The second most common reason why startups fail is a lack of financing. This makes securing startup funding an enormous challenge that founders must address and overcome. To help startups navigate the arduous funding landscape, we have identified the three most viable sources of financing:
- Grants and Subsidies
- Investment
- Loans
1. Grants and Subsidies
Federal and territorial government agency programs provide financing, such as subsidies and grants, to fund startups. Given the strong competition and stringent criteria, becoming the recipient of a grant or subsidy can be a very challenging process. Additionally, in an increasing number of instances, grants require startups to match the funds they are being given.
Opportunities for Grants and Subsidies in Canada
The Government of Canada provides a comprehensive listing of various programs that offer government grants and government subsidies at the federal and provincial level. Among these are:
- Clean-Tech Fund provides funding to promising clean technology projects that demonstrate the potential for GHG emissions reductions, reductions in water consumption and/or the reduction of water, soil or air contamination.
- Industrial Research Assistance Program (IRAP) supports the development and commercialization of technology-driven products, services, or processes in Canada. Technology can be new or improved.
There are many opportunities for startups to get funding from Ontario Government initiatives.
2. Investment
An investor is any individual (person or entity) who commits capital with the expectation of receiving a benefit in return; financial or otherwise. In most instances, startup investors take a long-term strategic position in a company.
Crowdfunding
A crowdfunding platform affords startups an opportunity to raise funding and promote their products or services.
Some of the most popular crowdfunding platforms include:
In rewards-based crowdfunding, individuals or companies pitch funders in an effort to raise small amounts of capital. In return for their contribution, funders are given a specific reward if the company meets its funding goal. The rewards are usually modest and proportional to the funded amount. Often, a final version of the funded product is given as a reward.
Angel Investors
Generally speaking, an angel investor is an individual who has significant financial capacity, is often experienced in investing, and is motivated by a higher rate of return than they would receive from traditional investment methods.
Typically, angel investors are wealthy entrepreneurs or retired company executives. These men and women are leaders in their respective field and, in addition to funding, contribute experience, insight, and their network of contacts. Angel investors are inclined to finance the early stages of a startup with investments between $25,000 and $100,000.
Angel Investor Networks in Ontario (Canada)
The National Angel Capital Organization (NACO) is an umbrella organization that helps build capacity for Canadian angel investors.
- Angel Investors Ontario are involved in the start-up businesses they invest in .
- Angel One Investor Network (Oakville)
- Capital Angel Network (Ottawa ON – Gatineau PQ)
- Georgian Angel Network (Collingwood ON)
- Maple Leaf Angels (Toronto ON)
- Northern Ontario Angels (Thunder Bay ON)
- Ryerson Angel Network (Toronto ON)
- Spark Angel Network (Durham ON and Northumberland ON)
- Southwestern Ontario Angel Group (London ON)
- York Angel Investors (Vaughan ON)
Venture Capitalists
Venture capital funding refers to an investment from a venture capital firm (VC) and refers to Series A, Series B, and later rounds of funding.
It is important to be aware that the venture process can be very time consuming and that Institutional venture capitalists prefer big investments, often larger than $1,000,000. Typically, venture capital investors want to invest in startups that are pursuing big opportunities with high growth potential. Additionally, they want startups who have demonstrated traction; for example, they have a working product prototype, early customer adoption, etc.
It is expected that venture capitalists will take an equity position in the startup. When pursuing VC funding, founders should be prepared to give up ownership or equity to an external party.
Opportunities for Venture Capital in Canada
The BDC venture capital team supports leading-edge companies strategically positioned in a promising market. Like most other venture capital companies, it gets involved in start-ups with high-growth potential.
3. Loans and Financing
75% of startups are funded by banks loans, credit cards, and/or lines of credit.
When you are applying for a business loan, having a good idea is not enough to secure a loan. Lenders are seeking companies with an established track record of good business performance and excellent credit. Additionally, it is likely a startup loan will require a personal guarantee from the founder/s.
With regards to loans and financing, there are two types of funding available to startup businesses:
- Line of credit. The startup can access funds from the lender as needed. There will be a cap on the amount of funds accessible. In some instances, a startup may qualify for Accounts Receivable financing. This is a line of credit secured by the company’s accounts receivable, allowing the startup to get cash immediately. This financing is paid down as the accounts receivable are paid by customers.
- Business loan. In some instances, working capital loans are unsecured. However, companies that have little or no credit history will likely be required to pledge collateral for the loan, or provide a personal guarantee. Working capital loans tend to be short-term loans of 30 days to one year. Such loans typically vary from $5,000 to $100,000.
Opportunities for Loans and Line of Credit in Canada
The Business Development Bank of Canada (BDC) offers startup funding to entrepreneurs in the startup phase or first 12 months of sales. Startups may also be able to postpone their principal payments for up to 12 months.
The Access Community Capital Fund (ACCF) supports entrepreneurs with viable business plans with financing not available from other sources. The borrower may have no credit history, or may have a poor credit record due to unemployment, illness or unforeseen life events.
Futurpreneur offers aspiring entrepreneurs between the ages of 18 and 39 access to up to $15,000 in start-up financing.
When The Fun Comes Out of Startup Funding
It’s no surprise that most businesses fail because they can’t pay their bills. So, having adequate startup funding is vital to a startup’s success.
In the pursuit of financing, founders often communicate to funders how the startup will grow. Growth – the direct progression of current processes – is good; however, its linear nature requires significant resources to support. Funders want to see scalability – growth and increased revenue, without significantly increasing costs.
Financing a startup is a risky endeavor. Getting the funding you asked for can result in increased pressure (especially from financiers) to scale-up your business, quickly. Although financing can be helpful to fuel a startup, sometimes it can bring about negative repercussions. For example, a company that cannot manage its rapid expansion will fail, despite having received huge amounts of investment. The lesson to be learned from this is, do not ask for more funding than your startup needs to achieve strong growth, complimented by higher revenues and sustained without a needless rise in costs.
