It is without a doubt that the startup ecosystem in Canada is thriving. In 2013, three Canadian locations placed in the top 20 most active cities for startup growth- Toronto 8th, Vancouver 9th, and Waterloo 16th. With such booming startup economies, it is understandable that people are voicing their concern about whether or not the newly elected government should implement a startup strategy. Plan or no plan startups are going to continue to be founded and will need to raise money to grow. The real question is, how are startups currently receiving funding and how fast is the exchange happening?
Every startup begins with an idea. But where does it go from there? The first stage of any business calls for personal investments. Commonly known as bootstrapping, any new founder will use their savings and credit, to get the idea off the ground. Next it’s time to lean on supportive friends and family who believe in the success of the company. Once both streams, bootstrapping and love money, are exhausted then it’s time to make the big decision. Venture capital, angel investors and new methods such as crowd sourcing and incubators all help startups grow. Choosing the right strategy and knowing the benefits (and risks) can be the difference between sinking or swimming.
Within the first six months of 2015 over $1 billion was invested into Canadian startups from venture capitalists (VCs). Most VC’s are looking for large markets that a startup can disrupt. While cold calls can happen, a meeting with a VC is more likely if a founder already has one foot in the door. Receiving money from a VC takes time. Building meaningful relationships is best practice, but it can also be a slow one- be prepared. Once a relationship is established, next comes the money, right? Wrong. Since VCs can contribute millions of dollars, they want to be sure that a good investment is being made. They want high returns and a seat on the company’s advisory board. Money is distributed at specific intervals and usually has a sum of $3 million or more. In 2013, the Canadian government created an action plan that consisted of making four new funds to increase investments from the private sector. VCs are all about high risk/high reward and are becoming increasingly popular in Canada. Even though a VC investment looks intriguing, research is crucial to know whether or not it is the right decision for your company.
Angel investments are quite the opposite of VCs but can still offer a lot of value to a startup, granted it is the fit upon evaluation. Angel investors are by no means a new method of raising, but are certainly a lot more accessible with the development of technology, take Angel List for example. A platform that focuses on getting entrepreneurs in touch with the appropriate networks. Angels can invest smaller amounts of capital, and they do not need to have control over the company. Angel’s are looking to exit sooner rather than later and believe in the idea that fuels the company forward. An example that can be found here provides a five-month timeline for receiving an angel investment that includes the back and forth time with lawyers to finalize the deal. However, approaching angel investors in the same industry as the startup may lead to a cheque that can be handed over in a matter of days or even minutes.
Got a consumer product? Then crowdfunding might be the answer. Websites like Kickstarter and Indigogo allow companies to set fundraising goals for their product(s) and collect pledges from the public. In 2011 worldwide crowdfunding totaled $1.5 billion in capital on over 1 million campaigns. While some challenges do exist, business failure & personal fraud among others, crowdfunding empowers the public to support companies they’re passionate about. In 2012, the Kickstarter platform brought in 400 million for over 76 000 new ventures. Crowdfunding gets products in front of a lot of people and is an easy way for a company to earn capital in a short period of time, should the campaign be successful, without having to part with any equity.
Incubators, new to the startup scene, are also increasing in popularity. Digital Media Zone (DMZ) at Ryerson University has just ranked first by the North American UBI Global Awards. Over a period of five years, DMZ has supported 200 startups, which have created 2000 jobs and secured 120 million in seed funding. Incubators (or accelerators) are built to nurture startups as they grow. While they do not provide capital they do offer an environment that speeds up growth, provides connections to investors, and provides mentorship to early stage startups. Along with DMZ, Highline, InCubes, and Jolt are incubators that did not exist five years ago but are now widely used and associated with startup success. While no capital is provided the environment, expertise and networking opportunities are accessible by the startups almost instantaneously, no wait time required.
Every startup is different with specific company goals. Choosing how to raise is a critical component of a startup’s success. The more capital a startup has, the more likely it can foster innovation, disrupt markets and make waves internationally. Venture capitalists, angel investors, and crowdfunding are all strategies to earn money, and each method comes with its risks and rewards. In the startup environment, money is time, it’s important to use it wisely, to your advantage and make sure it doesn’t fly past.