Leverage Financing: Lenders and Investors
Where can I go for funds?
Generally, small and medium-sized enterprises (SMEs) usually use their intellectual property (IP) rights in order to obtain funds from private investors (so-called "angel" financing), venture capitalists, specialized banks and on occasion from regular banks. SMEs may even obtain loans based on future royalty payments from licensing their IP rights. In order to get funds in this way, it's important to put forward a strong business case showing future potential cash flows in correlation with a sound and accurate valuation of the IP assets, preferably by a specialized IP valuation firm.
Regular banks usually require evidence of tangible forms of equity for funding IP-related projects. SMEs should also consider specialized banks, e.g., the Business Development Bank of Canada (BDC) that provides SMEs with flexible financing, affordable consulting services and venture capital. BDC supports the needs of entrepreneurs at every stage of growth.
Venture capital investors prefer to invest in companies that have already received significant equity, and have some valuable IP assets. They can also provide valuable guidance and business advice, and are looking for substantial returns on their equity investments. On Industry Canada's business information Web site, under "Sources of Financing", you will find an extensive directory of Canadian financial providers, a powerful search engine of financial providers, information on different types of financing and financial providers, and tips to help you secure financing. Further, you may browse a list of banks, credit unions, leasing companies, venture capital companies and much more.
Compared to the venture capital investors, the private investors show a stronger interest to get involved at an early stage in the company's growth. They are typically interested in smaller financing and usually expect the same rate of return for their investments, although they assume a higher risk than the venture capital investors. They may provide value-added services such as assisting their SME clients to obtain additional financing, and develop their clients' long-term strategies. Prospective SME clients should be prepared to spend some time and effort to find a suitable private investor since most of the private investors are part of informal networks of trusted friends and business associates.
What are some limits and obligations that I might incur?
Both venture capital and private investors prefer to invest in SMEs that have the managerial talent necessary to commercialize an innovation or creation. Note that venture capital investors often take a hands-on approach to their investments, requiring some representation in the management of your company. Private investors also may require involvement in the management of their SME clients. This kind of involvement might create problems for SME owners who value autonomy and control over their businesses.