From Startup to Small Business: The Evolution of Funding and Support Options

A business idea is only as good as  its entrepreneur or team’s ability to grow and nourish it from the ground up. To have the potential of succeeding, each startup business must obtain some form of capital support whether it be through personal investment, family support, angel investors, or through other means. And maintaining that cash flow for future growth is just as important. It’s easier for some, harder for others, but ultimately important for all.   

Establishing a startup business means understanding the risks of high failure rate as an average of 20% of Canadian startups fail to develop during their first year, and roughly 60% are unable to sufficiently excel within their initial three years. Although, according to CBInsights, 38% of startups dissolve due to lack of cash or ability to raise new capital, highlighting the critical importance of funding support for startups to achieve success. 

The search for financial support, strong resources, and guided mentorship should be a vital focus for any entrepreneur wishing to break through the glass ceiling that prevents many startup businesses from reaching great heights.  

Due to less risk and greater reward for investment purposes, the Government of Canada establishes and caters the majority of funding programs for mature businesses that have been incorporated for at least two years, hold a positive net income, and have at least 15 employees on payroll.  

Despite this challenging setback, there are plenty of support options for Canadian startup businesses that offer personalized guidance and funding opportunities that can greatly increase a business’ chances of long-term growth and success.  

This article thus aims to summarize the process a startup encounters that may lead them to becoming a successful small business, and the evolution of resources, Canadian government grants, and funding options available throughout the journey.  

The Differences Between a Startup and a Small Business 

As a startup entrepreneur, it can be hard to define when the crossover to small business status could occur. What exactly is a small business in Canada? Since small businesses are defined as “firms with less than 100 paid employees”, and a total of 99.8% of all Canadian businesses are small- to medium-sized enterprises (SMEs) with less than 500 employees, what truly is the defining difference between a startup and a small business? 

The Key Disparities that Separate Startups and Small Businesses  

The truth is that there are a variety of definitions for what qualifies as a small business, and it’s mostly based around revenue status, years established, how many employees a business has, and thus accessibility to relevant funding options.  

As a general guideline, here are four distinct ways that small businesses differ from startups: 

1. Business Scope and Rate of Growth 

• An incorporated small business will possess, in one form or another, a comprehensive business plan full of goals, projects, and future timelines. 
• A startup business does not have any limitations on its scope or growth from a strategic standpoint and focuses instead on winning over as much market share as possible in its initial stages. Its rate of growth is expected to be much faster in order to prove viability.  

2. Innovation and Technologies 

• A small business has already established its place in the market, proving that its products and/or services are being utilized and can contribute productively to the economy.   
• A startup business, on the other hand, must create something brand new or improve on what already exists to carve out its own niche in an everchanging and growing market.  

3. Team, Hiring, and Management  

• Small businesses have been operating long enough to follow more structured hiring processes, team management styles, and have established work-life balance routines, regardless of their size (a small business has at least 5 employees, anything less is defined as a micro-business).  

• In contrast, startup businesses start with only one or two people who often see no profit for years, having invested their own money or are living off of allocated investment support as a temporary salary-like payment.  
• Startups must continue progressing in order to keep increasing the number of staff they’re able to hire and establish the hiring and training process of each new position on the go.   
• In short, small businesses can offer job security, longevity, benefits, and much less risk than signing onto a role with a startup business that may close in a year’s time. However, being a key player at a startup early can present excellent career opportunities and strategic planning that will impact the entire business.  

4. Profit and Financing  

• A big financial difference between startups and small businesses lies within the availability of funding options, something incorporated small businesses typically have more access to.  

• Small businesses are often sustainable on their own without having pressure from external funding sources such as angel investors pushing for more progress reports. 
• Likewise, a small business is focused on the continuation of earnings, whereas a startup is focused on creating a product, solution, or service that can be accepted by consumers – something that must be successful before a startup gains its first profits. 

What Prevents a Startup from Becoming a Small Business? 

A comprehensive survey titled ‘The Top 12 Reasons Startups Fail’ by CBInsights analyzed 110+ Canadian startup businesses post-failure to find out the reasons why they were unable to push forward in their respective markets.  

The main results are revealed in this infographic: 

The next few sections will therefore focus on and discuss supportive resources and funding options available that aim to prevent startup businesses from running into the common problems observed in CBInsight’s findings.  

Financial Support Options and Free Resources for Startups  

According to Canada’s SME Research and Statistics, roughly 95,000 startup businesses are founded each year in Canada. Many of these startups fail. In a majority of cases, they fail because of poor planning caused by a number of underlying reasons (see above infographic).  

To give a startup business the chance of success, entrepreneurs must allocate time for writing a strong business plan, gathering information, researching market compatibility, obtaining valuable and helpful resources, gaining professional guidance, applying for funding support options, and much more.  

“There is no royal flower-strewn path to success. And if there is, I have not found it, for whatever success I have attained has been the result of much hard work and many sleepless nights.” 
– Madam C.J. Walker, entrepreneur, philanthropist, and political and social activist 

Financial Support Options for Startup Entrepreneurs 

The common phrase “don’t put all your eggs in one basket” is well known for a reason, and it can be especially true for when it comes to the vital business strategy of a startup business.  

When a business can properly explore and access a multitude of support sources, such as with Canadian government grants and guidance options, it will help equip them with a stronger line of defence against the imminent downturns and challenges on the field ahead.  

Some possible sources of startup funding options for Canadian entrepreneurs are:  

1. Personal and/or Community Investment  

• When starting a business, your first investor might very well be yourself. This shows to investors and bankers that you believe in your long-term plan for your business idea and that you’re ready to take the necessary risks. 
• Money loaned to entrepreneurs by a spouse, parents, family, or friends is considered as “patient capital” which is funding that can be repaid later as a business profits increase.  
• When borrowing patient capital, startup businesses must be aware that lenders may want to have equity in the business, and that a business relationship with family or friends should be discussed in detail before simply accepting support.   

2. Venture Capital Funding  

• Venture capitalists are most interested in supporting innovation in technology businesses with high-growth potential in specific sectors.  
• They take a risk by assuming an equity position in the startup business to help it carry out a promising but higher risk project.  
• Venture capitalists generally expect a healthy return on their investment, so the pressure on progress is at the highest level with this financing option.  
• BDC has a venture capital team that supports progressive and innovative startup businesses in strategically entering the market. 

3. Angel Investments  

• Angel investors are typically wealthy individuals or retired company executives that are or were leaders in their own field. 
• Their investments contribute financial support as well industry insights through experience, technical and/or management knowledge, and often a network of contacts. 
• Angel investment can offset the early stages of the business with average funding of $25,000 to $100,000. 
• Similar to venture capitalists, angel investors expect a great return on their financial support and entrepreneurs often feel great stress to meet results.  

4. Business Incubators  

• Business incubators are organizations and programs that give startups and other early-stage companies access to investors, startup funding, mentorship, shared workspaces, and technical resources to help them get established.  
• Incubators may be funded by the government, supported through membership fees, or provide support in exchange for equity in companies. 

5. Bank and Other Support Program Loans  

• Bank loans are the most commonly used source of funding for startup businesses. 
• Canadian banks offer various advantages from personalized services to custom repayment schedules.  

• Futurpreneur Canada is a business support service that has been fueling the passions of Canada’s young business leaders for over two decades. They are the only national, non-profit organization that provides financing of up to $60,000 ($20,000 + $40,000 from BDC), mentoring, and support tools to aspiring business owners aged 18-39.  

Free Resources for Canadian Startup Businesses  

Similar to the resources and support options that Futurpreneur Canada provides, startup businesses should consider accessing the following free resources: 

1. Research Innovation Centres (RICs) Services 

• RICs include entrepreneur specialists and analysts with years of business experience who are well-positioned to deliver programs and services.  

2. Trade Shows and Networking Events  

• Attending an industry trade show or networking event can do great wonders for a startup. From finding further investment opportunities to diversifying clientele, these in-person or virtual gatherings can introduce entrepreneurs to many new and free resources.  

3. The Canadian Startup Funding Checklist 

• Mentor Works offers a free downloadable Startup Funding Checklist to help Canadian entrepreneurs establish a solid foundation early on in order to become eligible for more government funding in the future.  
• The checklist includes content on how to build a business plan, valuable business resources to grow a business, and finance options to improve cash flow. 

Transitioning to a Small Business: New Funding Options 

Once a startup has overcome the crucial stages in proving the market worthiness of its products and/or services through time and profits, it slowly but surely evolves into a recognized and established small business.  

What wasn’t available as a young startup can now be accessible. The business just needs to meet key eligibility criteria and there are dozens of government funding programs open to mature businesses that are:  

• Incorporated in Canada for at least 3 years; 
• Have 15 or more payroll employees; and 

• Hold a positive net income. 

“A whole new world, a new fantastic point of view, no one to tell us no, or where to go, or say we’re only dreaming…” 
– Song Lyrics by Alan Menken featured in Disney’s 1992 feature film, Aladdin  

Next Steps: Discovering and Applying for Government Funding 

Does going from startup to small business feel a little bit like hopping on a magic red carpet? It might be so. With a whole new range of funding opportunities available via the provincial and federal governments, and less pressure from capital and/or angel investors, small businesses can begin to explore and navigate the future of their companies in a more strategic and less rushed manner. 

That’s not to say that a startup turned established business shouldn’t still reach out for external support. The world of government funding may be more appealing and accessible than other financial support options such as bank loans, but the landscape is not an easy one to understand. Almost all grant and loan programs have their own set of eligibility criteria for applicants, projects, and program deadlines.  

Discovering and applying for government grants and loans is not simple. Small businesses can reach out to service providers that have a depth of knowledge in Canadian funding. For example, Mentor Works, a Ryan Company can help find the best fit for a company’s upcoming projects while streamlining the application process through a team of professional funding specialists.