Taking innovation from idea to execution requires investment by financiers willing to accept risk. Thanks to two periods in recent history where innovation funding went seriously wrong—the dot-com bust in the early 2000s and the credit crisis of 2007-08—masses of gun-shy investors are choosing safer, low-yielding assets over higher-risk opportunities. In fact, a recent Centre for Business Innovation (CBI) survey found 25% of businesses identified financing as their number one innovation challenge.
Fortunately, plenty of funding options are still available for business owners who can develop an approach with an investor’s perspective in mind. A recent Conference Board of Canada report, Financing Innovation by Established Businesses in Canada, outlines ways SMEs with a plan for innovation can increase their odds of securing funding.
1. Brush up on business communication
Explaining the way a business makes money is no small feat. Incorporating a clear explanation of how a new innovation will add to the bottom line is even tougher, especially considering many entrepreneurs are not necessarily trained in business or communications. If you’re an innovator with an engineering background, but not a business background, you need help to create a pitch to inspire confidence and ultimately investment. Bring in an outside consultant, work on developing sharper business communication skills or take advantage of tools designed to help build investment proposals. The CBI, for instance, is developing tools to help SMEs calculate metrics and articulate the likely ROI for new products or services.
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2. Find a faster track to commercialization
Being slow to commercialize with a new product or service can knock the wheels off a funding bus. It takes a Canadian company an average of 1.5 times longer to commercialize an innovation than it takes to develop the innovation from an idea to a product or service in the first place. A company is especially vulnerable to running out of funds during the stage between development and breaking even, since financing partners often want to see more commercialization progress before they’ll offer up continued funds. This may seem short-sighted to an entrepreneur but to an investor it’s simply risk management. Finding a faster track to commercialization will put investors’ fears to rest and reduce the risk period for the innovating business.
For a detailed explanation of how to take a great idea to market, check out The Inventor’s Playbook in the May issue of PROFIT, on newsstands now!
3. Think globally
Innovation policy often comes wrapped in the Canadian flag, notes the Conference Board’s report. This puts it at odds with finance, which is increasingly border-free. In fact, foreign companies are among the top R&D spenders in Canada and foreign private equity funds have a significant share of the Canadian market. For a company looking to finance an innovation, expanding a search for investors beyond Canadian borders is likely to yield more and better options.
4. Consider pension funds
Don’t rule out large pension funds, suggests the report. Some, like the Ontario Teachers’ Pension Plan, manage private equity investments internally. Others, including the British Columbia Investment Management Corporation, work with private equity funds to make their investments. These large funds are slowly shifting focus away from low-yield investments and looking to support innovative companies in greater numbers.
Did You Know?
Canada ranks second-to-last among its peers in venture capital investment and business R&D spending, according to The Conference Board of Canada’s ranking of innovation among the world’s leading economies.
“Despite a decade or so of innovation agendas and prosperity reports, Canada remains near the bottom of the pack among its peers on innovation,” says president and CEO of the Conference Board, Daniel Muzyka.
A handful of new indices for added to the ranking this year. Among them is the ease of entrepreneurship index. Canada gets a “B” and ranks 4th out of 16 countries. The biggest factor dragging down our grade? According to the Conference Board, Canada’s barriers are at the regulatory level. Canada should focus its attention on reducing barriers to competition—the sub-indicator on which it ranks lower than most of its international competitors. Action to enhance fair competition in the Canadian economy should be an innovation policy priority in light of the evidence showing that competition is a key driver of innovation performance.