Small Head, Big Bellies – The State of Ontario Government Assistance of Emerging Business

By , September 9, 2009 12:39 pm

Screen shot 2009-09-08 at 4.53.15 PMJust recently the Ontario Ministry of Research and Innovation released the criteria for submissions for the Ontario Emerging Technology Fund. A lot of study and research went into creating this fund, but it seems it was all for naught. The intention of the fund was to help new companies get a foothold in the market by helping our small, frail venture and angel industry by providing matching funds to their investments. Fast, market-driven investment was the goal.

This fund does nothing to help emerging companies in Ontario, but instead funds the bigger bellies of mid-stage companies, and their respective consultants, lawyers and accountants.

In theory the matching fund is a good idea, just badly implemented.

The fund creates an economy with more funding for already established mid-level companies and simply adds fat to their loins, while ignoring the smart, entrepreneurial brains that can drive greater economic growth.

Angels and venture capital companies spend a lot of time doing due diligence in companies trying to figure out whether they will get a return on their investment; whether the team is competent and able, whether there is a market for the product as well as a solid distribution and marketing plan and, importantly, whether the investment is a fit for their personal goals.  This kind of due diligence is something government bureaucrats, or even quazi-bureaucrats working within the government funds could never do, because it’s not their money they invest. This is what creates, fast, market driven investment.

The Ontario Ministry of Research and Innovation decided to to another route, one suspects in part lobbied by the larger consulting and accounting firms who work with larger companies with more fat they can chew off their ‘growth’ clients. The criteria to get access to this fund makes it impenetrable by any company smaller than $2-3M in revenue. It is not clearly not intended to feed the brains who need the develop the fit bodies to compete in a global market, but instead to fund the established companies – or, to be clearer, ones who are well established at finding money within the the government support infrastructure.

This bill provides a strong direct dissuasion from smaller investors getting involved with start-up entrepreneurs. Firstly, the fund is set up with a minimum $1M investment. This predicates any self-respecting entrepreneur taking a serious dilution to get the financing, or just walking away. Most will walk away at that type of deal – the ones who really believe in their company. Many entrepreneurs can make a small amount of money go a long way and, both within Canada and the U.S. angel rounds are often less than $500k.  With that many of them can make significant progress, bringing a beta product to market or implementing early stage marketing initiatives, or simply innovating their product or service.

Secondly, the angel fund required individual registration and applications for each specific investment again raising the transactional cost of the investment. Why not outsource these costs to the angel groups? They are doing due diligence and  often funding it out of their pockets, and they often work with simple legal and share structure set-ups to further reduce transactional costs. The liability for errors can also be moved to the angel groups also, creating a higher level of due diligence within their ranks. Angels do want a return on their investment.

Lastly, there is even a requirement for angels to disclose net worth, to have matching funds applied. This rule makes it clear that the Minister has never met an angel investor in person – I’d suggest he get out more.  We already have angel investment criteria in place. It works.

This bill is designed to support the fat belly of lower growth, mid-stage companies, often well supported by other funds and government initiatives.

But why did the bill end up like this? It makes sense. The people who often influence the minister the most are the consultants, lawyers and accountants who make their living living off Canadian companies too small to leave the country and hire internationally. Their role is to grow their business and they have successfully lobbied to build a fund that does exactly that.

However, the Minister should step back and look at his role. It is not to feed that fat belly of mid-stage companies, but instead support the smart brains – our entrepreneurs – and build them into fit bodies ready to compete internationally.

(Disclosure – I am the President of Home Stars Directory (homestars.com), a company recently funded by a set of Canadian angel investors, most of which would have liked matching funds for their investment, but none of whom would have gone through this process to get it)

3 Responses to “Small Head, Big Bellies – The State of Ontario Government Assistance of Emerging Business”

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  3. Excellent article, bookmarked for future referrence

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