Research

Bringing more capital into the innovation funding system is good for business

By James Langton |

 

Crowdfunding has so far provided a relatively tiny amount of capital to new Canadian businesses, but could some day rival angel investing as a source of funding for startups, according to a new report from the Conference Board of Canada's Centre for Business Innovation (CBI).

In the first couple of years since securities regulators developed prospectus exemptions to allow crowdfunding, it has only been a modest source of capital for Canadian businesses, the report says.

Indeed, businesses in Canada raised just $50 million through crowdfunding in 2016, the report says, mostly in business lending. By comparison, non-business crowdfunding, such as non-profits that use donation- or reward-based models, raised over $180 million during the year.

Moreover, startups raised more than $3 billion in venture capital, and over $4.4 billion on the TSX Venture Exchange, over the same period. "In comparison to other available sources of risk capital, crowdfunding has a long way to go before it makes a substantive contribution to Canadian innovation finance," the Conference Board says in an announcement accompanying the report's release.

Yet, the growth of crowdfunding in other countries suggests that it become a more significant source of capital in Canada, according to the report. "Crowdfunding may rival angel investing in Canada within the next decade, which raised an estimated $500 million in 2016," the report says.

Whether the crowdfunding market grows to that extent or not will depend on investors and companies embracing the model, and efforts by policymakers to harmonize the regulatory environment, which is currently quite fragmented due to the adoption of different regimes in different provinces.

"By connecting investors directly with entrepreneurs, crowdfunding may actually do a better job of identifying niche funding opportunities missed through traditional venture capitalist vetting," says Paul Preston, director, science, technology and innovation, at the Conference Board, in a statement. "With Canadian innovators regularly citing financing as a major barrier to their success, any initiative that brings more capital into the innovation funding system is good for business."

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