To Encourage Innovation Canada Must Simplify Startups’ Access to Funds

By June 26, 2012
computers exchanging money

How can technology innovation be stimulated in Canada? By connecting investors and startups more efficiently, making crowdfunding popular and creating a market in the shares of companies prior to their launch on the stock exchange, says Alpha Exchange.


Despite an impressive education system and favourable regulation, Canada’s technology industry has underperformed ever since the Internet bubble burst a decade ago. In fact Canada’s Internet economy ranks below the G20 average, apparently due to both a lack of start-up management talent and poor availability of funding. Alpha Exchange has published a white paper on the subject, setting out five initiatives which could help start-ups – the main drivers of innovation, according to this alternative stock trading platform provider. First of all, Alpha Exchange points up the need to find a means of connecting investors and start-ups via online networks, helping these fledgling companies to go beyond their personal contacts for funding or mentoring. In addition, linking incubator programmes would help transfer knowhow more effectively. Secondly, the authorities ought to be fostering the development of ‘crowdfunding’, which basically means raising capital through relatively small contributions from a large number of people. This new approach needs favourable regulation to facilitate the creation of a small investors’ platform, which is what happened in the UK with Crowdcube, where £3.5 million was invested in the first year, with an average investment per person of just £1,327.

Tax breaks for ‘angels’

Thirdly, the white paper suggests creating a ‘pre-IPO’ capital market – i.e. a market where the shares of start-up firms can be traded prior to their flotation on the stock exchange. In the United States, the platform – a “marketplace for alternative investments” – saw a billion transactions carried out in 2008. This pre-IPO capital market reduces the gap between start-ups which are able to tap the stock markets for funds and those which are not. It also fosters investment by bringing these promising companies to the notice of potential investors and reducing the risks associated with investment in illiquid stocks. Fourthly, Alpha Exchange suggests focusing on the specific needs of the tech sector in terms of marketing, state programmes to encourage start-ups, and structuring market pricing of securities to enable start-ups to get over the hurdle of being listed on an exchange under the right conditions. The fifth initiative would be to encourage investment by providing tax breaks for ‘business angels’. The UK provides a 30% tax credit for returns on this type of investment – which has resulted in an average increase per investor of 50-70%, points out Alpha.

Creating an overall favourable environment

Beyond this, Alpha Exchange points out that if Canada wants to drive development in the technology sector, it must create an overall favourable environment, which will require the authorities to bring in a number of changes to the regulatory and tax frameworks for firms in this category. Alpha even advocates the State itself making direct investments in start-ups. In addition, government ought to be encouraging demographic diversity and facilitating the creation of global connections and promoting creativity and innovation through a more open immigration policy. Government should also be helping to attract foreign investment, while at the same time maintaining national control of the companies, says the white paper. The paper cites as a good example Israel’s Yozma Programme, under which the State keeps a 60% share in a company, while allowing foreign investors to take a stake of up to 40%.

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