While Canada scores high on the level of research and development, the commercialization rate of Canadian new-to-market products is among the lowest of OECD countries. This means that Canadian businesses and Government are not receiving the full value of their investment in R&D. The following series examines multiple options available to Canadian companies that can help to bridge the major commercialization gaps in the manufacturing, ICT, and Agri-food industries to maximize returns on R&D investment.
Our previous blog series detailed the SR&ED program with an emphasis on reconciliations, understanding and preparing for CRA reviews/audits, and the possible outcomes. In this three part series, we now explore how Canadian companies can improve the transition from performing SR&ED to commercializing their products or services. This article will focus specifically on business growth in the Information and Communications Technology (ICT) sector, while the two subsequent articles will focus on training and hiring in the manufacturing sector, and innovation in the Agri-Food sector.
Business growth in the ICT sector is hampered by multiple challenges that primarily revolve around funding. Early-stage startups are particularly vulnerable to funding woes as they have generally exhausted their access to funds from friends and family, but are not sufficiently large to obtain bank loans, attract interest from venture capitalists (VCs), or apply for the bulk of government grants, including CanExport and the Southwestern Ontario Development Fund (SWODF), etc. (Figure). For situations such as this, the government has actively promoted collaborations between small- and medium-sized enterprises (SMEs) and public academic institutions. The Ontario Centres of Excellence has multiple programs for SMEs, including those under the Industry-Academic R&D Collaboration and Commercialization umbrellas. Such programs provide grants to SMEs with ties to academia, with the goal of accelerating the innovation and commercialization of products that stem from publicly-funded academic research.
Figure. Dashed lines encompass the pre-commercialization gap. Funding sources change throughout the stages of business development. Support from government funding councils (e.g., tri-council), internal academic grants, non-profits, or private donors support basic research efforts. Funding for industry-academia partnerships (OCE) support early stage product development, along with support from friends and family, and government initiatives, including the SR&ED tax incentive program, IRAP, and BCIP. Companies with a viable product and initial revenues are attractive to angel investors who provide the necessary cash stimulus and guidance to grow a product/service to commercialization. The commercialization of a product/service attracts Venture capital VC investments, and qualifies businesses for myriad other sources of funding including bank loans and government initiatives to support exports, expansion, job creation such as the Ontario Centres of Excellence (OCE) initiatives, Scientific Research and Experimental Development (SR&ED) tax credits, and grants such as the Industrial Research Assistance Program (IRAP), Built in Canada Innovation Program (BCIP), and the Southwestern Ontario Development Fund (SWODF).
The federal government has also implemented the Build in Canada Innovation Program (BCIP; formerly the Canadian Innovation Commercialization program) for companies that have a product or service that has yet to be commercialized (Figure). Under BCIP, the Government of Canada purchases pre-qualified goods and services that have not previously been made commercially available—although some sales are permissible for product development. The intent of this program is to bridge the commercialization gap within Canada and render the Government as the company’s first customer in order to move state-of-the-art goods and services from the laboratory to the marketplace.
Canadian-controlled private corporations (regardless of revenues) can also bridge the commercialization gap by leveraging Canada’s lucrative Scientific Research and Experimental Development (SR&ED) tax incentive program (Figure). For most SMEs, this entitlement program provides refundable (cash) tax credits on all eligible R&D efforts that result in technological advancements. Because of this, refundable tax credits can be reinvested to subsidize the cost of, or to perform additional R&D. Refer to our prior blog series for more information on the ins and outs of the SR&ED program.
The National Research Council Industrial Research Assistance Program (NRC-IRAP) provides up to $250,000 in non-repayable financial assistance to SMEs whose objective is to generate or grow profits through the commercialization of R&D (Figure). Such technology commercialization project funding is awarded to incorporated SMEs that are incorporated with fewer than 500 employees and are focused on growth, development, and commercialization in technology-driven new or improved products, services, or processes in Canada. IRAP Youth Employment Strategy programs also help SMEs offset labour costs by providing funding for the employment of Canada’s youth (15-30 years old). Not only do these grants support small businesses by assuming labour costs—and thereby freeing capital for other business development initiatives—but they also promote the employment and advancement of Canada’s youth.
Revenue-generating early stage companies may appeal to angel investors who offer equity financing (dilutive), convertible debentures, or debt financing (non-dilutive) to promote growth (Figure). Multiple angel networks, including the Golden Triangle Angel Network (GTAN), National Angel Capital Organization (NACO), and the Angel One Investor Network, to name a few, are comprised of private individuals who invest in promising SMEs, prior to VC interests, and can be leveraged to support and advise on business growth. Angel investors promote business growth through funding operations and mentorship, and also provide the necessary investor backing that is required for some government funding programs, including the Federal Economic Development Agency for Southern Ontario’s Investing in Business Innovation (FedDev IBI) program.
FedDev IBI provides mentorship, entrepreneurial support, and up to $1M in repayable loans to early-stage businesses in South Ontario to support labour, expertise, and non-capital expenditures. Notably, eligibility for this program requires businesses to also obtain cash commitments from angel investors belonging to South Ontario angel groups registered with the Network of Angel Organizations-Ontario, or Venture capitalists belonging to Canada’s Venture Capital and Private Equity Association or Réseau Capital.
Bridging the gap between R&D and commercialization is a complex endeavor that all successful startups will face. However, there is an increasing number of avenues that companies can access to navigate the financial landscape throughout their commercialization efforts at different stages of the business life cycle. Once the pre-commercialization gap is successfully bridged, and products enter the commercialization stage, the availability of funds increases as investor interest grows, bank loans are provided for less-risky endeavors, and the government increasingly supports exports, job creation, and company growth.
In the next part of this series, we will focus on training initiatives for developing the advanced manufacturing workforce capabilities that are needed to bridge the gap between R&D and commercialization.
*Co-authored by Gerry Fung, Vice President of Business Services, and Ryan Lamers, Technical Writer at NorthBridge Consultants.