Dr. Geoff Gregson is the JR Shaw Applied Research Chair in New Venture and Entrepreneurship. Geoff came to NAIT in 2014 from the University of Edinburgh, where he was a director of the University’s Centre for Entrepreneurship Research. He holds a PhD in Management, LLM in Innovation, Technology and Law and MSc in Social Research from the University of Edinburgh.

Access to capital for knowledge-based, innovative and growth-oriented small and medium-sized enterprises (SMEs) is a key policy issue in many OECD countries (Organisation for Economic Co-operation and Development). Such SMEs often have higher-risk profiles that makes them ineligible for many financing instruments provided by banks and other financial intermediaries. Government intervention, typically justified to address structural or functional constraints in local, regional or national markets, can be seen in policy initiatives to stimulate capital flows that recognize the disproportionately high contributions such SMEs can make to economic growth. Some policies initiatives have attracted debate, such as those redirecting public funds to high-growth enterprises or enterprises in particular sectors and those which provide financial incentives to risk capital providers (e.g. business Angels, venture capital) in an attempt to stimulate more private capital investment.

This article presents findings on a recent study of policy effects on capital flows in Canada, where a policy-rich environment has developed to support different government priorities and a diverse set of local economic conditions and community capacities. We observe that, while the federal government plays a prominent role in funding the transformation of research and scientific knowledge and supporting new enterprises, Canada has a poor record of transforming science for market applications or building innovative enterprises to scale. A contributing factor for the former is the weak alignment of institutional incentives linking ‘upstream’ private sector-led research with ‘downstream’ priority-driven research. The scale-up challenge is more complex; the combination of a small, fragmented local market, shortages of experienced business talent, lack of ‘at-scale’ sources of growth capital and aversion to risk by some of Canada’s large, established firms.

Canada’s structural market challenges affect raising large amounts of equity capital to fund capital-intensive SMEs and to fund early-stage growth; challenges which are more pronounced in peripheral regions of the country. We observe that approximately 40% of all VC funds in Canada are foreign, with the prominence of larger foreign VC funds targeting later-stage deals and early-stage deals comprising approximately half of all Canadian VC investments. Private equity-backed enterprises have smaller exits and face a longer path to exit than their U.S counterparts for example; limiting the redeployment of risk capital and talent to new opportunities and emerging technology sectors in Canada.

The study offers a number of policy recommendations. One recommendation is provision of a national investor tax credit and more streamlined financial regulations. Currently, Canada’s ten provinces and three territories each have different financial instruments to support innovative SMEs, which may include investor tax credits, side car funds and specialized funding programs. The study identifies growing demand for larger funding rounds and increased interest in co-investing and cross-regional investment. Direct incentives, i.e. tax credits, are identified as the most capital efficient way to incentivise and channel local risk capital investment (e.g. Angels) to early stage companies. A related recommendation is a more streamlined approach to funding, where different funders could align their money. SMEs typically need to show traction between each of their funding sources and, in some cases, need to adhere to government reporting metrics – which can adversely affect their ability to raise Angel or VC funding.

Another recommendation is more corporate ‘early-adopter’ companies to trial and adopt new products offered by Canadian SMEs and embed them into their processes. Early adopter companies could assist in refining a new product i.e. “risk capital of adoption versus investment” – allowing enterprises to develop, scale and progress to next level and potentially supporting these enterprises long enough for them to flourish internationally. The study identifies the need for more SMEs to sell internationally and to learn how to scale up (e.g. for companies between 5-15 years), and recommends further public support to develop ‘home-grown’ sales and growth management talent early in the business lifecycle.

A copy of the full study can be found at: https://www.nacocanada.com/cpages/research.

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