Lack of adequate financing is holding Canadian businesses back from creating marketable innovations, says a new report from the Conference Board of Canada’s Centre for Business Innovation (CBI). But business owners themselves may be the biggest obstacle when it comes to finding innovation financing.
According to a recent CBI survey, 25% of Canadian businesses cite “lack of financing” as their No.1 innovation challenge, four times as many as those who cite the next top challenge. But Michael Grant, director of research, capital markets for CBI, says lack of innovation financing can’t be blamed entirely on reluctance among investors to back innovative companies. “Firms need to do a better job of explaining to investors how new or improved products will make money,” Grant says.
The problem, says Grant, is that many business owners, while highly knowledgeable about the technical aspects of their business, lack the “soft” sales and marketing skills required to commercialize their new ideas. Commercialization skills are undervalued by business owners, he adds, who are often so wrapped up in the R&D process they don’t see looming financial problems. “These skills are invaluable; but when many business owners get to the commercialization phase, they don’t know how to roll their product out properly and they don’t know how to get in front of the right people,” Grant explains.
Having the skills required to get in front of the right investors and make a solid pitch for innovation financing is even more important given the current investment climate in Canada. The CBI report found that venture capital, private equity and pension fund investors remain “inhospitable to risky investments.” According to Dan Hall, senior vice-president of institutional sales with the Toronto-based investment consulting firm Teir 1 Transaction Advisory Services, there is plenty of investment money around but the lingering slow recovery has made investors cautious. “Entrepreneurs have to be very convincing; you have to be able to prove you have a plan in place that is going to lead to a marketable product in a reasonable time frame,” says Hall.
Part of the problem, says Grant, is that there is sometimes a disconnect between what the business owner thinks is relevant and compelling about their innovation and what investors want to hear. While entrepreneurs may base their pitch for innovation financing on the complex technical aspects of their R&D work, what investors really want to see is business-specific financial and operational data that speaks to the financial performance and solvency of the business. Investors are also interested in seeing industry metrics or benchmarks that will allow them to compare the innovative company to its competitors, and market metrics that give an indication of the firm’s valuation.
“Commercialization is the proof that a new idea is likely to improve the firm’s financial position over time,” Grant explains. “That’s why it is important for innovators to connect their innovative activities to firm performance.”
The CBI report points to several ways an innovative firm can quickly acquire the skills required to take their idea to the next level. A simple solution is to hire a consulting firm that specializes in bringing products to market, but that costly strategy may be impossible for a company already in need of financing. Another approach is to bring in a venture capital or private equity partner that has the expertise required to lead the commercialization phase, but that also comes at a cost.
“Those kinds of investment partners usually want a big piece of equity, and most entrepreneurs get turned off by that,” says Hall. “It takes most entrepreneurs a while to figure out that it’s better to own a piece of something than 100% of nothing. But that is often the price you have to pay to move an idea forward.”
The CBI report suggests a number of ways to improve investment in innovative Canadian companies and offers suggestions to companies seeking innovation financing. For example, business owners are encouraged to look outside Canada for investor support, and CBI believes pension funds should consider directing a larger portion of investment funds toward private equity in innovative companies. The report also suggests that universities should strive to give students in technical disciplines more well-rounded training that includes instruction in commercialization skills like sales and marketing.
“Canada is good at financing innovation; we have managed to do it in the oil and gas and mining sectors,” argues Grant. “The financing techniques used in those sectors need to be adopted in sectors like telecommunications, computer technology, biotech and clean energy.”