They badly need money but they don’t know who, when or how to approach the people who have it.
This, in a nutshell, is the major challenge of early stage companies in Ontario seeking startup capital, according to a recent survey released by the Innovation Synergy Centre in Markham (ISCM).
ISCM polled owners of 100 technology-based startups in Ontario on their understanding of capital acquisition and their confidence in obtaining it.
Last January, ICSM launched the Investment Network as part of its goal of becoming a bridge between startup firms and investors.
Ninety three per cent of the companies surveyed reported that obtaining financing within the next 12 moths is very important for their growth.
Despite this, 82 per cent admitted they didn’t have the knowledge to access the necessary financing, said Catarina von Maydell, director for the ISCM’s Investment Network.
The survey indicated that 64 per cent feel they have “low to moderate” knowledge of the most appropriate types and sources of funding and 66 per cent acknowledged they are uncertain of how investors and lenders make their decisions regarding backing an early stage company.
“These numbers are of concern because early stage companies are the foundation of Ontario’s economy,” said von Maydell.
“Most entrepreneurs are highly skilled in their fields but lack the business acumen to run their companies,” noted the ICSM exec, who previously served as director of the National Angel Organization of Canada and as manager of the Toronto Angel Group.
A principal of an Ontario-based tech company seeking funding to get off the ground agrees.
“The early stage of the game when you are looking for R & D capital or seeking money to get your product to the market is the most critical moment,” said Stephane Attal, chairman and acting CEO of Ask Kinjo Inc., a Toronto-based company that’s developing a geo-spatial mobile phone application.
The company hopes to market the product as an ad-supported service that assists mobile users locate services and shops and compare prices as well.
The company expects to achieve $500,000 in revenues in its first year.
Attal has gone through three other startup ventures in the past so he says he “knows the ropes” but other entrepreneurs have very little inkling of what they’re up against.
“The situation is you need money to start R & D or you want to get the product into the shelves. Unfortunate venture capitalists rarely want to risk their money unless you already have market traction.”
In most cases, he said, locating financing can take three months to a year.
It is vital to know what stage your business is at and what financing is available to you at that phase, according to von Maydell.
She said there are basically four business stages where capital sourcing is critical:
1. Pre-R & D
At this stage the company is looking for money to finance research and development of a product or service.
Businesses often access the personal finances of their principals, relatives and friends but they should also be on the look out for government and non-profit funding sources.
To get outside help startups should present a viable business case and prove that there is a sustainable market appetite for the service or product they propose.
“It might be enough to tell friends and relatives you’re onto a really cool product. But you need to convince other investors of its value proposition.”
2. Going to market
Once you’ve created your product, the next big step is to get it to market. Personal lines of credit, credit cards are often maxed out at this stage. Banks are still wary about extending help without any security. They want proof of sustainable revenue.
Attal said it is also crucial to present a credible and competent team before potential investors as this will reassure them of the company’s chances of survival.
At this stage ideal backers are so-called angel investors – individuals or groups with lots of cash who are also entrepreneurs who can be high-risk tolerant.
Since they could be experienced in your field and were once in need of financing to, angel investors can be vital mentors and allies.
3. The business is now generating revenue
The product or service is out in the market for some time and is now earning some revenue. The biggest challenge is to support that growth and keep abreast or ahead of the competition.
It’s now much easier to raise money. You can go to banks, search more government programs, tie up with angel investors are seek out the equity investment firms that offer bigger bucks.
The principles remain the same. You have to prove you’re a good investment.
4. When you’re generating $1 million or more
You want to keep the good times rolling. As the business matures, so does your funding needs. Merchant banks are potential sources or big capital, but merger and acquisition specialists can also point you to bigger partners.
In every stage though, a startup might be asked by potential investors to give up some control or share of the company. As each new investor comes in, the owners could go through what is called a “dilution of share.”
It’s an essential step because investors want security for the time and money they will be spending. Refusing to let go could atrophy the company but giving away too much might mean your losing your baby, said von Maydell.
“The wise entrepreneur will have to determine the right mix for his own business. It’s a delicate balancing act.”
The ISCM has invited specialists from various financing disciplines to speak on these topics and more in a forum called Money Chase which will be held in Markham, Ont, in January 24.
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