Leveraging Start-up Fundraising in Atlantic Canada with R&D and Government Incentives

Determining how much money your start-up needs in order to meet its milestones (and to survive until the next financing round) begins with translating your business plan into its financial representation i.e., a good set of financial projections (Financial Modelling Blog). If you do a diligent job of building a set of financial projections, the model will reveal how much money you need to raise from investors.

NON-DILUTIVE FINANCING

As you build those projections you will want to estimate how much non-dilutive financing you are likely to secure to help advance your plan. Non-dilutive financing is money you secure that does not dilute the ownership position of investors. This type of financing is sometimes called “leverage” and includes instruments such as grants, company loans and refundable tax credits. Simply put, if the money is not revenue from operations and is not in exchange for ownership in the company (now or in the future) it is non-dilutive funding.

Non-dilutive funding is the friend of start-ups and their investors. If you read my blog about fundraising and your cap table, you got my central point that understanding the impact of fundraising on your cap table is important for many reasons. I won’t rehash that here but if you want to take a quick peek at the importance of modelling your cap table you can do that here – Cap Table Blog.

When the Atlantic Canadian start-up scene was younger, start-up founders struggled with understanding what their options were for non-dilutive funding. I think start-ups today have a somewhat better idea of the assistance that is available to them.

SOURCES OF NON-DILUTIVE FUNDING

If you are a technology start-up in Atlantic Canada there are three sources of non-dilutive funding you need to know about from the moment you incorporate your business. Sure, there are other sources of leverage, and you should explore them, but these three sources of non-dilutive finding stand apart from the others if you: are a start-up technology company, plan to commercialize your technology and want to maximize the support you get (which can support include the relationships, advice and knowledge).

Before I say a few words about three important organizations that offer non-dilutive funding, please know this – the best relationships in life occur when you put an effort into them. No effort in will equal something less than you hoped to get out of the relationship. As you foster relationships with any financing partner be it a lead investor or non-dilutive funding partner, remember to not mail it in. Partners need to trust you, so put the effort in, respond to inquiries, give them what they need to help you and most importantly… do not forget about them once you have their money.

There are no surprises below. What is described is the value I think these organizations can bring and why. I submit that if you are an Atlantic Canadian start-up, you need a relationship with each of them.

1. ACOA

ACOA or the Atlantic Canada Opportunities Agency is an economic development agency that helps technology start-ups and innovative companies in Atlantic Canada. If you want to speak with a program manager you can begin by reaching out to ACOA here – ACOA Info.

My experience with ACOA has been excellent and many start-up CEOs would tell you the same. For the start-up company ACOA has tools that help leverage private fundraising activities in the form of loans which have favourable terms (versus commercial banks and that is assuming a start-up could even qualify for a loan from a bank) and non-repayable project contributions (grants). Additionally, I have found their program managers and other team members to be very helpful in all activities from pre to post project funding. ACOA project funding can support payroll, certain business costs and even some equipment purchases depending upon the project in question.

Project costs they fund can be a little broader in scope than the next two sources of non-dilutive funding described below both of which fund technological innovation and support costs related to them.

2. NRC IRAP

NRC IRAP is the National Research Council of Canada Industrial Research Assistance Program – NRC IRAP Info. If you are a technology start-up company in Canada developing technology to sell, you need to be speaking to you an ITA (Industrial Technology Advisor). ITA’s can offer business advice, referrals, and more including a pathway to non-repayable contributions if you have a project that meets their criteria for funding. This funding can be significant and may cover technology development costs from employees, contracts and project overhead.

Like the ACOA program managers, ITAs help business formulate projects that are fundable and help in many ways in between.

3. SR&ED

SR&ED stands for Scientific Research and Experimental Development (program) and is a tax credit available to companies doing SR&ED eligible work. For many people, SR&ED is the most difficult of the three sources of non-dilutive funding, described here, to understand, owing to the fact the program is administered by the CRA (Canadian Revenue Agency) and defined within the Income Tax Act – subsection 248(1). Borrowing from the SR&ED definition in part – “‘scientific research and experimental development’ means systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis…”. The definition continues but suffice to say that if you are a start-up company doing SR&ED eligible work, you need to investigate this tax credit which may be refundable. In this context
“refundable” means getting a refund from CRA even if your company does not pay income tax.

If your company qualifies for a SR&ED tax credit, then the company would “apply” for this non-dilutive funding as part of its annual tax filing.

SR&ED claims can be lucrative to companies, especially start-ups. I highly recommend looking through this site – SR&ED Info. Alternatively, reach out to me at my email address if you have questions and I will do what I can to help.

Summing It Up

ACOA, NRC IRAP, and SR&ED are often the anchors in a technology start-up’s non-dilutive funding plan and for good reason. These non-dilutive funding sources can work together (there are stacking rules that govern how much government money your company can receive for the same activities) to help achieve your start-up’s milestones.

As you lay the groundwork to use and deploy non-dilutive funds, do not ignore the homework and work you need to do to get the funding or the relationships you need to build and foster with these vital funding partners. Getting non-dilutive support can mean so much more to your company the money received.

About Bill
I have been working with start-up leaders and innovators for over 20 years in Halifax, Nova Scotia. I have worked in companies as a mid-level manager, as senior and executive management, as a founder and, on and off for the last 14 years, as an embedded executive and advisor.

If you would like to automatically receive this newsletter in your inbox, or if you have questions about how I can help you and your start-up company email me at bill.power(at)powerforward.ca.

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