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Investing In The Startups That Invest In Innovation

The startups and small businesses that innovate aren’t just coming up with new technologies — they’re creating entirely new business models that, while progressive, can place increasing pressure on cash flow management for the enterprise.

Like in much of the world, Canada’s alternative lending market has stepped in to try to fill in the funding gaps to smaller companies that struggle to access a bank loan. But, for companies like IT innovators and software as a service (SaaS) startups, business models that depend on recurring revenues and strong investment in research and development can mean sporadic financing isn’t always enough.

This is the type of market Venbridge has in mind. The company made its debut on the Canadian market earlier this week to lend support and capital t0 the tech innovators of the country, according to CEO Garron Helman.

“We’re targeting companies that undertake R&D,” he recently told PYMNTS in an interview. “It could be in IT, it could be in manufacturing, pharmaceuticals — the core similarity between all of them is that they have an R&D spend, and they attract tax credits. They sometimes get grants from the government, or they’re Software-as-a-Service companies, and they have recurring revenue.”

These business models can place a strain on cash flow, Helman explained.

“With Software-as-a-Service companies, they invest in a lot of R&D, in client acquisition and they’re investing a lot in deployment of their solution to clients with the expectation that, over time, they will collect their monthly recurring revenues,” the executive noted. “What you see, often, is that these costs of R&D — plus acquisition, plus deployment — are significant, and far greater than the revenue they’re currently generating.”

Helman added that Venbridge finances these types of companies with the understanding that incoming revenues do not always meet outgoing expenses as a company scales and develops. Venture debt funding is provided by Merchant Advance Capital, which is launching the Venbridge name while also providing tax consulting services to SMBs that focus heavily on R&D.

In Canada, these types of companies are often eligible for what’s called Scientific Research and Experimental Development (SR&ED) tax incentives. This leads to two challenges for such companies: One, tax filing can be more complex for a business to ensure they qualify for these tax breaks. Two, Helman said it can take, on average, 18 months for these tax breaks to actually reach the company.

Helman, who is a tax consultant himself, said Venbridge takes these factors into account to provide these companies with funds on a quarterly or monthly basis, while also offering them tax consulting services — all with the understanding that borrowers will eventually receive both tax breaks and revenue from recurring services or sales as the company continues to grow.

“Providing them with working capital to undertake their activities allows them to meet their needs that they have, to fulfill the demands of their clients,” he said. “They have a huge need for cash. Sometimes folks can’t make payroll and, as a result, they lay off employees. We want to help them avoid those little bumps in the road, and be sustainable and grow their business[es].”

According to Helman, Canada’s current market presents a significant opportunity for financial service providers to meet the unique needs of these types of businesses.

“It’s very difficult for small companies to receive any type of financing,” he explained. “You may start with friends and family, and maybe find angel investors and move up to venture capitalists, but we haven’t had a great track record of funding these small startups in Canada over the last two decades.”

SaaS and innovative technology firms not only have unique business models, but they also have unique tax management needs. Helman said he wants to combine solutions that address both of these issues.

“It’s providing debt financing to them, it’s non-dilutive so they don’t lose control of their company and it allows them to pay for their expenses as they incur [them],” Helman explained. “It really provides them with much-needed capital that just isn’t available in the market, because in Canada, we just simply don’t spend enough on investing in small startups with great ideas.”

Targeting innovative companies that may not yet be cash flow-positive has implications that reach beyond the borrowing firm itself, too.

“The whole goal of Venbridge is to help spur the Canadian economy by focusing on the small and medium enterprises,” Helman stated.

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Latest Insights:

Our data and analytics team has developed a number of creative methodologies and frameworks that measure and benchmark the innovation that’s reshaping the payments and commerce ecosystem. The September 2019 Mobile Order-Ahead Tracker, serves as a monthly framework for the space. It provides coverage of the most recent news and trends as well as a provider directory that highlights key players across the mobile order-ahead ecosystem.

 

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