54% of entrepreneurs plan to boost workforce in 2013 but accessing capital remains challenging
(As originally published in the Financial Post, March 2013)
By Jim Lutes, Atlantic Managing Partner, EY
Entrepreneurs in Canada and around the world are optimistic about the year ahead, with more than half expecting to grow their workforce in 2013. Ernst & Young's Global Job Creation report shows this anticipated growth comes on the heels of a similar trend in 2012, in which 74% of respondents said they increased headcount.
In spite of some stark economic forecasts around the globe, entrepreneurs are pushing ahead with their plans for growth. But what really stands out is the reason behind that growth. The vast majority of respondents cited innovation as the main driver, which makes it one of the biggest job creators out there right now.
Innovation the one true differentiator
In fact, 88% of survey respondents across a wide number of industries agreed that innovation was the one genuine differentiator and advantage they have over the competition. That number was slightly higher (90%) among Canadian respondents. Some 74% said that innovation is the reason behind their growth in the last year.
Access to finance remains challenging
Despite the amazing impact entrepreneurs are having on economies around the world, access to funding continues to be one of the most significant challenges for the creation, growth and survival of small-to-medium sized enterprises (SMEs). In a survey of more than 1,000 entrepreneurs across the G20, almost two-thirds found access to finance difficult in their country.
Overall investment in SMEs across the G20 stands at US$714 billion, 6.2% of the total US$11,507 billion spend for all other forms of investment. By far the biggest share of this comes from bank lending, at US$569 billion.
So how can entrepreneurs improve their access to capital?
Creating a vibrant entrepreneurial environment requires action from entrepreneurs and their governments. Each must play their part to ensure that funding is available at every stage of business development.
SMEs at every stage of growth should consider the following options to improve their access to capital:
Pre-seed and seed stage
- Manage cash carefully to minimize the need for external finance in the early stages. Build flexibility into planning and operations to avoid critical funding problems. Costs should be kept to a minimum, working capital should be maximized and capital expenditure should be avoided unless essential.
- Assess whether innovative funding models, such as peer-to-peer lending or crowdfunding, are right for your business. Government grants and incubators may also be available.
- Explore options for managing working capital, such as invoice finance. Although not suitable for every company, working capital solutions, such as invoice factoring and discounting, can help to overcome some of the challenges. Choose carefully — invoice discounting can be expensive, so be prepared to shop around for a service that’s flexible and transparent.
- Tap into networks of angel investors. With venture capital (VC) firms increasingly focusing on later-stage ventures, business angels are becoming a more important source of funding for start-ups in some sectors. Angel investors will expect to see a business plan that is convincing and promising. Seek out angels who are active in your sector and deal size.
Emerging growth stage
- Have a credible business plan to take to banks. Entrepreneurs who have a robust business plan will find it easier to access bank lending than those without this information. Keeping rigorous management accounts also helps to build confidence with banks.
- Seek out specialist or banks that may have a stronger link with your business and community. They can offer a more sensitive ear and may be more willing to lend because they better understand what you’re trying to achieve.
- Explore the potential for corporate venturing. Many corporations recognize that not all of the best ideas emerge from corporate R&D labs; they can also come from small start-ups, which are more likely to have the skills and agility required to create breakthrough innovations.
- Use junior stock markets as an alternative source of funding. This can create a competitive advantage and is often used by entrepreneurs as a springboard to the main stock exchanges.
- Open up to international markets as opportunities arise. This may include cross-border IPOs as a potential source of funding and should involve monitoring the policies of foreign governments and exchanges that are implementing attractive cross-border listing legislation.
- Explore private equity options. In rapid-growth markets, private equity firms are playing an important role in filling the funding gap, helping companies grow and providing advice, resources and management capabilities to take them to the next level.
Access to financing is vital for entrepreneurial companies. Without funding, they can't achieve their growth potential and may not survive at all.