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CB Blog

CB Blog

July 5, 2017 by Terry Booth

Financing options for early stage tech companies

If you are trying to find financing for an early stage tech company, you’ve got three main options: government grants, equity investment, and/or bank loans. In most cases, companies try to survive off government grants and maybe some equity funding from friends and family for at least the first two years. The criteria are different when trying to get equity investors involved as opposed to a bank. Traditionally, banks want to see at least two years of business history before seriously considering financing. On the other hand, angel investors don’t really care how long you have been in business. They tend to be more concerned about how much traction you’ve been able to achieve with your customers. With that in mind, here’s a closer look at the financing options available.

Government grants

The federal government and a number of provincial governments have made a great deal of funding available for early stage companies, in order to diversify the economy. This includes opportunities like the scientific research tax credit and the Industrial Research Assistance Program (IRAP). Beyond that, there are a number of grants that are more industry specific. The federal government also has a program that buys products directly from early stage companies, simultaneously addressing the government’s needs and the sales goals of these companies.

Equity investment

Typically, early stage companies turn to family and friends in the beginning, asking them to put money into the company as an investment. That’s how you finance a company before you’re generating revenue—through the founder’s contacts. Once you have revenue and you’re continuing to grow, you can also gain access to the angel investors and angel investment forums currently active across the country.

Finding angels

Angels are hard to find, but most of the major cities in Canada have business incubators. Examples include MaRS in Toronto and Innovate Calgary. If you talk to people in that innovation eco-space, they’ll tell you where you can find angel investors that are appropriate for your company. Angel investing groups are a little more open than the average single angel investor. If you go to the national association of angel investors, you will find a list of angel investment groups that organize regular events where you can go to raise money. It is also important to know your market. Ideally, you want to connect with investors who are knowledgeable about your business sector. During this search, you should also be on the lookout for potential mentors.

Investor tax credits

It’s an exciting time to be in Canada as a startup because many of the provincial governments have investor tax credits for people who invest in early stage companies. For example, if you invest in a qualifying small business, the Alberta investor tax credit offers you a tax refund equal to 30% of your investment. There are many angel investors out there who are quite excited about these programs and the new opportunities they provide.

Bank loans

While banks are traditionally reluctant to support early stage companies, they are now willing to offer loans to tech companies at a much earlier stage. Most available bank loans are pretty similar, but amounts and repayment terms depend on what stage of the business life cycle you’ve reached. Banks get very worried if there is a lot of complexity in a deal or if you’re not well organized when submitting an application, so it’s always worthwhile to make sure your affairs are in order before you go to the bank. You should make sure financial statements are available, minute books are up to date and all the information that the bank requires is in the correct format.

Keep spending to a minimum

An increasingly prevalent trend is early stage companies that are lean, mean and fast to sale. The more common model now is raising around $50,000 to do a minimum viable product, going out and talking to customers and trying to get some traction in your market segment. You need to talk to your customers as early as you can without investing a significant amount of money and time.

Terry Booth, CPA, CA, is a partner at Collins Barrow Calgary LLP. He has a significant not-for-profit practice and extensive experience working with entrepreneurial private and public companies.