No matter what your personal political convictions or choices are, if you are a technology entrepreneur you need to be paying attention to what is being proposed, if anything, by the major parties in the current provincial elections in Ontario. What is at stake here is the dismal state of capital funding for high-tech startups which has dropped down by a factor of 10 over the last decade.
What is the essence of difficulty with seed funding? It all has to do with risk and risk management. It goes without saying that at the seed stage risks are enormous and, what is worse, they are hard to mitigate. For all practical purposes, it means therefore that the risk will stay high and is unavoidable. Now, on the other hand, many, though certainly not all, innovative early-stage companies hold an allure of “changing the world” and bringing high financial pay-offs to their investors.
Certainly from the societal standpoint it is a good thing to create and invest in innovative companies. In fact, there seems to be some hard economic data for Canada, which indicates that “40% of new jobs is created by young companies which make up about 4% of businesses.” Clearly, finding a workable mechanism which would ease the pain of raising seed funding and provide practical incentives to investors, should result in increased new business formation and therefore significant economic benefits which would contribute to the prosperity of all of us.
So, what is happening on the political stage in Ontario in this context? Well, it appears that just about the only proposal to address these issues is coming from the Liberals. Glen Murray, the Ontario Minister of Research and Innovation, recently proposed
the “angel investment” incentives program which would offer tax credits for individuals contributing seed capital to fledgling startups. The details are somewhat vague and will need to be worked out but, as an example, someone investing $100,000 in a startup could get a 25-per-cent tax credit.
Apparently, this plan is modelled on a similar one which has been in operation for 10 years in British Columbia and has proven to be successful while costing the province something like $30 million a year.
If implemented sensibly and within a reasonable time this plan could really make a difference and help immensely. It would provide incentives to people willing to take a risk – and seed funding new companies is all about risk management and sharing.
To illustrate principles, let’s say I need to raise $0.5M for my startup. If I go to you and ask you for the whole $0.5M or just a $100K chunk, even assuming you have the means, you are going to ponder this and agonize over the decision endlessly. However, if I go and ask you to invest $10-15K, you are going to spend far less time worrying about it and will be much more predisposed to take flight. Thus by employing this tactic, an entrepreneur will likely raise their $0.5M because the risk is shared among many investors and each of them does not risk that much individually.
This is exactly how I had raised angels financing for ATMOS Corp by bringing in about 20 private investors, each of whom on average contributed anywhere between $10K and $25K. The beauty of this approach is that nobody is going to lose sleep and the entrepreneur gets his/her objective accomplished. In fact, this is the same principle in action that powers the IPOs and syndicated VC rounds, albeit in a smaller scale. It works, therefore, use it. Of course, there are some pitfalls to watch, such as government regulations, accredited investors requirements etc., but these can be navigated around.
The key in seed funding is to incentivize and reward risk taking. It is disappointing that other political parties are not paying attention to this important issue. The current Ontario Liberals proposal is addressing this need well. Let’s hope we shall see it implemented without much delay.