Posted: June 28, 2016
It’s been a long time coming, supporters say, but the removal of barriers, along with investor incentives to encourage “crowd funding” will soon be forthcoming from the provincial government and the Alberta Securities Commission.
“Crowd funding” is a means by which small start-up companies can raise investment capital through online websites. Young companies can tout their investment potential to thousands of potential small-amount investors.
Currently new Alberta companies face arduous and expensive regulatory processes before being allowed to sell company shares to the general public.
To some, the encouragement of crowd funding is tremendously exciting news.
Successful Alberta high-tech entrepreneur and business mentor Don Pare has been preaching the gospel of crowd-funding in this province for years. Crowd funding, says Pare, can’t come soon enough.
So far, crowd funding in other parts of Canada has mostly been confined to consumer-based companies – promising “rewards” such as new products to those making the initial online investment.
Pare is convinced crowd funding will become the new normal – the primary way in which young companies can raise investment capital directly from the public without the need for a cumbersome regulatory authority and without the services of stockbrokers. Such websites are – like Uber and AirBnB – usually self-regulating through online commentary.
If government creates incentives for investors (i.e. tax credits) to take a flyer on Alberta companies looking to raise money online, Pare thinks crowd funding will accelerate at an even faster rate.
But at the same time, Canadian angel investor groups – wealthy individuals banding together to make investments in high-risk startup companies – are lining up against the very idea of crowd funding.
The problem, TEC Venture Angels’ director Randy Thompson says, is maintaining investors’ interest beyond the first “baby step” of crowd-funding.
“Crowd funding fills the school bus with kids,” says Randy. “If you have 1,000 unsophisticated shareholders owning a start-up company, you’re scaring off the next round of investors, i.e. angel investors and venture capital funds. Sophisticated angel investors and venture capital funds will not deal with that school bus full of shareholders, not at that stage of the game.”
If anything, Thompson suggests, the focus in Canada should shift from the raising of money by small companies to concentrating on what’s best for the investor.
“After 10 years, angel investors in 32 groups across Canada are restless. They haven’t seen much return on start-up company investments. Most angel investors haven’t had exits (selling companies at a profit) that they’d be proud of.
“For those of using encouraging angel investment, our primary obligation is not to the startup entrepreneurs but to the angel investor – to earn them a rate of return in line with the investment risk.”
To that end, TEC Venture Angels is the first angel group in Canada to create an internal mergers and acquisitions group – helping entrepreneurs in whom investments have been made to sell their companies in order to create a return for patient angel shareholders.
Pare, on the other hand, is utterly convinced that crowd-funding, in the context of a supportive business eco-system, is the way to go.
He is urging the Alberta government to consider the Chilean model, where, based on a report card system, government picks 300 new start-ups in every quarter of the calendar year, providing each start-up company with a $50,000 grant to build a product prototype, devise a business strategy, then proceed to a crowd-funding platform with a credible product ready for commercialization.
Four batches of 300 start-up companies a year, at $50,000 each, would cost the public purse $60 million a year.
“It’s something Alberta has to do,” Pare argues. “The oil price drop has been a good warning, a hot across our bow. We have to move as fast as possible to grow new businesses not dependent on fossil fuel.”
TEC Centre tenant CanBiocin – developing species-specific probiotic dog food – tried the crowd-funding route this past spring.
CanBiocin invited small investors to participate on both ATB Financial’s Alberta BoostR fund-raising website and on the international Kickstarter crowd-funding site.
“We worked hard at it, did all the right things, we offered a suite of awards to investors, but we didn’t succeed financially,” says CanBiocin CEO Jake Burlet. “On both platforms, if a company doesn’t not raise a pre-determined goal within a pre-determined time frame, all money is returned to investors.
“What we did have,” Jake says,” was unintended positive consequences. Being on Kickstarter, our product came to the attention of an American businessman who specializes in bring new pet food products to market. He’s now a useful and credible contact, helping us enter the American market.
“And for an extremely modest amount of capital, we gained a great deal of market intelligence and information about interest in our product, without paying six-figure marketing consultant fees. We have learned a great deal about what not to do, about re-positioning our product.
“The experience was extremely useful,” says Jake. “Nothing ventured, nothing gained. Crowd funding is legitimate.”
While TEC Venture Angels director Thompson is high skeptical, he still can put his criticisms in perspective.
“Twenty years ago, venture capital investors were extremely critical of angel investors,” Randy shrugs. “There were too many involved with each company, they over-valued the companies they invested in, they thought they were know-it-alls … which is pretty well what angel investors today think of crowd-funding!”