With the popularization of crowdfunding (public platforms where entrepreneurs can pitch their ideas in hopes of gaining financial support), the Canadian government and various Provincial governments have begun to weigh in on the implications for early-stage businesses. In this article I hope to offer some insight into the recent changes to Canadian law as well as highlight other funding mechanisms that small businesses can take leverage to support their growth.
Crowdfunding and Broader Consumer Appeal
Crowdfunding allows early stage businesses to pitch their idea, product, or service online, typically with high quality media (videos, infographics, etc.) to a public audience. They solicit donations towards the company and in return offer tiered rewards. Rewards range from things as simple as “thank you” e-mails to early-stage access to the product, or access to unique features.
This can certainly be an attractive method for small businesses to obtain early-stage capital to help get their business off the ground. The Pebble Time e-ink smart watch (3rd generation Pebble watch) received over $20M through crowdfunding, well over their original goal to raise $500K. This not only provided them with a healthy amount of working capital but also consumer momentum to help lead up to the release (expected to start shipping late June 2015). This type of viral backing on an innovative consumer product can help ensure commercial success.
Crowdfunding has obvious appeal for businesses – you can reach a very wide audience and are giving up little. Successful crowdfunded projects typically have to have some aspect of innovation and/or broad consumer appeal. It’s not surprising then to see why a company like Pebble can be so successful with this platform.
Securities Regulations for Crowd Funding in Canada
In response to the growing popularity of crowdfunding platforms such as Kickstarter and Indiegogo, securities regulators in six provinces (B.C., Saskatchewan, Manitoba, Quebec, New Brunswick, and Nova Scotia) have established rules for early stage businesses looking to raise capital via crowdfunding platforms. Businesses in these provinces will be limited to $500,000 per year in crowdfunded raises with a maximum of $250,000 per campaign.
“…the publicity and hype generated by a successful viral crowdfunding campaign may be worth much more than $500,000 in the long run.”
Although this is a hard limit, many early stage businesses with innovative products that have broad consumer appeal may still see the benefits of crowdfunding as outweighing these restrictions. After all, the publicity and hype generated by a successful viral crowdfunding campaign may be worth much more than $500,000 in the long run.
Early Stage Funding Options for Other Businesses
Crowdfunding simply is not a viable option for many other small businesses. Many early stage businesses that do not operate in the consumer sector will have trouble gaining significant momentum in crowdfunding. As a result, early stage businesses often turn to private investments that may offer tied capital or capital for equity. These businesses have other options, however, that may offer a higher ROI and have limited impact to their equity position or overall control of the business.
Depending on the industry, level of innovation, and scope of the project, early stage businesses can take advantage of a range of Canadian government grants, loans, and incentive programs. Many of these programs can be stacked with private funding (e.g. V.C. or angel investments) thereby optimizing an early stage business’ cash flow. Some of these programs include:
- Investing in Business Innovation (IBI): Early stage businesses with V.C. or angel investors can receive a loan up to a 50% match of the private investment to support commercialization activities.
- Southern Ontario Fund for Investment in Innovation (SOFII): Loans ranging from $150,000-$500,000 to support job growth, increase market penetration, improve company competitiveness, and commercialize new products
- Export Market Access: Small business grants up to $50,000 to support export market development activities (e.g. trade show exhibitions, outgoing/incoming sales missions, custom market research/intelligence, and foreign bidding projects).
How is Your Small Business Assessing Funding Options?
When assessing the variety of small business funding options available to startups, it’s important to understand what is available on the market, how each funding product will impact your business’ position (vis equity, loans, restrictions on sell offs or dividends, etc.), how and when to leverage grants vs. loans, and how to optimize cash flow planning.
Partnering with a firm like Mentor Works will give you a clear understanding of the range of products out there and access to the expertise to obtain Canadian government funding. Our team of government funding experts are knowledgeable on over 100 Canadian government funding programs and helped our clients leverage well over $210M last year. If you are interested in learning more about how your small business can benefit from government funding, contact us now or register for a free Canadian government funding event to learn more.