mean anything when applying for the next one.

The managers of these programs all say they are very interested in working with companies. When asked if they collaborate with other initiatives to streamline the application and reporting process, they tell me it’s a good idea, but they don’t have the mandate.

Collectively, Canada’s various levels of government have invested more than a billion dollars in excellent startup programs designed to help companies grow faster and hire more people. But in the absence of a co-ordinated approach, as a whole they are far less effective than they could be.

For example, BDC Capital offers $150,000 in convertible notes to startups that graduate and qualify from a pre-approved list of accelerators. This great program has funded close to 100 startups over the past few years. Its goal is to provide early-stage funding for companies, so that within 24 months they can secure further financing from other investors. 

In reality, though, most of the companies in the program are not hitting the 24-month target to land that next round of investment. The biggest reason is they have to jump through far too many hoops to progress in their development. Let’s face it, Canadians are cautious about spending money and many of these companies have to use the $150,000 to survive rather than thrive.

The BDC offering is one example of an individual initiative that could benefit greatly from being aligned with others. Making all such programs part of one seamless process would allow startups to focus on growth and success, not to mention making them much more interesting to potential investors.

This sounds like a nice idea, but is it possible?

 

Integrated Approach to Accelerating Startup Growth

I believe a limited trial could tie together a target group of federal programs for technology-based startups. IRAP, the Canada Accelerator and Incubator Program, BDC’s convertible loans, EDC’s small business financing and equity services and the Foreign Affairs Department’s Canadian technology accelerators could become part of one streamlined startup acceleration process that includes introducing these startups to the venture capitalists who received funding under the $400-million federal Venture Capital Action Plan. I believe this system would have a much greater benefit to companies and accelerate their international growth.  

Startups could access the programs and services during various stages of development using a single application process and an individual measure plan. There are 15 CAIP partners across Canada, each graduating between 12 and 36 high-quality candidate companies per year. These partners could create an intake approval and monitoring system to provide validation, assessment and oversight of all programs. 

This approach would not require any additional government funding. In fact, it would be more cost-effective in the long run by ensuring that taxpayers’ money helps only those companies that achieve clearly defined benchmarks for success.

Now if we could just find that one program that wants to champion something new and change the status quo!

 

Jeffrey Dale is the director and co-founder of the Odawa Group as well as the former president of the Ottawa Centre for Research and Innovation.