OTTAWA – Ottawa entrepreneur Paul Dombowsky is getting into the online matchmaking business.
But he won’t be pairing up lonely hearts. Instead, the chief executive of IdeaVibes will be matching up the empty pockets of entrepreneurs with the wallets of the general public.
It’s called crowd-funding, a fundraising method already making waves, and millions of dollars, south of the border.
Canadian-born entrepreneur Eric Migicovsky has raked in $10 million from more than 66,000 donors who want to see his Pebble smartwatch, a time piece that connects to smartphones and can run apps, succeed.
Migicovsky and his California-based team at Pebble Technology Inc. are using an American website called Kickstarter.com to crowd-fund dollars from small, online investors.
Websites like Kickstarter help fledgling entrepreneurs get around the shortage of capital that often keeps ideas from getting off the ground.
While such websites already exist to raise money for charities and arts projects, when it comes to fundraising for businesses, they risk running afoul of Canadian securities laws.
Each province has its own securities legislation, but in general there are only a few ways people can buy into a company that hasn’t filed a prospectus: they have to be family, friends or accredited investors who have a strong enough financial position to withstand risks and losses.
The Kickstarter model, which Dombowsky plans to replicate, gets around such limitations by offering no equity.
The money is technically a donation, although some entrepreneurs like Migicovsky offer product in exchange. Supporters will receive a watch if they donate $99 or more, and the number of watches promised rises with the size of the donation.
Such supporters could soon be transformed into traditional, albeit small scale, investors, in the United States after the Obama administration passed new legislation to make crowd-funding a legal way for entrepreneurs to collect startup capital.
Get daily National news
In April, the U.S. passed the Jumpstart our Business Startups (JOBS) Act, a law that, among other things, allows companies to crowd-fund up to $1 million a year through websites regulated by the U.S. Securities and Exchange Commission. The law also limits the amount people can invest based on their income and net worth.
Many in Canada’s innovation community would like to see the same happen in the Great White North, where a lack of venture capital is sending ideas and jobs south or is killing them before they can get to market.
“Our hope is once our government wakes up, we end up with some sort of crowd-funding legislation, and then we will be able to convert the site,” said Dombowsky.
Such a site would make a world of difference for Peter Lalonde of Openera, a company just named Canada’s hottest early-stage startup by its peers at a recent innovation convention.
Lalonde said crowd-funding would be more efficient and faster than knocking on doors of venture capitalists, pitching ideas about market need they may know nothing about. Instead, the audience would be industry experts or consumers:
“They are people that can look at your pitch and say this is going to be big,” he said.
The innovation gap is an issue that has caught the eye of the federal government,
which funneled $1.1 billion into innovation, including $500 million in venture capital, in the last federal budget.
Crowd-funding would be an easy way to kickstart Canadian innovation say supporters.
“I, 100 per cent believe that if Canadians had access to the same crowd-sourced investment, you would see a lot more innovation that turns into commercialization,” Lalonde said.
The alternative, according to one industry association, is to wave goodbye to companies headed to New York or California.
“It’s basically saying let’s not use the new paradigm, where networks go beyond international boundaries, to help Canadian business succeed,” said John Reid, president of the Canadian Advanced Technology Association.
“(Crowd-funding) is an opportunity for us to become a start-up nation, so why wouldn’t we get all over this,” he added.
But the method comes with risks that some in the investment community aren’t ready to take.
“Our mandate as securities regulators is to protect investors. We can’t simply go at the rules from the standpoint of determining how it would be easiest for issuers to raise money,” said Bill Rice of the Canadian Securities Administrators, a body that speaks on behalf of Canada’s provincial regulators.
There are fears crowd-funding may make inexperienced investors easy prey for fraudsters or that people may invest more than they can afford on ideas that may never make it to the marketplace.
“We may have a circumstance under our current regime where a few people lose larger sums of money,” Rice said. “Under the crowd-funding model, you will have a very large number of people all losing a small amount of money, and that causes a big fuss and a lot of unhappiness.”
Rice said he and his provincial peers will let the U.S. take the gamble, while they monitor whether those fears will actually take place. Acting too early could backfire if investors start losing money or companies start defaulting, he warned.
There wouldn’t be dramatic problems provided there are rules, limits and punishments in the new system, according to Reid.
“You have to have governance,” he said. “But you can’t take the position that you can’t do things because there is risk.”
Dombowsky said it’s time to let investors decide for themselves: “It’s very much a risky endeavor to put money into a startup. You have to be willing to lose money right away.”
His site, expected to launch by July, will require entrepreneurs to disclose some basic information about their companies and products and report regularly on what they are doing with the money investors have given them. If they don’t, the entrepreneur will be publicly blacklisted – and in a social networked world, that’s a fate much worse than what the securities regulators can inflict.
Comments
Want to discuss? Please read our Commenting Policy first.