Whether you’re a tech savvy graduate aspiring to be the next big thing in IT or a small business owner with a great local service idea, the largest barrier to turning those kitchen table ideas into reality is access to capital.
Across Canada, small and medium-sized enterprises (SMEs) identify insufficient access to capital – essentially, start-up investment – as the primary impediment to their growth. More than 70 per cent of SMEs in Ontario believe access to financing is the biggest obstacle to getting off the ground and growing their business.
According to Industry Canada, financing for higher risk, young and innovative firms is the hardest and most expensive funding to acquire. Consequently, nearly three-quarters of all start-ups and more than 50 per cent of SMEs rely on personal savings to get started, placing significant limits on their ability to invest effectively in growth and hire more employees.
Crowdfunding — a relatively new form of online financing — is poised to help address these needs and, in so doing, is a potentially transformative catalyst for local economic development and local employment.
In crowdfunding, individuals donate, lend or invest into a specific project or new enterprise. Through the total sum of many small contributions, entrepreneurs are able to fulfill financing needs, from the low thousands into the millions of dollars. The donation model is more common across Canada than the lending or investing model, and donations are often rewarded with a token of relatively low value, usually one of the start-up’s products or an opportunity to experience their services. Lending and equity models haven’t yet received legislative approval in Canada, but consultations on the latter have been held in several provinces, including Ontario, with an eye towards enabling these models in the near future.
Pebble Technology understands the potential of crowdfunding. Developed by University of Waterloo graduate Eric Migicovsky, the Pebble is a wristwatch that connects with a user’s smartphone wirelessly to alert the user of incoming calls and messages. In April 2012, Migicovsky raised more than US$10 million from 68,829 backers on Kickstarter, a prominent online crowdfunding platform. He did so after having struck out in attempts to raise the funds through traditional channels. Pebble Technology now employs over 30 people and has delivered more than 93,000 Pebbles to customers around the world.
iFundWaterloo is a collaborative project set up by the City of Waterloo and iFundSocial, a Toronto-based technology consultancy. It’s the first government-backed crowdfunding site in Canada, and while the site’s activity is modest with only three projects currently hosted, it has so far attracted just shy of $1000 from 25 funders. Waterloo Mayor Brenda Halloran said, “The City of Waterloo is a major advocate of technology innovation in our community and we wanted to be the first city in Canada… to further modernize their cities to enable new forms of citizen engagement.” Citizens can now help fund the projects they think are most worthy of their contributions.
Ultimately, given the funding challenges that exist for both Canadian small businesses and non-profits, crowdfunding offers a novel way of getting financing into the hands of the entrepreneurs who need it. To be sure, there’s a certain level of risk for donors and investors, but with proper requirements for information disclosure and limits on investment and fundraising, crowdfunding can be a catalyst for local economic development and for giving everyone a bigger stake in it.
Dan Herman is the co-founder of the Centre for Digital Entrepreneurship and Economic Performance (deepcentre.com) and a PhD Candidate at the Balsillie School of International Affairs.