Winter is here.
After a bull run lasting a decade, soaring inflation, high-interest rates, and geo-political uncertainties have given VCs the chills. Valuations of private startups fell by 56% between 4Q 2021 and 4Q 2022. Startups are found dreading down-rounds – a disappointment for investors and employees alike.
VC risk appetites are shrinking and they are holding off on ‘capital calls’ during this slowdown, turning to safer assets. The entire situation has made VCs more cautious, not because of lack of funds – hundreds of billions of ‘dry powder’ lies dormant, but priorities have been realigned to focus on intense due diligence and return on investment.
According to CB Insights, global VC funding fell by a third in 2022, and the number of new unicorns dropped by 86%. Some of the biggest names in tech investing, such as Sequoia and Tiger Global, have admitted to making mistakes and overestimating the prospects of some of their portfolio companies.
Canadian VC Trends in 2022-2023
According to recent data from KPMG, in Canada, 2022 concluded with 1,080 transactions, resulting in a total investment of over US$10 billion. This investment amount is still high for Canada, second only to 2021, which saw $13 billion invested in 1,361 deals.
“The drop in the VC market was expected and consistent with trends globally.”, CEO of The Canadian Venture Capital and Private Equity Association of Canada [CVCA], Kim Furlong, said in an interview.
Unfortunately, as startup entrepreneurs, you may not have the time to wait for the VC winter to blow over or leave your fate in the hands of uncontrollable macro conditions, so we’re here to help you prepare your business to survive the winter and get wise to alternate funding sources.
How to survive the VC Winter as a startup
To ensure the survival and protection of existing investments, startups must proactively address:
- Liquidity and Maximizing Cash
Startup founders must closely monitor cashflow forecasts and put into action strategies that will accelerate sales and cash collections.
- Revising Business Plans
Focus on profitability over growth; investor priorities have changed and startup founders must identify measures that allow the business to reach profitability in a shorter time-frame.
- Transparent, Timely Communication with Stakeholders
Founders should reach out to stakeholders early enough to mitigate potential challenges. Suppliers or landlords can be re-negotiated with, defer bonuses for employees, give notice to creditors and more.
Alternative funding for startups during the VC Winter in 2023
A VC downturn does not mean that you have to give up your appetite for additional funding. You can consider many alternatives to VC funding like crowdfunding, risk-sharing programs, bank loans, corporate sponsorships, grants, and subsidies.
Relying only on Venture Capital is like putting all your eggs in one financial-source-basket. Whereas diversifying your funding sources can help plug in different types of funds based on your specific requirement. And we all know that VC funding isn’t a walk in the park, it comes with it’s own set of speed bumps like reduced ownership stake, conditional funds disbursal, and the expectation of rapid expansion.
With this list of alternate funding sources in Canada, we want to help proactive entrepreneurs explore new pathways for funding needs this year.
Crowdfunding is based on the principle of ‘many drops make up the ocean’. Startups can take in investments of smaller amounts from a large number of people to achieve their target funding goal. Crowdfunding for your startup can take many different forms in Canada:
Equity Crowdfunding: Investors receive shares in a company or the right to a part of revenues or profits from a particular product by investing an amount into your company. You can skip the line and get access to not just one, but multiple investors using this method. Equity-based crowdfunding is the only type of crowdfunding that is regulated by the NCFA (National CrowdFunding Association) in Canada. You can look up crowdfunding platforms like FrontFundr.
- Debt Crowdfunding: Investors lend their money to a company in exchange for repayments plus interest. Lenders mitigate their lending risk because a large amount is spread across small loans. Debt Crowdfunding is a good option for companies that require capital in the short term. Platforms like NexusCrowd allow debt and equity crowdfunding specifically for the real estate market. They have already helped close 13 deals and raised $9.1 million in Canada.
- Donation/Reward based crowdfunding: Backers fund your startup in return for rewards or tokens of gratitude. The company is free to get creative with their rewards, the funds contributed can act as a pre-order for a product, can equal first access to new products, free merchandise, goodies, and more. This is a good option for early stage companies or founders in the validation stage. Ulele is a popular Canadian crowdfunding platform for a large variety of innovative products, services and people. They have a 76% success rate as of 2023, and have collected over $285,420,668.
The Business Development Bank of Canada (BDC) is a foundational catalyst in the startup space in Canada. They are bankers for entrepreneurs with a proven history of over 75 years. They offer flexible financing solutions for businesses small to medium size businesses in the form of:
- Small Business Loans
- Commercial Real Estate Renovation
- Purchasing or transferring a business
- Working Capital
- Equipment purchase
- Fulfilling purchase orders
- Technology Purchase
- Tech Company Financing
Below are a few (out of many!) BDC commercial loans that could match your business funding requirement:
- Newcomer Entrepreneur Loan
Immigrants who have moved to Canada can access startup loans of up to C$50,000 and business advice within three years of the move.
Your business can get access to a repayable loan to buy a company, merge or acquire a competitor to expand your operations.
If you’re looking to acquire an existing business or the business of a competitor or supplier, you can get access to an asset-based loan.
- StartUp – Fund operations, working capital
If you’ve been in business for at least a year, you can get loans of up to C$250,000 to help get your business off the ground, finance operations, and replenish working capital.
Risk-Sharing Funding Programs
At a time when VC risk appetites are shrinking, a risk-sharing funding program could be the perfect alternative. This type of financing arrangement brings together multiple parties, like the government, lenders, and investors to share the risk and rewards of funding a project.
A risk-sharing program provided by the Government of Canada and Innovation, Science and Economic Development Canada. They help small businesses get loans from financial institutions by sharing the risk with lenders.
Through this program, 53000+ businesses have received loans totalling over $10 billion in 10 years. Eligible startups can get access to up to C$1,000,000 for term loans for any one borrower and up to a maximum of $150,000 for lines of credit.
Futurpreneur Canada, a national, non-proﬁt organization offers startup financing in partnership with BDC. As an eligible newcomer entrepreneur to Canada, between the ages of 18-39, you can receive a repayable loan of up to C$25,000.
If you have an established credit history, then this number can go up to C$60,000. Read more here.
As an entrepreneur, the one thing you could never lack is creativity, especially when it comes to solving challenges. Corporate Sponsorships are one such way of getting your creative juices flowing to create more channels of funding.
This generally entails leveraging something you already have built, or have access to, to a larger company that sees value in it – and getting them to pay for it. Think, community access, brand exposure, product endorsement, and local appeal.
Here are 4 tips to help you land your first Corporate Sponsorship Deal:
1. Identify potential sponsors: Start by identifying companies or brands that are a good fit for your startup and that have a similar target audience. Remember, different products, same customers. Research their sponsorship history and values, and reach out to them with a well-crafted pitch that highlights the benefits of partnering with your company.
2. Develop a compelling sponsorship package: Create a sponsorship package that highlights all the similarities (the more numbers, the better!) and shines your spotlight on the opportunity. Package it into an end-to-end service for them with brand exposure, access to your customer base, co-branded marketing campaigns, etc. Make sure to tailor your pitch to each potential sponsor.
3. Communicate with the right department: As obvious as this may sound, sponsorship proposals can just lay in someone’s inbox unseen – if they’re not the right person, in the right department. Depending on your sponsorship proposal, you may be looking for a Head of Marketing, Public Relations Manager, Advertising Head, or Community Outreach Officer. Apart from cold-emailing, attempt to foster these relationships by showing genuine interest in their business.
Once you have secured a corporate sponsorship deal, it is important to deliver on your promises and exceed expectations. Providing regular updates will help you build a strong, long-lasting relationship and increase the chances of securing future sponsorship deals too.
Canada being an extremely business-friendly country, has a robust ecosystem of Government grants, subsidies, and tax credits to ensure the wheels are always turning. Government grants available to startups have strict eligibility, terms, and audiences. Before applying for a grant, always confirm that you fit the eligibility criteria because startup grants are created for very specific purposes. A mismatch can lead to precious time lost for you as an entrepreneur and the funding agency.
Here are the most popular grants for entrepreneurs looking for startup capital in Ontario:
Offered by the Government of Ontario and the Ministry of Economic Development, Job Creation and Trade provides funding of up to C$5000, along with business advice, guidance, and workshops to help you start a new company, expand an existing company or buy a business in Ontario.
Startups that need research funding for developing and commercialising innovative, technology-driven new or improved products, services, or processes in Canada can be eligible for the National Research Council of Canada Industrial Research Assistance Program. With a threshold of up to $10M, you can get contributions of up to 60-80% of internal technical labour and subcontractor expenses towards a specified innovation project.
Business Benefit Finder
The Canadian Government’s Business Benefits Finder is a tool designed to help Canadian businesses identify government grants, loans, and other funding opportunities that they may be eligible for. As an entrepreneur in Canada, turn this into your Google – for business support. You can filter government benefits by Province, Amount, Goal, Industry and more! The Business Benefit Finder can save you time, help you maximize your funding opportunities, and most importantly, save your money!
Are you looking to start up in Canada?
At TBDC, we help international entrepreneurs start up and scale businesses in North American markets. Apply for our Soft Landing Program to get access to our network of mentors, investors, and entrepreneurs.