Non-Profit is not the only way to support starting a company

Jesse Rodgers
whoyoucallingajesse

Non-profit organisations are the primary tool supporting early stage businesses and developing high risk, often research based, ideas in Canada. There have been a significant number of successful companies supported but relatively little to none of that success goes back to the organisations that first invest in those founders.

That success instead gets used to generate attention and that attention attracts more sponsors and public support. The organisation is required to spend more time on attention from stakeholders for revenue over the founder’s success. This feeds an alignment problem.

We must rethink that.

With a non-profit model focused on where the largest reward is to be found, we are leaving a lot on the table for others (usually outside of the community) to take and leaving nothing to go back into the community. The result has been a decreasing amount of any support for early funding in Canada and Angel investors.

It is time to re-evaluate where these organisational models are applied and consider what would be possible if some organisations were instead structured in a way that allows the organization to be aligned and rewarded for success. Why? Because that generates wealth and that wealth is re-invested in our community.

How big is the non-profit model in Canada?

In Canada we have 170 000 non-profit organisations, 85 000 are registered charities. We apply that organisation model to just about everything. In some industries it works and in some it might be hurting growth in the sector.

If the GDP of Canada was approximately 1.8 Trillion and expenditures of the registered charity sector alone is about 13.3% of that amount. The 13.3% figure does not even include the value of volunteer time!

The Canadian registered charity sector alone (not even including non-profits that are not charities) is bigger than the following industries (as a percentage of GDP):

Real estate and rental and leasing (13.04%), Manufacturing (10.36%), Mining, quarrying and oil or gas extraction (8.14%), Finance and insurance (7.1%), Public administration (6.33%), Wholesale trade (5.66%), Retail trade (5.41%), Transportation and warehousing (4.44%), Utilities (2.27%), Accommodation and food services (2.17%) and Agriculture, forestry, fishing and hunting (1.65%)

Key statistics on Canada’s charity and non-profit sector

This massive ‘industry’ is partly due to how much public support is delivered in Canada. Government funds program delivery of all kinds of services and they do that through non-profit orgs.

There is also a significant number of charitable organisations that exist due to how individuals are encouraged through our tax system where they can take a capital gain, give it to a charitable organisation, and receive a tax credit for the entire amount. You don’t get this when you invest in a company.

Established in 1988, the Charitable Donation Tax Credit (CDTC) is designed to encourage Canadians to give as much as possible. https://sencanada.ca/content/sen/committee/421/CSSB/Briefs/CSSB_FinanceCanada_e.pdf

Wealthy individuals are encouraged to invest in charities — and that isn’t bad — but they aren’t encouraged to invest in new companies in the same way.

This makes charities a more useful hammer for individuals personal finance and public funds. They are looking for nails. The market responds.

The lost alignment

When a non-profit ‘invests’ in early stage companies the return on that investment is not going to the people investing time in making that investment happen. It treats any money that might come in the form of a grant as the only solution and the people as mindless drones that are event hosts.

Value is created but not appreciated.

The organisation is people and those people look for meaning in other ways and that has consequences as they change their focus, less companies are being supported. The organisation changes and drives alignment further away from founders.

The failure to capture the value and focus on activities that increase value has left the startup ecosystem fragile, fragmented, and limited. It takes a long time to build a growth stage company (as seen in later stage financing deals for companies over 10 years old). A stagnation or significant drop in the number of companies being founded in Canada is happening. This means for the next few years, we have missed the opportunity to have even more growth companies to feed all the venture funds that are now available. Unless we can increase the number of and quality of companies that go from founded to funded.

Investing in early stage companies can and does generate a significant return that does acknowledge the amount of value that early stage support brings to the table.

A non-profit team has all the same performance expectations as a for-profit with none of the upside.

The return on investment for a non-profit organisation is only on paper but we can look at early cohorts of Velocity, Creative Destruction Lab, Communitech’s Hyperdrive, and even at Volta (things I know and experienced — this data is not public) to get a very good understanding of what is being left on the table.

Read: The Misaligned Support of Startups | by Jesse Rodgers | whoyoucallingajesse

Broken Angels and little early stage investment

A very serious symptom of this non-profit mindset is that there is very little early stage investment in Canada. This is not a stage that makes sense for a venture capital model where capital in smaller amounts is relatively expensive to manage. It is normally the domain of Angel investors.

Angel investors usually give support to start-ups at the initial moments (where risks of the start-ups failing are relatively high), once or in a consecutive manner, and when most investors are not prepared to back them. — Wikipedia

This is not the case in Canada. At least not the ‘common case’ when it comes to Angel group investors and this is not their fault.

Sourcing quality Angel deals of very early founders that understand the value of the person more than the money is very difficult. Angels tend to operate outside of the non-profit organisation as the lack of alignment means the organisation produces too much noise for the angel and founders don’t build those relationships.

It is better for the investor to look at Seed or pre-seed level companies that have revenue and value their expertise to increase the value in the company.

Read: Early stage funding is missing in Canada. | by Jesse Rodgers | Dec, 2022 | whoyoucallingajesse

Building on what we learned

The good news is that new companies are formed every day and the opportunity to invest in new founders almost always exists. We need to seed some processes and communities to get them the support they need to build momentum and find success, that success must lead to more investment in new early stage companies. Not less like the current state of things.

This does not mean we have to abandon all the work done before but we will need to challenge some deeply entrenched thinking and put aside the egos of institutions. There needs to be space made for new models of support to exist.

Almost all investors in Canada are still looking towards non-profit models as the way to get the ball rolling for founders. What will need to change here is a willingness to invest in new ways of doing things so that they are sustainable and not reliant on public funding.

Early is where the biggest value is created and returns are found!

We can change this if we stop using the non-profit hammer and look at the opportunity that exists when we support and invest in early founders.

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Written by Jesse Rodgers

Built some programs that support founders, founded a company, spend a lot of time thinking about innovation ecosystems and infrastructure to build the future.

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