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Expain the following concepts: 1) The life cycle theory of capital 2) debt financing 3)equity financing

cover these points: What is the issue in the concept and relate that issue to financing i.e. in terms of raising capital. 100 words each topic

How to apply that concept 100 words each topic

what is your solution or recommendation to solve the issue. 50 each topic

administrative
sciences

Article

Financing of Entrepreneurial Firms in Canada:
Some Patterns

Anton Miglo
Department of Accounting, Finance and Economics, Birmingham City University, Birmingham B4 7BD, UK;
anton.miglo@bcu.ac.uk

Received: 14 June 2020; Accepted: 31 July 2020; Published: 6 August 2020
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Abstract: This article analyzes the patterns of financing for entrepreneurial firms in Canada.
We compare the predictions of major theories of entrepreneurial finance and some more recent
ideas (e.g., crowdfunding-related ideas/theories) with empirical evidence. Regression and correlation
analyses were used to analyze the connections between firms’ financing choices (e.g., debt/equity
ratio) and different variables such as firm age, firm owner origin, and the fraction of intangibles
assets. We found strong evidence that the financing choices of entrepreneurial firms in Canada are
consistent with flexibility theory and credit rationing theory. We did not find evidence that taxes play a
significant role in explaining these choices. We also found that the likelihood of using crowdfunding is
consistent with local bias ideas and internet access. We also provide an overview of literature related to
entrepreneurial financing in Canada and discuss its major challenges and directions for future research.

Keywords: entrepreneurial finance in Canada; small business financing; capital structure; crowdfunding

JEL Classification: F30; G15; G18; G21; G24; G28; G32; G38; M13

1. Introduction

In this article, we analyze the patterns of financing for entrepreneurial firms in Canada.
Financing is an important and puzzling topic for large corporations (see, for example, a survey
of managers by Graham and Harvey in 2001) as well as for entrepreneurial firms (Jõeveer 2013). Several
theories that explain the ideas of firm capital structure and financing choice exist, including the
flexibility theory of financing innovations, asymmetric information, credit rationing and the life
cycle theory (for a review, see, for example, Harris and Raviv 1991; Klein et al. 2002; Miglo 2011).
Firstly, most of these theories do not have unanimous empirical support (see, e.g., a discussion in
Frank and Goyal 2003). Some of these theories find some support in some countries but not in others
(see, e.g., de Jong et al. 2008; Jõeveer 2013)1. Secondly, the implications and relative importance of
these theories are different for corporations and entrepreneurial firms (see, e.g., Frank and Goyal 2003;
Lee et al. 2015). Thirdly, in recent years, some new theories that are focused on entrepreneurial firms
(see, e.g., Robb and Robinson 2012) have been offered. Fourthly, debates still continue about which
theory is the dominant one in the area of firm financing. For large firms, the trade-off theory and
the pecking-order theory have emerged as the most important ones (see, e.g., the debates in Graham
and Harvey 2001; Miglo 2016). However, what theories are more important for entrepreneurial
firms? Finally, in the last decade or so, some new ways of financing entrepreneurial firms (such as
crowdfunding) and several new ideas about these types of financing have been developed. For all
these reasons, the topic of financing for entrepreneurial firms remains interesting and important.

1 In general, the topic of capital structure and optimal financing remains one of the most controversial topics in finance (see,
e.g., Graham and Harvey 2001).

Adm. Sci. 2020, 10, 50; doi:10.3390/admsci10030050 www.mdpi.com/journal/admsci

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Adm. Sci. 2020, 10, 50 2 of 27

Several articles address the capital structure choice by large corporations in Canada (see, e.g.,
King and Santor 2008; Gill and Mathur 2011). The financing of entrepreneurial firms has been studied
in several articles that focus on some specific types of financing (e.g., Cumming and MacIntosh 2003,
2006; Suret 2008 (focused on venture capital finance)). An analysis of the effect of different theories on
the financing choices of entrepreneurial firms that takes into account all types of financing, as well as a
comparison of theories’ relative importance, has not been done. At the same time, Canada is one of
the top countries in terms of developing new ways of financing, such as crowdfunding2, as well as
one of the best countries in terms of entrepreneurial support3. In this article, we aim to analyze the
implications of the main theories of financing with regard to entrepreneurial firms in Canada.

Below, we briefly describe the main theories of financing and formulate the hypothesis of our research.
Signalling by risk-bearing (Leland and Pyle 1977) predicts that the good quality entrepreneur would

keep a higher fraction of shares in his/her company than the low-quality entrepreneur. It assumes that
firms have private information about the quality of their projects, and on the other hand, entrepreneurs
are risk-averse. By holding a relatively high fraction of equity, the entrepreneur sends a signal to market
participants that the firm has good quality projects and that he/she is ready to bear the risk of these projects.

The flexibility theory (Diamond 1991) suggests that if a firm has too much debt or it does not have
any credit experience, it will be harder for it to obtain loans when necessary. Firms, therefore, preserve
debt capacity or hold back on issuing debt because they want to maintain flexibility. Firms maintain
excess debt capacity or larger cash balances than warranted by current needs in order to meet
unexpected future requirements. The flexibility theory predicts that firms with a lot of potential
investment and growth opportunities should have a lower debt/equity ratio. While maintaining this
financing flexibility has value to firms, it also has a cost; the excess debt capacity implies that the firm
is giving up some value and has a higher cost of capital.

The credit rationing idea suggests that if an investment yields large returns, the firm’s owners
capture most of the gains. If, however, the investment fails, debt holders bear the consequences. As a
result, the firm’s owners may benefit from investing in high-risk projects, even if the projects are
value-decreasing. This leads to a decrease in the value of debt and reduces the incentive to provide
loans when the investment choice is difficult to monitor, especially in the case of start-up firms. In some
cases, it leads to the credit rationing phenomenon (Stiglitz and Weiss 1981) when there is no equilibrium
for bank loans, even if a firm has a positive net present value (NPV) project available. The main
implication of the credit rationing idea is that banks may refuse to provide a loan if the uncertainty
regarding the firm’s projects is very high, which is often the case for small or start-up companies.

In contrast to dividends, interest paid on debt reduces the firm’s taxable income. Debt also increases
the probability of bankruptcy. Trade-off theory suggests that capital structure reflects a trade-off between
the tax benefits of debt and the expected costs of bankruptcy (Kraus and Litzenberger 1973). As the
expected bankruptcy costs increase, the advantages of using equity also increase. This result has several
interpretations. Small firms that are less diversified and have a higher default risk should use less debt.
Tangible assets suffer a smaller loss of value when firms go into distress. Hence, firms with more tangible
assets should have higher leverage compared to those that have more intangible assets, such as research
firms. Growth firms tend to lose more of their value than nongrowth firms when they go into distress.
Thus, the theory predicts a negative relationship between leverage and growth. Higher taxes lead to the
greater tax advantage of using debt. Hence, firms with higher tax rates should have higher debt ratios
compared to firms with lower tax rates. Inversely, firms that have substantial nondebt tax shields, such as
depreciation, should be less likely to use debt than firms that do not have these tax shields. If tax rates
increase over time, debt ratios should also increase. Debt ratios in countries where debt has a much larger
tax benefit should be higher than debt ratios in countries whose debt has a lower tax benefit.

2 https://www.statista.com/outlook/335/108/crowdfunding/Canada.
3 https://www.cnbc.com/2018/02/05/us-world-news-report-2018-top-10-best-countries-for-entrepreneurs.html.

https://www.statista.com/outlook/335/108/crowdfunding/Canada

https://www.cnbc.com/2018/02/05/us-world-news-report-2018-top-10-best-countries-for-entrepreneurs.html

Adm. Sci. 2020, 10, 50 3 of 27

The life cycle theory of capital structure (e.g., Damodaran 2003) predicts that firms in the
development stage will abstain from issuing risky debt and will instead issue equity. Firms in the
growth stage will begin generating positive earnings. Accordingly, these firms rely on debt financing
to fund their growth options as they face less financing constraints and as they expect to repay their
debt with growing future earnings. Thus, firms in the growth stage tend to have high leverage ratios.
Firms in the maturity stage generate large cash flows from assets already in place and rely mainly on
self-financing for their investment needs. They are more concerned with servicing the debt they raised
during the growth stage than they are with issuing more debt because they expect future cash flows to
deteriorate. Accordingly, mature firms prefer to maintain moderate debt levels.

In recent years, Canada has been quite successful in developing new forms of financing for
entrepreneurial firms, including crowdfunding. This area belongs to FinTech, which refers to innovative
technologies used to improve the financial sector (Das 2019). Crowdfunding is a form of fundraising
usually performed online, where firms raise funds from a large number of investors/funders (see,
e.g., Ahlers et al. 2015). In the literature, it has been suggested that crowdfunding relaxes geographic
constraints on fundraising, which inhibit venture capital and angel financing (Agrawal et al. 2010).
By volume of these sources of finance, Canada is consistently ranked among the top 10 countries (see,
e.g., Huang et al. 2019)4. Research in these areas is quickly growing.

The main aim of this paper is to gain new scientific knowledge about the patterns of financing
for entrepreneurial firms in Canada. In particular, we will look at different variables describing
the financing strategies of these firms (such as the sources of finance used and debt/equity ratios)
and connect them with different features of these firms, such as size, age of the owner, and asset
structures. The key research question for us is to identify what theory of financing is able to highlight
the behaviour of entrepreneurial firms in Canada. Based on the analysis of major theories of financing
for entrepreneurial firms described previously, we will analyze the following hypotheses.

Hypothesis 1 (H1). Smaller firms have a lower percentage of approved requests compared to larger firms.

Hypothesis 2 (H2). Entrepreneurs born outside Canada have a lower approval rate.

Hypothesis 3 (H3). Younger firms have a lower approval rate compared to mature firms.

Hypothesis 4 (H4). Firms in knowledge-based industries and industries with a high fraction of intangible
assets have lower debt/equity ratios compared to other industries.

Hypothesis 5 (H5). Firms with higher expected bankruptcy costs have lower debt/equity ratios than firms with
lower expected bankruptcy costs.

Hypothesis 6 (H6). Firms with higher tax rates have higher debt/equity ratios than firms with lower tax rates.

Hypothesis 7 (H7). Younger firms have lower debt/equity ratios than older firms.

Hypothesis 8 (H8). The likelihood of using crowdfunding is positively correlated with the provincial population.

Hypothesis 9 (H9). The likelihood of using crowdfunding is positively correlated with internet access.

The rest of the paper is organized as follows. Section 2 provides a literature review. Section 3
describes the methodology and data sources. Section 4 describes the results of our analysis. Section 5
provides concluding remarks, discusses the limitations of our analysis, directions for future research,
as well as the state of entrepreneurial finance education in Canada.

4 In addition, see https://p2pmarketdata.com/crowdfunding-statistics-worldwide.

https://p2pmarketdata.com/crowdfunding-statistics-worldwide

Adm. Sci. 2020, 10, 50 4 of 27

2. Literature Review

Existing literature on traditional debt and equity financing for entrepreneurial firms in Canada
usually focuses on explaining the problems of external financing for entrepreneurial firms or why
interest rates on loans are typically higher for small- and medium-sized enterprises (SMEs) than for
large firms5. For example, Beck et al. (2008) analyzed the financing patterns of firms in 48 countries,
including Canada, and found that the ability of smaller cash-constrained firms to obtain external
financing, including bank financing, was more limited as compared to larger firms.

Some literature focuses on venture capital financing for entrepreneurial firms. Historically, venture
capital financing reached its peak in 2000, and afterwards, its growth rates were not very impressive.
One factor behind this pattern was the great recession of 2008/2009. Furthermore, in Canada, the venture
capital industry has problems such as relatively low listing requirements. This reduces the incentive
for SMEs to partner with venture capital firms on the one hand, and on the other hand, it creates a
lot of asymmetric information about SMEs (Carpentier and Suret 2010), which creates difficulties in
raising public funds and a reduced interest from venture capital firms. Another interesting aspect
of the venture capital industry in Canada is the large presence of labour-sponsored funds (LSVCF)6.
Historically they played an important role in the creation of the venture capital industry, especially in
Quebec. However, it seems like their institutional structure needs some major revisions in order to
move the venture capital industry forward (Cumming and MacIntosh 2003, 2006; Cumming et al. 2007;
Lerner 2009; MacIntosh 2012; Suret 2008). There have been some improvements in the venture capital
industry during the last 10 years. The government implemented a venture capital support program in
2013 that included deploying CAD400 million in new capital over the next 7 to 10 years to reinvigorate
the venture capital sector in Canada7. As a result, we observed a sharp increase (2014/2015) in the
amounts of venture financing. Additionally, the growth of angel financing and accelerators is observed
in most OCDE countries, including Canada.

Crowdfunding is a new way of financing for entrepreneurial firms that has become very popular
around the world, including in Canada, in the last 10 years or so. It is a highly growing area of
interest among practitioners and theorists (see, e.g., Ahlstrom et al. 2018). As we write this article, the
number of empirical papers significantly exceeds the number of theoretical papers. Rainey et al. (2017)
discussed major types of crowdfunding and their growth before focusing on equity crowdfunding as a
method of financing for small businesses and start-ups in light of the recent legislative changes related
to equity crowdfunding in both the United States (US) and Canada. The authors covered the current
global market and both countries’ new legislation, as well as the specific challenges and benefits of
equity crowdfunding. They also touched on what the new trends in crowdfunding could mean for
impact investing, with a spotlight on the millennial generation’s investing patterns8.

For large companies, the implications of different theories of financing and capital structure
have been analyzed, for example, by Gill and Mathur (2011). In this article, we aim to analyze the
implications of the main theories of financing with regard to entrepreneurial firms.

We seek to make several conceptual and empirical contributions. Firstly, we hope to make
an important contribution to our knowledge about the theories of financing and capital structure
choice theories (Harris and Raviv 1991; Cumming et al. 2019). This topic remains controversial
and puzzling for large companies (Graham and Harvey 2001) as well as for entrepreneurial firms
(Bhaumik et al. 2015). Secondly, we would like to help fill the research gap related to the patterns of

5 The interest rate on loans to SMEs is, on average, 4 percentage points higher than the rate charged to large firms
(https://www.oecd.org/cfe/smes/SME-Scoreboard-2016-Highlights ).

6 For a history of LSVCF and their major features see, for example, Vaiiancourt (1998).
7 We use traditional notations for currencies (see, for example, https://ca.finance.yahoo.com/currencies/investing.html):

CAD for Canadian dollars, USD for American dollars.
8 A more detailed description of different sources of financing available for entrepreneurial firms in Canada is present in

Appendix A.

https://www.oecd.org/cfe/smes/SME-Scoreboard-2016-Highlights

https://ca.finance.yahoo.com/currencies/investing.html

Adm. Sci. 2020, 10, 50 5 of 27

financing of entrepreneurial firms in Canada. Many previous studies have focused on some specific
types of finance for these firms (e.g., private equity (Cumming et al. 2007)) but not on a systematic
analysis of these patterns. Thirdly, this article contributes to the growing line of research in finance
and entrepreneurship that uses surveys (see, e.g., Jude and Adamou 2018). The survey provided by
Statistics Canada is quite unique and should help researchers with a lot of data about entrepreneurial
firms’ access to finance, which, in many countries, is quite limited (Schmidt et al. 2017). Finally,
this paper contributes to the entrepreneurship literature in general. The reason is that, as many studies
argue and many surveys, including surveys we use, confirm, the financial activities of entrepreneurial
firms are the key problem for the majority of these firms. For many of them, it is the key reason for
failure. The problem of entrepreneurial firms is that they do not have a large number of assets, nor do
they have a long credit history or liquid market for their shares. As a result, they do not have easy
access to external sources of capital. Obviously, they do not generate a lot of profits, especially in
the initial stages of their development, so the internal sources of financing for them are also limited.
In these conditions, it is vital for these firms to understand the major theoretical ideas of financing,
as well as the knowledge of how these ideas interact practically with available data in order to be as
efficient as possible when dealing with different sources of financing and to increase the chances of
their survival. In this regard, we also look at student education related to entrepreneurial finance in
Canada. The quality of this education is crucial for developing entrepreneurial finance and, ultimately,
for developing entrepreneurship in Canada (for similar ideas, see, e.g., Solesvik et al. 2014).

3. Methodology

We mostly use two sources of data. Firstly, we use OCDE data that compares entrepreneurial
finance in Canada with other OCDE members9. Secondly, we use the Statistics Canada/Industry Canada
data about the financial needs of small- and medium-sized businesses because most entrepreneurial
businesses are found in this group10. Thus, we will use information about the financing of small- and
medium-sized enterprises (SMEs) as a proxy for the financing experience of entrepreneurial businesses11.

Regression analysis (the ordinary least square model) and correlation analysis will be the methods
used to determine the strength of the relationship between firm financing choices and other variables.

For example, to test H3, the formula for regression is

Debt/equity ratio = α + β1 × ICT + β2 × RD + β3 × New + β4 × C + ε,
where the dependent variable is the debt/equity ratio. The independent variables are the fraction of the
firm’s total assets invested in communication and technology (ICT), research and development (RD)
and new machinery (New), and the control variables (C) include different variables such as firm sales.

To test H7, the formula for regression is

Number of crowdfunding providers = α + β1 × Population + β2 × GDP/capita + β3 ×Market
income/capita + β4 × HC + β5 × HI + β6 × Entrepren + ε,

where the dependent variable is the number of crowdfunding providers in a province. The independent
variables include provincial population (Population), GDP per capita (GDP/capita), market income per
capita (Market income/capita), the number of households with a computer at home (HC), the number
of households with access to the internet (HI) and a variable (Entrepren) that measures the level of
provincial support for entrepreneurship (as a proxy, we used the international ranking of the province’s
largest city). We normalized data using an approach similar to Beck et al. (2008).

9 http://www.oecd-ilibrary.org/industry-and-services/financing-smes-and-entrepreneurs_23065265;jsessionid=
a4qc4i6hdobm3.x-oecd-live-02.

10 Throughout this article, if the source of data is not explicitly indicated, then it is one of the two sources indicated above.
11 Industry Canada defines small- and medium-sized enterprises as those with fewer than 500 employees. http://www.ic.gc.ca/

eic/site/061.nsf/eng/Home.

http://www.oecd-ilibrary.org/industry-and-services/financing-smes-and-entrepreneurs_23065265;jsessionid=a4qc4i6hdobm3.x-oecd-live-02

http://www.ic.gc.ca/eic/site/061.nsf/eng/

Home

http://www.ic.gc.ca/eic/site/061.nsf/eng/Home

Adm. Sci. 2020, 10, 50 6 of 27

In some cases where the available data were limited, comparison or qualitative methods were used.

4. Patterns of Financing for Entrepreneurial Firms in Canada

The main implication of the credit rationing idea (Stiglitz and Weiss 1981) is that banks may refuse
to provide a loan if the uncertainty regarding the firm’s projects is very high, which is often the case for
small or start-up companies. Typically, banks and other potential investors have more information
about large companies.

This table shows the amounts of requested and approved debt financing of different types by
Canadian SMEs in 2013. In most cases (as follows from lines 2–6 of Table 1), smaller firms had a
lower percentage of approved requests compared to larger firms. Similarly, firms in knowledge-based
industries also had a lower approval rate (75.5%) compared to the SME average (86.1%). Additionally,
younger firms had a lower approval rate than older firms (see section “Age of Business”),
and entrepreneurs born outside Canada had a lower approval rate (see section “Place of birth”).
It is reasonable to assume that in all these cases, banks have less information regarding the category
of firms with lower approval rates than the category(ies) with higher approval rates. This provides
strong support for our Hypotheses H1–H3.

Table 1. Canadian small- and medium-sized enterprises (SMEs) debt financing.

Total Amount Authorized-to-Requested, %

Nonresidential
Mortgages

Term
Loan

Line of
Credit

Credit
Card

Overall Debt
Financing

All SMEs 1 to 499 employees 85.5 88.0 85.2 91.5 86.1

Employment Size 1 to 4 employees 81.7 X 84.4 X 82.8

5 to 19 employees 83.8 86.2 76.5 88.8 81.2

20 to 99 employees 84.6 92.2 86.9 94.9 87.8

100 to 499 employees 98.8 X 97.5 X 98.2

Industries

Agriculture, Forestry, Fishing and Hunting,
Mining and Oil and Gas Extraction 96.8 93.2 92.3 90.9 93.9

Construction 85.9 94.2 88.3 93.0 89.1

Manufacturing 91.2 90.2 84.7 90.2 87.1

Wholesale Trade 96.4 95.9 92.4 98.4 94.1

Retail Trade 87.2 88.4 74.8 92.3 80.9

Transportation and Warehousing 98.2 84.3 89.0 90.6 89.9

Professional, Scientific and Technical Services 83.1 96.0 88.6 93.3 89.1

Accommodation and Food Services 68.4 75.7 48.7 74.8 67.2

Other Services 82.1 84.2 78.3 84.0 81.2

Information and Cultural Industries, Real
Estate and Rental and Leasing, Administrative

and Support, Waste Management and
Remediation Services, Health Care and Social

Assistance, Arts, Entertainment and Recreation

79.1 74.9 88.3 92.3 82.0

Special
industry

aggregations

Tourism 52.9 98.1 64.8 86.1 66.5

Information and
Communication

Technologies
83.9 94.1 69.9 99.6 81.3

Knowledge-Based Industries 49.5 68.8 81.6 83.1 75.5

Age of Business

2012–2014 (2 years or younger) 77.2 63.4 79.6 86.0 75.0

2004–2011 (3 to 10 years old) 81.9 80.5 79.6 92.2 81.4

1994–2003 (11 to 20 years old) 86.8 91.6 87.6 91.3 88.3

Prior to 1994 (more than 20 years old) 87.7 94.8 87.0 92.4 89.0

Place of birth
In Canada 86.6 89.3 87.0 91.7 87.6

Outside Canada 81.0 80.5 74.2 90.5 78.6

Source: IndustryCanada/Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises, 2014.

Adm. Sci. 2020, 10, 50 7 of 27

These patterns of financing of Canadian SMEs are consistent with patterns in many other countries.
For example, in the Euro area, access to finance and finance conditions appear to be consistently more
favourable for large enterprises than for SMEs, with a smaller percentage of large firms reporting
supply restrictions in the provision of bank loans, consistently higher rates of success and lower
rejection rates and a considerably lower net percentage of large firms reporting an increase in interest
rates and collateral requirements (See e.g., Hashi and Toçi 2010; OECD 2012).

Signalling by risk-bearing (Leland and Pyle 1977) predicts that the good-quality entrepreneur
would keep a higher fraction of shares in his/her company than the low-quality entrepreneur. One can
see an implication of the signalling idea in some cases discussed in Appendix A. For example, it is often
the case for government funding or different grants for entrepreneurial firms: it often requires the owner
to keep a significant fraction of the firm’s equity or to make additional investments in the firm’s equity.
It can be used as a signal of an entrepreneurial idea’s quality. For example, one of the requirements
of the microvoucher program in Alberta is that the entrepreneur provides 25% of financing using
his/her own funds in order to obtain government financing for research and development investments
(Table A2).

The flexibility theory suggests that firms maintain excess debt capacity or larger cash balances
than warranted by current needs in order to meet unexpected future requirements.

Tables 2 and 3 demonstrate that firms that invest in RD, new machinery and ICT (i.e., firms
with uncertain growth) have a smaller fraction of debt12. Additionally, the debt/assets ratio in
knowledge-based industries, which by their nature require a lot of flexibility, is significantly below the
average ratio among all SMEs, and, in fact, knowledge-based industries have one of the lowest ratios
among all industries13. This analysis provides strong support for H4.

Table 2. Capital structure of SMEs in different industries.

R&D/Assets
(R&D + ICT * +
New Machine +

Edu)/Assets

(ICT + New
Machine +

Edu)/Assets

Total Debt
Provided/(Total Debt
+ Total Equity)

All SMEs 0.101423 0.185788 0.084365 0.876402

Industries

Agriculture, Forestry, Fishing and
Hunting, Mining and Oil and

Gas Extraction
0.030194 0.09795 0.067756 0.851103

Construction 0.024912 0.103518 0.078606 0.879258

Manufacturing 0.107341 0.187031 0.07969 0.914535

Wholesale Trade 0.078696 0.155541 0.076845 0.932882

Retail Trade 0.019579 0.144089 0.12451 0.954592

Transportation and Warehousing 0.069976 0.31067 0.240694 0.820551

Professional, Scientific and
Technical Services 0.358487 0.447588 0.089101 0.839725

Accommodation and Food Services NA NA 0.0661 0.948222

Other Services NA NA 0.034778 0.636527

Health Care and Social Assistance,
Information and Cultural Industries,
Arts, Entertainment and Recreation

0.054745 0.121457 0.066712 0.736784

Knowledge-Based Industries 0.255537 0.344665 0.089128 0.668598

Sources: Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises 2011.

* ICT—investments in communications and technology.

12 See Baldwin and Johnson (1996) for an example of a comparison of innovative firms and other firms based on large list
of criteria.

13 The calculations are present for 2011. They are very similar for 2014.

Adm. Sci. 2020, 10, 50 8 of 27

Table 3. Regression results. The dependent variable is the total debt provided/total liabilities (2011) ratio.

Variables (1) (2) (3) (4)

Intercept 0.8849 (15.0750) *** 0.8386 (21.0297) *** 0.8348 (24.2261) *** 0.8019 (142.2934) ***
R&D −0.4138 (−1.1011) ** −0.4138 (−1.1011) *** −0.7642 (−1.9316) *** −0.3617 (−5.5060) ***
ICT −5.7091 (−2.9636) ** −5.7091 (−2.9636) ** −3.6529 (−1.7157) ** −6.0310 (−16.6178) ***

new machine −0.5933 (−1.1839) ** −0.5933 (−1.1839) *** −1.0699 (−2.0147) *** −1.2679 (−16.3216) ***
Personnel cost 23.8033 (2.9661) ** 22.9318 (3.3036) ** 30.9827 (25.8864) **

Sales 0.0339 (1.5433) * 0.0441 (13.5520) *
Income −0.1426 (−12.0323) **
Adj. R2 0.4160 0.7718 0.8304 0.9965
F-value 2.9002 7.7671 8.8370 384.4273

*** indicates significance at a 1% level, ** indicates significance at a 5% level, and * indicates significance at a
10% level.

The trade-off theory suggests that capital structure reflects a trade-off between the tax benefits of
debt and the expected costs of bankruptcy (Kraus and Litzenberger 1973).

Expected Bankruptcy Costs and Debt. As the expected bankruptcy costs increase, the advantages of
using equity also increase. This result has several interpretations. Large firms should have more debt
because they are more diversified and have a lower default risk (see, e.g., Adair and Adaskou 2015).
Start-up and small firms should use less debt. Tangible assets suffer a smaller loss of value when firms
go into distress. Hence, firms with more tangible assets, such as airplane manufacturers, should have
higher leverage compared to those that have more intangible assets, such as research firms (Ozkan 1996).
Growth firms tend to lose more of their value than nongrowth firms when they go into distress. Thus,
the theory predicts a negative relationship between leverage and growth. Tables 2 and 3 provide
some evidence that is consistent with these predictions. Firms with high amounts of intangible assets
(and respectively high indirect bankruptcy costs) have smaller debt/equity ratios. This supports the
hypothesis H5.

Taxes and Debt. Higher taxes lead to the greater tax advantage of using debt. Hence, firms with
higher tax rates should have higher debt ratios compared to firms with lower tax rates (see, e.g.,
Modigliani and Miller 1963; Devereux et al. 2017). Inversely, firms that have substantial nondebt tax
shields, such as depreciation, should be less likely to use debt than firms that do not have these tax
shields. If tax rates increase over time, debt ratios should also increase. Debt ratios in countries where
debt has a much larger tax benefit should be higher than debt ratios in countries whose debt has a
lower tax benefit. In Canada, the tax rate is lower for small businesses. This implies that there is less
incentive to issue debt for tax-saving purposes.

From the above tables, we can see that for small businesses, the tax argument of capital structure
does not have a strong confirmation. Otherwise, one should see a positive correlation between the tax
rate and the debt ratio. One does not see this relationship when looking at data from different countries
and different provinces in Canada. For example, from Table 4, Manitoba has smaller tax rates for small
businesses than the Atlantic Provinces, while the debt ratio is lower in Manitoba. The correlation
coefficients between debt ratios and small business tax rates are negative in Table 5. As follows from
Table 6, the debt ratio is higher in Korea, for example, than in Canada, while the tax rates for small
businesses are lower in Korea. The correlation coefficients are insignificant in Table 7, although it is
slightly negative between the small business tax rate (all levels of government) and the debt ratio.
The fact that the tax argument does not have a lot of support among small businesses is consistent,
for instance, with Kashefi-Pour et al. (2010).

Adm. Sci. 2020, 10, 50 9 of 27

Table 4. Debt and tax rates.

Total Debt Provided/(Total
Debt + Total Equity)

Average Debt/(Average
Debt + Average Equity)

Small Business
Tax Rate

All SMEs 1 to 499employees 0.876402 0.370954

Region

Atlantic 0.877895 0.281993 14.3 *
Quebec 0.908257 0.339092 15.49
Ontario 0.884781 0.452786 15.5

Manitoba 0.948693 0.468568 11
Saskatchewan 0.896066 0.386107 13

Alberta 0.79838 0.299392 14
British Columbia

and Territories 0.840542 0.313839 14.25 **

* Average among Nova Scotia, Newfoundland and Labrador and New Brunswick. ** Average among British
Columbia and Northwestern Territories.

Table 5. Correlation coefficients (X–Y).

X Y Corr

Small business tax rate Total debt provided/(total debt + total equity) −0.0126
Small business tax rate Average debt/(average debt + average equity) −0.019

Sources: http://www.taxplanningguide.ca/tables/corporate-taxation-cpp-ei/table-1-business-income-eligible-sbd/.
Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises 2011.

Table 6. International debt and tax rates for SMEs.

Year 2015 2014

Targeted
Corporate

Income Tax

Small Business Corporate
Tax Rates SME Financing Sources Business

Loans/(Business
Loans + VC)Central

Government
All Levels of
Government Unit

Business
Loans, SME

VC
Investments

Country

Belgium 24.25 24.98 EUR mil 109776 0.323408 0.99999705 VC + growthcapital

Canada 11 15.19 CAD bil 93.7 2.4 0.97502601 VC + growthcapital

France 15 15 EUR mil 219647 3234 0.98549001 VC + growthcapital
Hungary 10 10 HUF mil 4831238 18759 0.99613216

Japan 15 21.42 JPY tril 251.7 0.117 0.99953538 VC + growthcapital
Korea 10 12.2 KRW tril 522.43 1.6393 0.99687198

Netherlands 20 20 EUR bil 18 0.434 0.97645655

Spain 25 25 EUR bil,2013 134 0.555 0.99587529

United
States 15 19.92 USD mil 589772 50297 0.92141941

Growth
capital

Sources: http://www.keepeek.com/Digital-Asset-Management/oecd/industry-and-services/financing-smes-and-
entrepreneurs-2016_fin_sme_ent-2016-en#page118; http://stats.oecd.org//Index.aspx?QueryId=59543.

Table 7. Correlation coefficients (X–Y).

Y X Corr

Business Loans/(Business Loans + VC) Small business corporate tax rates (Central Government) 0.0006
Business Loans/(Business Loans + VC) Small business corporate tax rates (All levels of Government) −0.0002

The life cycle theory of capital structure (Damodaran 2003) argues that mature firms should have
higher debt ratios compared to younger firms.

Table 8 shows that young firms have lower debt ratios than older firms (H7), which is consistent
with the life cycle theory.

http://www.taxplanningguide.ca/tables/corporate-taxation-cpp-ei/table-1-business-income-eligible-sbd/

http://www.keepeek.com/Digital-Asset-Management/oecd/industry-and-services/financing-smes-and-entrepreneurs-2016_fin_sme_ent-2016-en#page118

http://stats.oecd.org//Index.aspx?QueryId=59543

Adm. Sci. 2020, 10, 50 10 of 27

Table 8. Debt and firm age.

Numbers (Average) Total Debt Provided/(TotalDebt + Total Equity) Liabilities/Assets

All SMEs 1 to 499 employees 0.876402 0.493849

Age of Business

2009–2011 (2 years or younger) 0.442206 0.382821
2001–2008 (3 to 10 years old) 0.753462 0.493482
1991–2000 (11 to 20 years old) 0.902901 0.459491

Prior to 1991 (more than 20 years old) 0.930078 0.515598

Sources: Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises 2011.

Crowdfunding. Table 9 presents the statistics of crowdfunding data for Canada by provinces.
The regression results are reported in Table 10. The results show that the number of crowdfunding

providers is positively associated with the provincial population, internet access and entrepreneurial
support. The relationship with GDP per capita and the market income per capita is insignificant.
In general, the regression results are very strong. Ideally, raising funds via the internet should remove
geographical barriers for firms (Agrawal et al. 2010). However, the analysis suggests that provincial
features are important for crowdfunding data. It may be related to the cost and efficiency arguments.
First, consider them on the supply side. From the providers’ point of view, the population size provides
an indication of potential economies of scale for their business. Note that crowdfunding regulation
in Canada is two-fold: there is the federal level and the provincial level as well. As we discussed in
the previous section, some provinces are more advanced in terms of regulation on crowdfunding,
e.g., Ontario. Hence, providers of crowdfunding services understand that their services depend on
the regulations, and, therefore, the provincial population is a strong factor for them. Provinces with
a small population do not have a significant number of providers. Secondly, on the demand side,
the population can reflect the potential amount of feedback and benefits funders can receive from a
platform (Belleflamme et al. 2014): a large platform implies more interactions between funders and,
therefore, more benefits for many of them (see, for example, Belleflamme et al. 2015). GDP per capita
does not have a significant impact, probably because the difference between provinces is minimal.
Perhaps it also reflects the idea that crowdfunding is suitable for different types of investors, including
small and large ones. Entrepreneurial reputation has a positive impact on the number of crowdfunding
providers. These results also suggest that cost and efficiency are important factors for crowdfunding.
This also contributes to recent debates about local bias in crowdfunding (see, e.g., Hornuf et al. 2020).

Adm. Sci. 2020, 10, 50 11 of 27

Table 9. Crowdfunding statistics for Canada.

Number of Crowdfunding Service Providers, Jan 2019 Households Having

Equity-Based
Crowdfunding

Debt-Based
Crowdfunding

Service-Based
Providers Royalty Total Total, % Population

Population,
% of Total

GDP Per

Capita

Market
Income Per

Capita

A Home
Computer

Internet
Use from

Home

Entrepreneurship
Opportunities

Rankings

Alberta 0 1 5 0 6 0.0984 4,067,175 0.1157 80,175 39,056 86.1 91.9 97
British Columbia 4 1 5 0 10 0.1639 4,648,055 0.1322 59,066 34,426 88.8 93.2 37

Manitoba 0 0 0 0 0 0.0000 1,278,365 0.0364 53,708 28,853 79.6 86.1
New Brunswick 0 0 0 0 0 0.0000 747,101 0.0213 47,950 26,992 79.8 88.3
Newfoundland
and Labrador 0 0 0 0 0 0.0000 519,716 0.0148 63,243 29,646 79 87

Northwest
Territories 0 0 0 0 0 0.0000 41,786 0.0012 105,214 41,324

Nova Scotia 0 0 0 0 0 0.0000 923,598 0.0263 46,226 28,672 77 85 223
Nunavut 0 0 0 0 0 0.0000 35,944 0.0010 89,698 26,174
Ontario 13 6 18 0 37 0.6066 13,448,494 0.3826 59,879 34,033 85 89.3 24

Prince Edward
Island 0 0 0 0 0 0.0000 142,907 0.0041 45,539 27,043 81.6 88.1

Quebec 2 1 4 1 8 0.1311 8,164,361 0.2323 52,384 29,689 82.3 85.9
Saskachewan 0 0 0 0 0 0.0000 1,098,352 0.0312 69,373 31,724 77.8 88.4

Yukon 0 0 0 0 0 0.0000 35,874 0.0010 75,002 39,708
Total 19 9 32 1 61 35,151,728

Sources: https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1110022801&pickMembers%5B0%5D=1.5; https://www.startupblink.com/; https://en.wikipedia.org/wiki/Population_of_
Canada_by_province_and_territory.

https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1110022801&pickMembers%5B0%5D=1.5

https://www.startupblink.com/

https://en.wikipedia.org/wiki/Population_of_Canada_by_province_and_territory

Adm. Sci. 2020, 10, 50 12 of 27

Table 10. Regression results. The dependent variable is the number of crowdfunding providers
(2019) ratio.

Variables (1) (2) (3)

Intercept −0.0910 (−0.7535) * −1.4917 (−1.2905) *** 0.5889 (0.6729) **
Population 1.4026 (7.7045) *** 1.7009 (5.064) *** 1.0872 (4.2437) ***
GDP/capita 6.4698 × 10−7 (0.4431) −4.4505 × 10−6 (−0.7015) 9.1594 × 10−6 (1.7314)

Market income/capita 5.5746 × 10−7 (0.1105) 5.8075 × 10−6 (0.2473) −0.0001 (−2.2404)
Households having a home computer −0.0272 (−1.3228) −0.0004 (−0.0343)

Households having Internet use from home 0.0421 (1.5887) * 0.0017 (0.0926) *
entrepreneurship opportunities rankings 0.0967 (3.3395) **

Adj. R2 0.8459 0.8384 0.9543
F-value 22.9649 10.3405 32.3468

*** indicates significance at a 1% level, ** indicates significance at a 5% level, and * indicates significance at a
10% level.

Limitation Analysis

The limitations of our analysis are mostly related to data availability. Statistics Canada conducts an
entrepreneurs’ survey every 3–4 years. If these data were available on an annual basis, this would lead
to more precise results. Secondly, much more data is needed to analyze the patterns of crowdfunding.
The data are very limited as of now. Much more data are expected in the future, including features of the
firms conducting different types of crowdfunding campaigns (including their accounting and financial
data), and not only the campaign features themselves. In general, it is known that small business
data are more limited compared to large public companies. Nevertheless, recent developments in
online accounting and other areas of Fintech will hopefully reduce the cost of collecting information
for small firms, which can lead to more data about these firms in the future. Statistics Canada provides
an enormously helpful service for researchers by conducting these surveys, but, in the future, it would
be good to have more detailed information about the businesses and their operations.

5. Conclusions

This article analyzes the patterns of financing for entrepreneurial firms in Canada. We compared
the predictions of the major theories of entrepreneurial finance (the flexibility theory of capital structure,
the asymmetric information theory, the credit rationing theory, and the life cycle theory) with empirical
evidence. We found, for example, that the flexibility theory and the credit rationing theory are consistent
with many patterns of financing of SMEs in Canada. On the other hand, the tax theory of capital
structure does not seem to play a significant role for SMEs, as opposed to large companies, but it
may affect the choice of securities by firms that use venture capital. New forms of financing, such
as crowdfunding, are on the rise. Ideally, raising funds via the internet should remove geographical
barriers for firms. However, the analysis suggests that provincial features such as population size
are important for crowdfunding data. It suggests that cost and efficiency are important factors for
crowdfunding, and future research should continue aiming at revealing the most important factors
that can help reduce the costs and improve the efficiency of crowdfunding campaigns.

As was mentioned, credit rationing plays a significant role in explaining the patterns of financing
for entrepreneurial firms in Canada. Hence, debt financing is strongly affected by such factors as firm
age, its size and firm owner’s origin. In addition, small business interest rates margins are higher
in Canada compared to average numbers from OCDE countries. As an avenue for future research,
we think more ideas should be received regarding debt financing developments for entrepreneurial
firms. This is consistent with a new wave of interest towards debt financing among theorists and
practitioners (see, for example, Robb and Robinson 2012; Miglo 2016, chp. 8; Miglo 2020). Potential
developments in this area can be related to improvements in intellectual property rights and patents
and the usage of patents as collateral for loans, which is consistent with observed patterns in other
countries (Gallini and Hollis 2019; Mann 2018; Bellucci et al. 2014). With regard to Canada, note that
some researchers have pointed out that the Canadian ratio of patents to GDP is relatively low compared

Adm. Sci. 2020, 10, 50 13 of 27

to other developed countries (Gallini and Hollis 2019) and that Canadian researchers often participate
in joint research with researchers from other countries (mostly US) but do not own the intellectual
property rights of much of the research. Gallini and Hollis (2019) have suggested several directions
for potential improvements in this area of intellectual property regulation. Given our previous point
that intellectual property and patents are directly related to debt financing (including SMEs that
are responsible for a large part of innovative activities), this can be the next step in improving debt
financing for SMEs in Canada.

As was previously mentioned, although crowdfunding is a new and potentially more efficient
way of financing for entrepreneurial firms as compared to traditional financing, the analysis shows
that cost and efficiency are important factors for crowdfunding and research should continue aiming at
revealing the most important factors that can help to reduce the costs and improve the efficiency of
crowdfunding campaigns. Perhaps, in the future, the focus of research should be on factors such as
asymmetric information (Miglo and Miglo 2019), moral hazards (Strausz 2017; Chemla and Tinn 2019;
Schwienbacher 2018), and behavioural finance elements (Fairchild et al. 2017)14, discovered in the
literature on crowdfunding. With the accumulation of more data, more research is expected in these areas.

Finally, note that a high-quality education system is an essential part of the successful development
of entrepreneurial finance in Canada. It is hard to overstate the importance of education since the area
is very complicated and requires a superior knowledge of econometrics, microeconomics, accounting,
mathematics, game theory, contracts and law. Part of the research done for this article was collecting
information about existing finance programs in Canada15. Finance programs exist in most universities.
Most of them are not specifically focused on small- or medium-sized companies. Some universities,
however, are working on creating such a program. For example, Nipissing University is implementing
a finance program that offers a certificate in entrepreneurial finance, and many universities, including
the University of British Columbia, McGill, and Western University, offer entrepreneurial finance
and/or small business finance lectures/courses.

Funding: This research received no external funding.

Acknowledgments: I thank two anonymous referees, Jin Chen, Victor Miglo, Camilo Jimenez, Jason Pavunkovic,
Bilal Maycid, Jonathon Dean, Zara Raza, Isabelle Mineault, Greg Charbonneau, Markus Hawco, Melissa Toner,
Jacob Conrad and seminar participants of SME workshop at BCU at 2017 for their comments and for helping
with research on some topics. Also many thanks to assistant editors Grace Yue and Ramona Goga for their help
and encouragement.

Conflicts of Interest: The author declares no conflict of interest.

Appendix A

Appendix A.1. Sources of Financing for Entrepreneurial Firms in Canada

Appendix A.1.1. Debt Financing

In 2011, 36 percent of SMEs requested some type of external financing, with 26 percent requesting
debt, 7 percent requesting leasing, 8 percent requesting trade credit, 4 percent requesting government
financing and 2 percent requesting equity financing16. In 2014, the fraction of SMEs requesting external
financing and debt rose to 51.3 percent and 28.1 percent, respectively.

Table A1 shows the major suppliers of small business debt financing in Canada and the percentage
of firms indicating their source financing. Chartered banks were the main suppliers of financing to
SMEs in 2011 and 2014, followed by credit unions and caisses populaires. Microloans and community
investment funds are two other loan sources. Examples include Alterna Savings, which is Ontario’s

14 See also Belitski et al. (2019).
15 We mostly use publicly available information from university and college websites.
16 Some firms requested more than one type of external financing.

Adm. Sci. 2020, 10, 50 14 of 27

second-largest credit union. Community investment funds are nonprofit organizations dedicated to
helping people in Canada who cannot get the loans they need from traditional lending institutions.
Depending on the particular loan fund, an individual may be able to get a small business loan from
CAD2000 up to CAD150,000. In general, the Canadian banking system looks pretty balanced with
regard to serving small businesses (Klyuev 2008). Large banks have good international reputations,
although some surveys show that entrepreneurs often feel that large Canadian banks are pretty distant
from small firms17. Hence, other credit institutions serve as a good complement to large banks.

A part of debt financing is the growing area of online lending, which is a part of crowdfunding,
and it is considered in Appendix A.1.4. Government lending to SMEs is considered in Appendix A.1.2.

Commercial lines of credit, used by 13.8% of SMEs in 2014, are the most used type of external
funding, followed by commercial credit cards (11.2%) and commercial loans (6.9%).

Table A1. Major sources of debt financing in Canada (by the percentage of firms among firms requesting
external financing).

Source
Percentage

2011 2014

Chartered banks 55.3% 71.6%
Credit Unions and Caisses Populaires 16.3% 24.7%

Source: Statistics Canada, Survey of Suppliers of Business Financing 2011, 2014.

The data on SME loans in OCDE countries demonstrate different patterns of growth for different
countries. The outstanding stock of SME loans in 2013 was still below the prerecession levels of 2007 in
7 out of the 18 countries for which comparable data was available (Estonia, Hungary, Ireland, Japan,
Portugal, the United Kingdom and the United States). Although economic growth in OECD countries
recovered in 2010, increasing annually on average by 6.5%, SME lending in most countries did not
follow and, in some countries, declined even further in the following years. Canada is in the middle of
the range among OCDE countries in terms of the growth rate of SME loans. The total value of SME
loans increased from CAD86,428 million in 2009 to CAD90,172 million in 201318.

The 2013 Credit Conditions Survey results showed that credit conditions remained stable after
having recovered from the 2009 recession. The average interest rate charged to small businesses has
increased by 0.3 percentage points since 2011, reaching 5.6%. The average business prime rate (the rate
charged to the most creditworthy borrowers) stayed flat at 3%. The business risk premium (measured
as the difference between the average small business interest rate and the business prime rate) increased
from 2.3% in 2011 to 2.6% in 2013. This reflects stable access for debt financing for small businesses
in Canada.

In 2007–2010, in most countries, SMEs faced more severe credit conditions than large enterprises in
the form of higher interest rates, shortened maturities and increased requests for collateral (OECD 2012).
Between 2007 and 2013, the interest rate spread between large firms and SMEs widened considerably
for most Scoreboard countries for which data is available, with the exception of Belgium, Canada,
Colombia, Korea, Serbia, Sweden and the United States.

In 2013, the collateral requirements decreased in seven out of ten countries. This marked a
deviation from the trend in previous years. Canada, Finland and the United Kingdom witnessed
an increase in the proportion of loans that were rejected in 2013. Overall, it seems like there were a
few factors according to which the credit conditions loosened in most countries between 2011–2014,
like softer collateral requirements. For example, in Canada, the percentage of small businesses asked
to pledge collateral to secure their loans returned to 2009 levels (56%).

17 See, for example, Kazarian and McFarland (2016); Kelly (2013); Saltzman (2015).
18 OCDE SME Financing 2015.

Adm. Sci. 2020, 10, 50 15 of 27

It is well known that the Canadian economy is closely related to the US economy. In contrast to
Canada, however, in the USA, the total value of SME loans decreased from USD695,228 million in
2009 to USD585,347 million in 2013. Hence, an interesting question is whether the difference between
Canada and the USA can be explained by the difference in credit conditions and whether or not the
credit conditions are softening in Canada. On the one hand, we can see, for example, that interest rates
for SMEs in Canada increased in 2013, unlike any other country. Additionally, the total volume of
loans in Canada increased even more than loans to SMEs. Finally, Canada witnessed an increase in the
proportion of loans that were rejected in 2013. On the other hand, the percentage of small businesses
asked to pledge collateral to secure their loans decreased in 2014 and returned to 2009 levels.

Appendix A.1.2. Government Funding and International Foundations

Government grants and loans are used by 20.9% of Canadian SMEs. Additionally, as was
mentioned above, government institutions serve 7% of all financing requests. Table A2 shows the
major government programs.

Table A2. Major government programs.

Program Main Features

Canada Small
Business Financing
(CSBF) Program

Term loans of up to CAD500,000 for acquiring real property and equipment and making
leasehold improvements. The government is liable to pay 85% of eligible losses on defaulted
loans registered under the program, which allows private-sector lenders to comfortably
increase the amount of financing extended to small businesses. The program is supported by
charging 3% above prime and a 2% registration fee paid by the borrowers. The repayment of
the loan can be amortized over a period longer than 10 or 15 years.

Business Development
Bank of Canada (BDC)

Loans up to CAD100,000. The business should be Canadian-based. For the duration of the
COVID-19 crisis, the small business loan is offered at a 2.80% interest rate, which is BDC’s
floating base rate of 4.55% (effective 31 March 2020) minus 1.75%. The interest rate is subject to
change without notice. The loans are repaid over 60 months. A capital postponement is
offered for the first 6 months, and the initial six payments are interest only. Commencing on
the 7th month, the loan is repaid in 60 monthly payments, and all payments are due on the
10th day of the month.

CanExport
Funding is provided on a cost-sharing basis between the recipient and CanExport SMEs.
The program reimburses up to 75 percent of eligible expenses; the applicant is responsible for
the remaining 25% (in-kind contributions do not count toward the 25%)

Futurpreneur Canada
(former Canada Youth
Business Foundation)

Several different financing programs to support entrepreneurs aged 18 to 34, including one
that provides start-up small business loans of up to CAD20,000 with a term over five years.
Interest is charged at CIBC’s prime rate + 3.75%. Interest-only payments for the first year.
Principal repayments are made in equal monthly instalments together with interest, over the
remaining four years.
No penalty for early repayment.

Aboriginal Business
Canada Grants of up to CAD99,999 for eligible individual Aboriginal entrepreneurs

Western Economic
Diversification
Canada (WD)

Several programs (e.g., Western Innovation Initiative, Community
Futures Loan Program) to strengthen western innovation,
business development and community economic development.

Alberta Micro
Voucher Program

Eligible applicants can apply for up to CAD10,000, paid directly to the service provider,
to cover eligible expenses charged by the service provider for the purpose of one or more of
the following activities:
New product research and development; design, engineering and prototype development;
product testing and refinement; patent development (excluding patent maintenance fees);
advanced market assessment or segmentation analysis; advanced business and/or marketing
strategies; other technology development activities that will be considered on a case-by-case
basis. The applicant pays a minimum 25% cash contribution of the total eligible project costs.

Sources: https://www.ic.gc.ca/eic/site/csbfp-pfpec.nsf/eng/la03089.html; https://www.bdc.ca/en/financing/business-
loans/pages/small-business-loan-up-50k.aspx?gclid=CLqHjpuqjs0CFQyEaQodltAI7g; http://www.international.
gc.ca/canexport/applicant-guide-requerant.aspx?lang=eng; http://www.futurpreneur.ca/en/get-started/financing-
and-mentoring/spin-master-innovation-fund/?gclid=COjtvOKqjs0CFQsPaQodJKMGJw; https://www.aadnc-aandc.
gc.ca/eng/1375201178602/1375202816581; http://www.wd.gc.ca/eng/259.asp; https://albertainnovates.ca/programs/
micro-voucher/.

https://www.ic.gc.ca/eic/site/csbfp-pfpec.nsf/eng/la03089.html

https://www.bdc.ca/en/financing/business-loans/pages/small-business-loan-up-50k.aspx?gclid=CLqHjpuqjs0CFQyEaQodltAI7g

http://www.international.gc.ca/canexport/applicant-guide-requerant.aspx?lang=eng

http://www.futurpreneur.ca/en/get-started/financing-and-mentoring/spin-master-innovation-fund/?gclid=COjtvOKqjs0CFQsPaQodJKMGJw

https://www.aadnc-aandc.gc.ca/eng/1375201178602/1375202816581

http://www.wd.gc.ca/eng/259.asp

https://albertainnovates.ca/programs/micro-voucher/

Adm. Sci. 2020, 10, 50 16 of 27

The CSBF Program aims to increase the availability of financing for the establishment, expansion,
modernization and improvement of small businesses. It insures a portion of loans made to qualifying
small businesses by the private sector. It supports some 10,000 financings valued at around CAD1
billion each year. Under the CSBF Program, Industry Canada and commercial lenders share the risk
of providing small businesses with term loans of up to CAD500,000 for acquiring real property and
equipment and making leasehold improvements. The government is liable to pay 85% of eligible losses
on defaulted loans registered under the program, which allows private-sector lenders to comfortably
increase the amount of financing extended to small businesses. The program is supported by charging
3% above prime and a 2% registration fee paid by the borrowers. A lot of research has been done
to evaluate the efficiency of different programs, including CSBF. Much of it shows the significant
economic impact of these programs.19

The Business Development Bank of Canada (BDC) has a mandate to “create and develop Canadian
businesses through financing, venture capital and consulting services”20. The bank supports more
than 29,000 Canadian small and medium enterprises (SMEs) with financing and other commitments
valued at some CAD17.7 billion.

On 5 January 2016, the Minister of International Trade launched CanExport, a new program that
will provide $50 million over five years to help increase the competitiveness of export-ready small- and
medium-sized enterprises (SMEs) that target new export opportunities. It is open, with few exceptions,
to all industry sectors and to companies looking at export markets worldwide. To be considered
for possible funding, a firm must meet the following basic criteria: be a for-profit company, be an
incorporated legal entity or a limited liability partnership (LLP), have a Canada Revenue Agency
(CRA) business identifier number, have a minimum of one full-time equivalent (FTE) employee and a
maximum of 250 FTE employees, and have no less than CAD200,000 and no more than CAD50 million
in annual revenue declared in Canada.

Other notable programs include the Futurpreneur Canada (former Canada Youth Business
Foundation—a charitable organization heavily supported by the government), Export Development
Corporation (EDC), Aboriginal Business Canada and Indian and Northern Affairs Canada. Futurpreneur
Canada helps young entrepreneurs by providing mentorship, learning resources and start-up financing
when commercial lending is unavailable. It offers several different financing programs to support
entrepreneurs aged 18 to 34, including one that provides start-up small business loans of up to CAD15,000.
Founded in 1996, this program has invested in more than 3300 young people, whose businesses have
generated more than 16,600 new Canadian jobs, CAD93 million in tax revenue and hundreds of millions
of dollars in sales and export revenue. Export Development Corporation (EDC) supports large and small
businesses with critical export financing; of its 8300 clients, about 80% are SMEs. Although EDC does not
offer any grants, they do offer loan guarantees for companies exporting their products. If a company
expects to export products and wants to minimize its risk, EDC is a great resource. Aboriginal Business
Canada offers grants of up to CAD99,999 for eligible individual Aboriginal entrepreneurs. Indian and
Northern Affairs Canada has made progress in increasing the participation of Aboriginal entrepreneurs in
the Canadian economy through the Aboriginal Business Development Fund21.

19 For references regarding research on economic efficiency of different government programs, including CSBF, see, for example,
https://www.ic.gc.ca/eic/site/ae-ve.nsf/eng/03111.html.

20 BDC is a Crown corporation. Canadian Crown corporations are enterprises owned by the Crown or Queen in right of
Canada. They report to the government via a minister of the Crown in the relevant cabinet, though they are “shielded from
constant government intervention and legislative oversight” and thus “generally enjoy greater freedom from direct political
control than government departments”. For more information, see, for example, Iacobucci and Trebilcock (2012).

21 Other programs include the Business Credit Availability Program (BCAP), the Hiring Credit for Small Business, and Canada
Job Fund Agreements, which include the introduction of the Canada Job Grant (CJG), programs offered by the Federal
Economic Development Agency for Southern Ontario (FedDev Ontario), Advanced Manufacturing Fund (AMF), Export
Development Canada (EDC), the Business Innovation Access Programme, to be delivered through the National Research
Council’s Industrial Research Assistance Programme (NRC-IRAP), programs offered by Sustainable Development Technology
Canada, the Canada Accelerator and Incubator Programme (CAIP) and the Women Entrepreneurs of Canada (WEC).

https://www.ic.gc.ca/eic/site/ae-ve.nsf/eng/03111.html

Adm. Sci. 2020, 10, 50 17 of 27

Microloans and community investment funds are two other loan sources. In Canada, microloans of
up to CAD15,000 are available through some organizations for people who would have difficulty getting
a traditional business loan. Examples include Western Economic Diversification Canada, a government
entity in western Canada that works to strengthen western innovation, business development and
community economic development.

Many governments, including the Canadian government, offer entrepreneurs opportunities to
access alternative financing options that are often nonequity and nondebt based22. The types of financing
that offer these opportunities can be found through the Government of Canada, both provincially and
federally, as well as through entrepreneurship competitions and international organizations. Grants
and dual contribution grants offered by the Canadian Government can take a number of forms. First,
there are full, nonrepayable grants. The majority of them are aimed at research and development (R&D)
projects. In order to gain access to these R&D grants, a business typically, but not always, needs to be
performing R&D in partnership with a researcher, usually affiliated with a university. Since there are a
lot of risks and uncertainties surrounding R&D in general and in decision-making regarding grants
allocation, it is always good from the government’s point of view to see that companies are making an
effort to gain financial support from other sources as well. To some extent, it reduces the government’s
responsibility and risk as the main funder, but most importantly, it also increases business credibility23.
Thus, the second type of grant available is a dual contribution grant. These are more often the type of
grant available to businesses and are often nonrepayable. They do, however, require the business to
contribute in some way to the project being funded. Some programs require the company to match the
government’s financial contribution. This matching could be done using the companies’ own funds or
funds from another source, such as bootstrapping, angel investors or venture capital. The reason for
this is that it allows the government to gauge how the market views the opportunity (Lerner 2009).
Matching requirements differ between programs. There could be a one-for-one matching requirement,
where the company’s contribution needs to be monetarily equivalent to the government’s; other funds
may have a different matching ratio requirement. The matching requirement could only require a
partial monetary contribution along with “in-kind” contributions. For example, if a government grant
is being used to fund the hiring of staff, an in-kind contribution could take the form of mentorship for
the new staff members or supporting their professional development.

Vouchers are a relatively new funding tool. In some cases, it helps entrepreneurs to access business
services via prepaid funds. Vouchers can be administered by the government, universities and business
plan competitions. Services usually include business planning, market research, intellectual property
strategy, grant writing, and access to discounted rates24. The Microvoucher, Voucher and Product
Demonstration Program of the government of Alberta could help your Alberta-based business to
commercialize its innovative products and services. It includes, among others, the microvoucher that
provides up to CAD10,000 to assist with early start-up development.25

The EY G20 Entrepreneurship Barometer 2013 introduces a model for scoring G20 countries
across the five pillars of entrepreneurship26. Canada has scored pretty well in terms of overall funding
opportunities for entrepreneurs. However, Canada scores poorly on several dimensions regarding
government support, including mentorship, the provision of incubators by businesses and universities,
and the availability of networks such as entrepreneur clubs and associations. This explains why
Canada’s entrepreneurs are calling for more government start-up programs and better access to

22 See also Cumming and Hellmann (2013) and Taylor (2012).
23 More discussion regarding this point will be provided in the next section.
24 See Cumming and Hellmann (2013); Funding Portal (2013).
25 http://www.entreprisescanada.ca/eng/program/2415/, https://albertainnovates.ca/programs/micro-voucher/.
26 http://www.ey.com/CA/en/Services/Strategic-Growth-Markets/G20-Entrepreneurship-Barometer-2013-Overview.

http://www.entreprisescanada.ca/eng/program/2415/

https://albertainnovates.ca/programs/micro-voucher/

http://www.ey.com/CA/en/Services/Strategic-Growth-Markets/G20-Entrepreneurship-Barometer-2013-Overview

Adm. Sci. 2020, 10, 50 18 of 27

business incubators and mentoring programs. This is also consistent with previous years’ results of
some surveys, when many entrepreneurs felt that that government programs need improvement27.

Compared to other OCDE countries, the amount of government loan guarantees in 2013 was
below the 2007 and 2009 levels (2007 was the precrisis level, and 2009 was the year of large government
capital injections to support small businesses after the crisis). In most countries, the volume of
government guaranties in 2013 was higher than in 2007 (the exceptions are Austria, Finland, Greece,
United Kingdom). Direct government loans were below their level of 2009, although slightly higher
than that of 2007.

There are a large number of prizes offered by international foundations and organizations; some
governments may even have programs for international development (e.g., the USAID Development
Innovation Venture). The prizes offered by international foundations and organizations can take the
form of international recognition and/or monetary rewards. Some are focused on start-up companies;
others consider companies or individuals that have already made a significant contribution to their field.
Typically, there are well-defined criteria for each prize, including commitments required by winners of
these awards, as they are often expected to be involved in the promotion of their results. Additionally,
there are a number of business plan competitions that take place every year28. These events offer
start-ups a significant amount of publicity to the entrepreneurial community, as well as the potential to
receive funding through prizes or investments. The top applicants are usually asked to present their
business plan to a panel of judges. Some competitions require initial business plan submissions, after
which the top applicants are taken through a mentoring program to improve their initial business
plans, after which the improved business plans are presented to a panel of judges. The competition
judging panels typically consist of a combination of entrepreneurs, industry experts, “angel” investors
and venture capitalists. The panel chooses the best business plan(s) based on the presentation.

Among the most recent government programs of support for SME loans is, notably, CEBA,
an emergency program of support during the 2020 COVD-19 crisis. Scotiabank, together with other
leaders in the banking community, has been consulting with the government on these measures,
designing them specifically to help small business owners with their most pressing needs in order to
position the economy to recover. The CEBA program provides access to a CAD40,000 loan with the
following features: 0% interest until 31 December 2022; no principal payments until 31 December 2022;
principal repayments can be voluntarily made at any time without fees or penalties29.

Appendix A.1.3. Equity Financing

SMEs receive equity financing in the form of the entrepreneurs’ own funds, “sweet” equity
from family and friends, angel financing, venture capital and equity-based crowdfunding. As was
mentioned previously, most start-up firms use their own funds and funds from friends and relatives
since profits are limited or inexistent and external funds are hard to obtain. The percentage of SMEs
that use venture capital to start-up business is not large (see Table A3). Entrepreneurial firms begin to
look for venture capital at later stages.

Venture capitalists provide support to entrepreneurs in the form of equity or equity-linked
investments, as opposed to “pure” debt. Hence, they usually play an active role in the company.
Cumming (2006) argues that Canadian venture capital-backed firms receive financing via issuing
common equity, preferred equity, warrants, convertible debt and convertible preferred equity.

27 The CGA Entrepreneurship Survey found that 52% of members viewed government support for entrepreneurship as only
being fair, with 26% of members viewing it to be poor.

28 For example, the Startup Canada Awards (http://startupaward.ca/2016-awards/) or Queen’s Entrepreneurs’ Competition
(http://theqec.com/).

29 https://www.scotiabank.com/ca/en/personal/scotia-support/business-banking/small-business/canada-emergency-
business-account.html.

http://startupaward.ca/2016-awards/

http://theqec.com/

https://www.scotiabank.com/ca/en/personal/scotia-support/business-banking/small-business/canada-emergency-business-account.html

Adm. Sci. 2020, 10, 50 19 of 27

Cumming (2006) also argues that unlike US venture capital firms, convertible preferred equity
is not the most dominant type of security due to regulation differences between the US and Canada.

Table A3. Percentage of start-up firms that used different types of equity financing in Canada.

Source
Percentage
2011 2014

Personal financing 79.5% 84.3%
Retained earnings (from previous or other business) 13.0% 13.3%

Financing from angel investors and venture capital providers 0.6% * 1.8%

* Only venture capital funds. Source: Statistics Canada, Survey of Suppliers of Business Financing 2011, 2014.

Industry Canada (2014) shows that venture capital-backed companies grow significantly stronger
(in terms of assets, sales, wages and R&D) than nonbacked companies. At the same time, any significant
difference in profitability was not found.

Historically, venture capital financing reached its peak in 2000, and, afterwards, the volumes were
not very impressive. In 2009, for example, the total volume of venture capital investments was about
3 times lower than in 2000. Some factors behind this pattern included the tech bubble of 1999/2000 and
the great recession of 2008/2009. In addition, in Canada, the venture capital industry had some specific
features which lessened its competitiveness compared to, for example, the US. Among these features,
note the relatively low listing requirements of Canadian exchanges. As was mentioned previously,
this reduces the incentive for SMEs to partner with venture capital firms on the one hand, and on
the other hand, it creates a lot of asymmetric information about SMEs (Carpentier and Suret 2010)
and difficulties in raising public funds and, respectively, a reduced interest from venture capital
firms. Another interesting aspect of the venture capital industry in Canada is the large presence of
labour-sponsored venture capital funds (LSVCF)30. Historically, they played an important role in the
creation of the venture capital industry, especially in Quebec. However, it seems like their institutional
structure needs some major revisions in order to move the venture capital industry forward (Cumming
and MacIntosh 2006; Cumming et al. 2007; Lerner 2009; MacIntosh 2012; Suret 2008). In 2007–2013,
the Canadian venture capital industry was experiencing a very difficult transition. As is the case
for many other venture capital industries around the world, the industry was not able to deliver
strong enough returns to consistently attract Canadian and foreign institutional investors. As a result,
Canada’s venture capital investments, as a percentage of GDP, only rank 16th in the world. Financing
in the form of venture capital increased by 26.5% in 2013 to reach CAD1.9 billion but remained below
the levels in 2007. Venture capital funds are used by only 12.4% of SMEs. Interestingly, the volume of
venture capital investments at all stages of entrepreneurial firms was lower in 2013 than in 2007, except
at later stages (Table A4).

Table A4. Venture and growth capital in Canada, 2007–2013.

Source
CAD Million

2007 2013

Seed 98.2 43.3
Early stages 491 332.5
Expansion 795.5 516.5

Later and other stages 966.5 1037.3

Source: OCDE SME Financing 2015.

30 LSVCFs are generally sponsored by labor unions and offer tax breaks from government to encourage retail investors to
purchase the funds. Generally, these retail venture capital funds only invest in companies where the majority of employees
are in Canada. See Sandler (2004) for a review.

Adm. Sci. 2020, 10, 50 20 of 27

The situation has been changing since 2013/2014. The government-implemented venture capital
support program (The Venture Capital Action Plan) of January 2013 represents a strategy that had
several objectives, including deploying CAD400 million in new capital over the next 7 to 10 years and
demonstrating that Canada’s innovative firms represent superior return opportunities. More specifically,
the plan made available CAD350 million to establish up to four “funds of funds” (a “funds of funds”
portfolio consists of investments in several venture capital funds) and an aggregate investment of
CAD50 million in a few high-performing venture capital funds in Canada. Following a rigorous
selection process, the government announced, in fall 2013, the selection of high-performing venture
capital funds in Canada to receive an aggregate investment of CAD50 million from the government.
New “funds of funds” are expected to attract close to CAD1 billion in private sector investments.
On 21 January 2014, the Government announced the first closing of the Northleaf Venture Catalyst
Fund, with CAD217 million in commitments. Two other funds, Teralys Capital and Kensington Capital
Partners, were announced in 2014.

A Canadian Venture Capital Association (CVCA) report revealed a furious level of venture
capital activity at lower-dollar funding levels in 2014: Ontario led the way in dollars invested, while
Quebec took the lead in terms of the number of deals (Dingman 2015). Several private or independent
companies stood out for their pace of investment, among them Real Ventures (42 deals). BDC Capital
Inc., the government agency committed to early-stage startup financing, had 102 deals. There are
prominent Series A round funding companies such as Rho Ventures, Relay Ventures and iNovia
Capital (14 deals in 2014)31. For companies looking to raise an A-round, there are a number of top-tier
$50-million funds. There are two Canadian companies that will open their wallets and spend CAD10
or CAD20 million on a single deal: Toronto-based Georgian Partners Inc. (seven deals in 2014) and
OMERS Ventures (nine deals). Some of the biggest funding deals of 2014 were led by US money (the
low Canadian dollar makes Canadian investments cheaper for Americans), including Silicon Valley
investors such as Accel Partners, Sequoia Capital, and Bessemer Venture Partners, companies with
billions of dollars under management. These companies come with advantages in terms of advice
from major industry players and introductions to key international markets.

Equity markets around the globe, including public and private markets, were severely impacted
by the financial crisis. Most countries in OCDE’s report experienced a sharp decline in venture capital
and growth capital investments between 2008 and 2010. This decline was uniform over venture capital
for seed and early growth investments, later-stage venture capital investments and growth capital
investments. In Canada, the total volume of venture capital investments in all stages of entrepreneurial
firm development in 2013 was down by 14%, compared to the level of 2008. Interestingly, expansion
capital and later and other stages venture capital increased by 215% for the same period. This is the
highest percentage among all the countries. In fact, the only other countries that saw an increase in
later-stage investments are Austria, Finland and Ireland.

It is interesting to compare the situation in the venture capital industry of two close neighbours:
Canada and the USA. The venture capital industry is dominated by private firms in the US (more
than 80%). In Canada, LSVCFs cover almost 40% of all venture capital investments, and institutional
funds have about 15% (Sandler 2004). Until recently, venture capital investments in Canada were not
syndicated, and the venture capital industry was not very well developed in most of Canada, including
Ontario and Atlantic provinces (see, for example, Amit et al. 1997). As was mentioned previously,
a significant part of this industry in Canada represents LSVCFs. Some research has shown that these
funds’ profitability is very low (Cumming 2005; Nicholson 2009). The Ontario government cancelled
tax reliefs for investors in these funds in 2005. It led to shifts in investment policies for these funds,
including a reduction in investments in entrepreneurial companies. Additionally, note that Canadian

31 Types of funding and support available to Canadian companies include accelerators and incubators (no money), angels
(under CAD1 million), seed funding (CAD500,000 to CAD2 million), Series A (CAD2 million to CAD5 million) and Series B
(CAD5 million or more).

Adm. Sci. 2020, 10, 50 21 of 27

venture capital companies invest in more companies (proportionally), but the average investment in
a company is significantly larger in the US than in Canada, which can explain why the number of
high-quality “winners” is larger in the USA. Finally, note that unlike the USA, where the dominant
form of contract between entrepreneurs and venture capitalists are convertible preferred shares (i.e.,
Kaplan and Strömberg 2003), in Canada, venture firms use a variety of securities, including straight
common equity, preferred equity and convertible preferred equity (Cumming 2005; Cumming and
Johan 2008). Gilson and Schizer (2003) argued that this is because the taxes in the US favour convertible
preferred shares.

The wave of success in 2014/2015 might also be explained by factors such as the low Canadian
dollar, which makes investments cheaper for foreign investors, primarily US investors, and the fact that
Canadian technology companies have attracted interest from the global venture capital community
partially as a result of a generous tax incentive through the Scientific Research and Experimental
Development (SR&ED) investment tax credit program. The basic incentive available to any Canadian
corporation performing R&D is a refundable tax credit that is equal to 20% of “qualifying” R&D
expenditures (labour, material, R&D contracts, and R&D equipment). An enhanced 35% refundable
tax credit is available to certain (i.e., small) Canadian-controlled private corporations (CCPCs). As the
CCPC rules require a minimum of 50% Canadian ownership in the company performing R&D, foreign
investors who would like to benefit from the larger 35% tax credit must accept a minority position
in the company, which might not be desirable. The SR&ED program does not restrict the export of
any technology or intellectual property that may have been developed with the benefit of SR&ED tax
incentives. Additionally, we note that Canada has a unique venture exchange in Alberta that has no
direct analogue in the world32.

Angel investors are investors of high net worth who are willing to provide seed money to
businesses, often in exchange for returns of 20% to 30% through equity ownership. In Canada, angel
investors are currently investing over CAD3 billion in Canadian businesses each year. Industry Canada
created a longitudinal dataset of 110 angel-backed firms by linking data from NACO’s Canadian Angel
Group Surveys of 2010, 2011 and 2012 to Statistics Canada administrative databases. The Angel Group
data set provides a reliable picture of the characteristics and activity of the visible angel capital market
in Canada. The 2014 Angel Group Survey was completed by 30 angel investment groups. These 30
angel investment groups reported 237 investments and 217 deals in 181 companies in 2014, for a total
amount of CAD90.5 million. A higher share of investment went to new companies in 2014, as opposed
to existing portfolio companies, which represents a reversal of the trend observed in 2013. Angel group
investment activity remains concentrated in Central Canada. Of the CAD90.5 million reported angel
investments, 89% were made in Central Canada, 10% in Western Canada, and 1% in Eastern Canada.

Appendix A.1.4. Crowdfunding

Crowdfunding is the practice of funding a start-up company or a project by raising funds from a
large number of people (“crowd”). It is usually performed via the internet33. The concept can also be
executed through mail-order subscriptions, benefit events, and other methods. Moritz and Block (2014),
Cumming and Hornuf (2018), Estrin et al. (2018), and Mochkabadi and Volkmann (2020) provide
good reviews of the literature in this field. A small TV show called “Blue Mountain State” had been
cancelled by Spike TV in 2010, but in 2014, they decided to make a movie. Spike would not fund them,
so they decided to crowdfund through a “Kickstarter” campaign34. The BMS movie reached its goal of
USD1.5 million in less than a month. This is just one example of how crowdfunding is an important
tool for entrepreneurial firms and small business ideas.

32 For more discussion, see Carpentier and Suret (2010).
33 See, for example, Schwienbacher and Larralde (2012).
34 https://dorkofalltrades.net/2015/08/03/go-kickstart-blue-mountain-state-sloots/.

https://dorkofalltrades.net/2015/08/03/go-kickstart-blue-mountain-state-sloots/

Adm. Sci. 2020, 10, 50 22 of 27

There are four different types of crowdfunding: equity-based, where investors will receive shares
of the company; reward-based, where investors are counting on some extra benefits from the company,
like future product discounts, among other things; donation crowdfunding, where donations take
place, which is good for nonprofits and causes; debt-based crowdfunding, where the money comes in
the form of loans.

Reward-based crowdfunding often includes significant interactions between firms and
funders/customers in the form of product feedback. Backers are able to pay different levels of
money to receive items such as a Jet Black Pebble Watch with a CAD99 pledge35. The highest level, in
that case, was a CAD10,000 pledge to receive 100 Pebble watches. Thirty-one people made that pledge.
Pebble crowdfunding was a great success and a blueprint for entrepreneurial firms.

Canada is one of the leading countries in the world when it comes to setting up crowdfunding
campaigns. Canada ranked 10th in the world for crowdfunding in 2018 by the total amount of funds
raised with crowdfunding. Table A5 presents an overview of the main statistics concerning this type of
funding in 2014, 2015, 2019 and 2020.

Table A5. Crowdfunding in Canada.

2014 2015 2019 2020

Projects 9400 8677 3910 4300
Success rate 21% 20% 42% N/A

Average amount per project CAD14,700 CAD20,140 CAD29,517 CAD4813

Sources: https://www.statiAsta.com/outlook/335/108/crowdfunding/canada, https://p2pmarketdata.com/
crowdfunding-statistics-worldwide/, Canada 2016: The State of Crowdfunding Nation, The Crowdfunding Center.
https://www.thecrowdfundingcenter.com/data/places?location=CA.

According to CMF (the Canadian Media Fund), there are many different platforms that vary
widely in the way that they are structured. Most crowdfunding platforms solely focus on one model,
such as the donation model, but there are some that offer a choice of different models or offer a “hybrid”
model that combines elements from one or more of the three key models out there. The three main
crowdfunding platforms are

– Specialized platforms that cater to specific industries such as television, music recording and
video games.

– General-purpose platforms that do not really have any restrictions as to what they can feature.
This platform is the most popular and most recognized as it has spread through social media for
funding things like medical procedures, weddings, and artistic projects.

– There is also the activity-specific platform that caters to a variety of industries but focuses on
certain types of projects.

The most popular crowdfunding platform among Canadian firms is Kickstarter (US-based),
both in terms of the number of campaigns that have reached their target and the funds collected.
For example, 972 campaigns collected USD25.1 million on Kickstarter in 2015. A total of about 10,000
Canadian projects used Kickstarter in the last 6 years36. Indiegogo and FundRazr are also very popular
websites for entrepreneurs in Canada. The Toronto-based company named TellSpec raised USD386,392
on Indiegogo to market their invention of a device that shows the allergens in the food you are
eating. Another crowdfunding example in Ontario is how an Ottawa man named Frank Bouchard
raised USD424,314 for his product called Wipebook, a notebook that acts as a whiteboard so that you

35 https://www.kickstarter.com/projects/597507018/pebble-e-paper-watch-for-iphone-and-android/description.
36 https://www.cbc.ca/news/canada/montreal/what-10-000-kickstarter-projects-reveal-about-canada-s-entrepreneurs-1.

4084372.

https://www.statiAsta.com/outlook/335/108/crowdfunding/canada

https://p2pmarketdata.com/crowdfunding-statistics-worldwide/

https://www.thecrowdfundingcenter.com/data/places?location=CA

https://www.kickstarter.com/projects/597507018/pebble-e-paper-watch-for-iphone-and-android/description

https://www.cbc.ca/news/canada/montreal/what-10-000-kickstarter-projects-reveal-about-canada-s-entrepreneurs-1.4084372

Adm. Sci. 2020, 10, 50 23 of 27

can generate ideas from anywhere you want. This highly surpassed his original goal of USD4000
(Scarrow 2014). Crowdfunding platforms use social networks to spread their messages.

Regardless of which model you choose, there are two ways that the platforms typically get
structured to allocate the funds. One of the structures is called the “all or nothing” model. This model
has a set goal to raise and a funding period set. Once the funding period comes to an end, the project
owner only receives the funds if the project’s goal is met or surpassed. In the case that the goal is
not met, the contributors are reimbursed their pledges or their credit cards are not charged for their
donation amount. The other structure used is known as the “keep what you earn” model. This model
allows the project owner to keep any and all funds raised during the funding period, regardless of if
the initial goal was met or not. Crowdfunding platforms also have a variety of fee structures they use
for the service they provide, namely, commission, subscription or a flat fee37.

Certain project categories are more popular than others in Canada. These include creative projects,
arts, games and technology. Creative projects generally obtained a good success rate (27% for art,
60.6% for theatre, 58% for comics, 51% for design, 50.9% for dance)38. The success rate for video
games is relatively low (32.7%), but they are usually among the projects that raise the most funds in all.
These patterns remained quite similar in 2015–2019.

In terms of crowdfunding regulation, it is noted that back in May 2015, the Globe and Mail
newspapers came out with an article that outlined the six provinces that would be allowed to
raise capital through crowdfunding websites39. Provincial securities regulators in British Columbia,
Saskatchewan, Manitoba, Quebec, New Brunswick and Nova Scotia announced that companies in the
early-stage would be allowed to issue shares to investors through crowdfunding websites. Ontario
was also among the last of the six provinces but decided that they would not be participating in
the new crowdfunding regime for start-ups. Instead, they would continue to develop a broader
crowdfunding rule to cover both start-up companies as well as reporting issuers. In January 2016,
the Ontario Securities Commission released the Companion Policy 45-108CP Crowdfunding, with a
more detailed list of rules, regulations and explanations40. More recently, Alberta also adopted rules
regulating crowdfunding activities41.

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Labour-sponsored venture capital funds: Time for a reassessment

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Introduction

Literature Review

Methodology
Patterns of Financing for Entrepreneurial Firms in Canada
Conclusions
Sources of Financing for Entrepreneurial Firms in Canada
Debt Financing
Government Funding and International Foundations
Equity Financing
Crowdfunding

References

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