Successful businesses start with a great idea, but when they become mid-sized enterprises, they need good sources of money.
“It’s important for a business to understand the path of funding,” says Mark Bordo, co-founder and CEO of Vetster Inc., a veterinary telemedicine service that launched in November, 2020. This can be especially daunting for small businesses that are poised to make the leap to mid-sized and need financing to grow.
Vetster, with 35 employees, is the kind of company that’s on the verge of making the jump. Its value proposition is straightforward – veterinarians sign up and pet owners can connect for online appointments and advice when it’s either not necessary or too far to travel for a face-to-face appointment, or impractical due to COVID-19 restrictions.
Getting funding for a startup requires a lot of preparation and work, but it’s relatively straightforward compared with obtaining mid-sized funding, Mr. Bordo says. Within six months of its launch, Vetster, which operates in Canada and the United States, raised $12.25-million from several venture capital and angel investors.
But then what? Not many mid-sized companies get to the next stage.
According to Statistics Canada, as of December, 2019 (the agency’s most recent data) only 1.9 per cent of businesses in Canada (22,905 out of 1.23 million) were classified as medium-sized businesses, with between 100 and 499 paid employees.
Many of these companies may not be established enough to gain the confidence to snap up the funding they need to expand, and they may not have enough of a track record – or profits – for a traditional lender to finance their growth.
“In my experience, the most important thing is finding the right match in a lender. Mid-sized businesses will find a lot of lenders who are interested, but your company is not necessarily at a stage that matches every lender’s investment thesis,” Mr. Bordo says.
Businesses can turn to the Business Development Bank of Canada (BDC), the Crown corporation mandated to help small and medium-sized businesses. It has 72,000 clients and more than $35-billion in funds. The BDC also provides advice and tools for companies to approach private lenders and investors.
Mid-sized companies can also look to Canada’s big banks. In the past, mid-sized companies found it difficult to turn to Canada’s mainstream financial institutions, but Gary Chung, managing director of mid-market mergers and acquisitions at BMO Financial Group, says it’s different now.
Banks recognize the growth potential of many of Canada’s would-be mid-sized firms, and they’re willing not only to lend money but also to connect businesses with other potential investors and partners, he says.
Deals for mid-sized lending can be complicated and involve many different types of debt, as well as taking on new partners and shareholders. A deal could include a straight loan, seats on the company’s board, preferred shares (which pay a regular dividend before common-share dividends are paid and are more secure as they rank above common stock), or common shares.
Banks try to broker mid-sized deals that might involve several types of funding. “Once we connect companies with potential investors, our job is to optimize the connection and to negotiate on behalf of the company,” Mr. Chung says.
“Some of the banks do get it now,” says Sunil Mistry, partner at KPMG Enterprise. “They don’t all understand business models that show initial losses, which is common in Software as a Service (SaaS) companies, but some Canadian banks are starting to understand.”
Tech companies, in particular, still look more to U.S. lenders than Canadian ones, such as banks in California’s Silicon Valley, he adds.
The mindset among lenders in Canada is still relatively conservative, agrees Amber French, director of strategic capital at startup accelerator Communitech, and co-founder and managing partner at Catalyst Capital, both advisors that work with technology firms mostly in Ontario’s tech-rich Waterloo Region.
“I’d like to see some of the investment leaders here, such as pension funds, show more interest,” Ms. French says.
Damiano Peluso, a KPMG deals advisory partner and colleague of Mr. Mistry, notes that there is funding available from different sources if the expanding mid-sized firm is the right fit.
In September, 2021, market research firm Refinitiv reported that Canada’s tech sector set a full-year record for venture capital fundraising in the first nine months of the year, with 427 firms pulling in $10.92-billion.
Another good place to seek funding is through the growing number of family offices that oversee the fortunes of ultra-high-net-worth families.
“It’s not necessarily old money. There are a lot of younger family office investors who sold companies for $30-million and are looking for new businesses to invest in,” Mr. Peluso says.
“Family offices are a source, but not all are set up to look at new opportunities,” says Matt Cohen, an entrepreneur who sold a tech company and set up investment firm Ripple Ventures, which looks to work with small and medium-sized businesses.
“It’s a bit easier for tech companies to raise funds because investors are so interested. The mid-sized companies that have the hardest time are the traditional family-owned firms that are looking at succession at the same time as expansion.”
Mr. Peluso’s advice: funding seekers should be patient, they should have a solid, coherent business plan, and a clear story about why they think their business will grow and how it will get there.