Entrepreneurship-related Data in Canada ISTAT Seminar December 2006

Entrepreneurship-related Data in Canada ISTAT Seminar December, 2006 Terry Evers Director Small Business and Special Surveys Division Statistics Canada

Content 1. SME-FDI 1. 2. Overview of SME-FDI Research Findings 1. 2. 3. 2. State of SME financing Financing Gaps Business Angels Next Steps SME Statistics Program 1. 2. 3. Business problem Approach Timing 2

SME Financing Data Initiative (SMEFDI) SME-FDI is a comprehensive data collection program on the financing situation of small and medium-sized enterprises in Canada Partnership between Statistics Canada, Industry Canada and Finance Canada SME-FDI has two primary objectives: “builds a comprehensive knowledge base of timely and unbiased information on SME financing in Canada” Ü Ü Ü Reports to Parliamentary Committees (Industry Committee) Key Small Business Financing Statistics Small Business Profiles “supports the growth of Canadian SMEs by fuelling the public policy debate and bringing clarity to the SME financing market” Ü Evidence based policy and decision making 3

SME Financing Data Initiative (SME-FDI) Two-pronged data collection process consisting of baseline surveys and specialized studies: 3 surveys: Ê Survey of Suppliers of Business Financing q q q Ê Survey on Financing of SMEs q q q Ê tri-annual survey starting in 2000 measures demand for financing by SMEs Captures data by size of business, geographic region, age of business, business owner characteristics, etc. Survey of SMEs Needs and Satisfaction q q q annual survey starting in 2000 measures supply of financing covers all financial service providers (census) published in 2001 probed the attitudes & perceptions of SMEs owners on issues related to financing These surveys aim to measure the total value of new and outstanding financing by supplier, as well as shed some light on the financing practices and patterns of SMEs across Canada. 4

SME Financing Data Initiative (SME-FDI) Specialized Studies: Ê Ê Financial Marketplace Risk Capital SMEs and Entrepreneurs Other Research 5

What is an SME? SME-FDI definition The Survey on Financing of Small and Medium Enterprises includes businesses: with fewer than 500 employees, and with annual revenues of less than $50 million Excluded are unincorporated firms with less than $30 000 in revenues, nonprofit organizations, government organizations, schools, hospitals, subsidiaries, cooperatives, and financing and leasing companies 6

Importance of SMEs represent the growth engine of the Canadian economy. They play a key role in jobs and wealth creation, and in community well-being, throughout our country There were more than 1. 3 million SMEs in Canada in 2004 83% had fewer than 5 employees 66% operated in the service sector, with the remainder distributed among the good-producing sector (22%) and the resourced-based sector (12%) 7

SMEs Financing Needs in 2004 Canadian SMEs report having financed their operations with a wide range of financial instruments, which can be broadly categorized as formal or informal Top five informal instruments vs. formal instruments used by SMEs in 2004 Informal financial instruments used % of SMEs Personal savings of owners 57% Commercial Lines of credit 50% Retained earnings 54% Commercial credit cards 48% Trade credit from suppliers 52% Commercial Loans 44% Personal Credit cards of owners 50% Leasing 30% Personal Lines of credit of owners 45% Government Loans and Grants 21% Formal financial instruments used % of SMEs 8

Where SMEs go for financing? 19% of all SMEs applied for debt financing in 2004 They approached three main creditors: Chartered bank, Credit unions or Caisses populaires, and/or Crown corporations Credit Supplier % of SMEs Chartered bank 63% Credit unions or Caisse populaires 23% Crown corporations or government institution 9% Credit card companies 1% All other credit suppliers 7% Note: the percentages of SMEs may not added to 100% due to rounding 9

Where do SMEs do their day-to-day banking? 77% of SMEs indicated that they did their day-to-day business with banks in 2004 Institution % of business Chartered bank 77% Credit unions, and/ or Caisses populaires 20% Crown corporations or government programs 2% All other institutions 2% 10

Other Results Data has allowed: Development of profiles of various categories of SMEs Exporter SMEs Ü Women-owned SMEs Ü SMEs owned by youth, visible minorities Ü SMEs that have received business angel & love money investment • All broken down by sector, region, and other dimensions Ü Key Small Business Financing Statistics 11

Definition of “Financing Gaps” OECD (2006) credit rationing exists if: a) b) among loan applicants who appear to be identical some receive credit while others do not; or, there are identifiable groups in the population that are unable to obtain financing at any price. Canadian focus is on definition (b): does some segment of firms among the population of SMEs comprise an identifiable group of firms that are unable to access financing? 12

Postulated Gaps (Based on focus group data) Perceived Gaps in the Debt Market Perceived Gaps in the Venture Capital Market • A size gap is postulated such that business owners who seek small loans perceive that their borrowing needs are too small to be of interest to institutional lenders. • An early stage gap, which reflects the belief that small early-stage companies are not the strategic focus of most private investors. • A risk gap is claimed, according to which lenders do not price loans to reflect risk (rather, they reject loan applications if risk exceeds a particular threshold or if insufficient collateral is available). • A dollar gap, according to which Canada was said to rank tenth among developed countries in terms of venture capital funds raised per capita. • A flexibility gap is described in that some SME • An institutional gap that reflects the lack owners claim that financial institutions do not of involvement in the venture capital sector provide flexible terms and conditions on their loans. of pension funds, mutual funds, and other such institutions in Canada. • A knowledge gap is asserted, that "financial institutions do not understand knowledge-based businesses. • Source: BDC, 2001. • A smaller appetite for IPOs in Canada compared with the US. 13

Debt Financing Gaps After allowing for size, sector, age, etc. (measures of creditworthiness), are there certain borrower characteristics/attributes that are more likely to be turned down for debt financing than other firms without those attributes SME populations investigated to date include: Knowledge-based industries Women entrepreneurs SME Exporters 14

Results (Debt Financing Gaps) Knowledge-based firms are no more likely to be turned down for a commercial loan than firms in other sectors Commercial lenders are able to deal with knowledge-based firms Not supportive of a gap related to knowledge-based firms Women-owned firms are no more likely to be turned down for a commercial loans than firms owned by men No support for contention of gender gap Exporters: potential of a gap particularly for start-up firms seeking operational financing. Similar conclusion for term loans. 15

Business Angels Informal investment is an important source of equity financing, particularly for early-stage firms. Use data collected from the Survey on Financing of SMEs to estimate the flow and stock of informal investment from respondents to the survey. Ü Flow of informal investment > $11. 4 billion • Ü $3. 5 billion is from business angels (arm's length individuals). Stock of informal investment > $12. 8 billion • Are minima - survey captures only a portion of the population of informal investors (survey of business owners) • Caveat: very broad definition of informal investment 16

Next Steps Leverage SME-FDI in order to provide a broader range of data on SMEs in Canada This will be achieved by establishing partnerships with other interested stakeholders (federal and provincial government organizations) and working closely with academics and researchers to address current and emerging issues Much interest was expressed by private and public stakeholders at a workshop hosted by Industry Canada in September 2006 Stakeholders have different interests / needs Provinces like Ontario and British Columbia expressed a need for more subprovincial detail on SMEs Federal organizations like the Business Development Bank of Canada, Export Development Canada and Western Economic Diversification Canada expressed a need for data on SMEs that are part of their programs in order to better measure program outcomes Others including academics, researchers and the Canadian Federation of Independent Business expressed a need for data on other issues such as exporting, business transition planning, venture capital etc. 17

Satisfying these needs will require: Additional sample to support new domains of estimation Content changes to collect data on new issues Use of tax data as much as possible to minimize costs and response burden Establishing new partnerships will result in: More efficient data collection of required information (economies of scale) as we can build on the vehicle in place rather than each area developing its own data collection vehicle Pooling of resources to get maximum return on investment Better research because approach avoids duplication and overlap and encourages communication and collaboration on research issues Helps ensure that data gaps are addressed and that priorities are placed on the right issues Better management of response burden which is of great concern to Canadian SMEs 18

Thank You! For more information about the SME FDI or copies of the research reports completed to date visit the website at: Contact: http: //sme-fdi. gc. ca (english) or http: //pme-prf. gc. ca (french) or Brad Bélanger Senior Policy Advisor Industry Canada (SME FDI) belanger. brad@ic. gc. ca 19

SME Statistics Program Small Business and Special Surveys Division Statistics Canada ISTAT Seminar December 2006 20

Background Ø Ø Ø SMEs play an important role in innovation and job creation in all countries Need for better national data on the number, type and relative performance of SMEs Need for standards and common data to support international comparisons 21

Business Problem Ø Ø Ø Ø No standard definition exists In Statistics Canada (STC) / nationally / internationally Unable to create a comprehensive picture of SMEs in Canada Limits comparisons to other countries Lack standard measures of SME performance to assess productivity, business growth, competitiveness etc. Accessibility Users do not know what data STC has on SMEs; how / where to get it; and how to interpret it because of different concepts in use 22

Business Problem Cont’d Data Gaps Data on certain SME issues is either missing or lacking detail Ex. Owner characteristics, exporting, business transition planning, sub provincial detail Statistics Canada

SME Statistics Program Proposal Ø Ø Three Principals National and International focus Phased approach Stakeholder involvement (program design) and stakeholder commitment (financial support) 24

National and International Focus • To ensure that the SME Statistics Program is designed to meet the needs of the various stakeholders, STC has created a working group with Industry Canada (IC) and conducting extensive user consultations • Federal and Provincial Government, researchers, academics, government business entities, business associations • To ensure that the SME Statistics Program is designed to permit international comparisons • • • STC and IC sit on the OECD Structural Business Statistics Cmt. STC sits on the OECD Advisory Cmt. for International Entrepreneurship Indicators Project IC is a partner in the Danish research project on entrepreneurship 25

Phased Approach Ø Ø Ø • • • Objectives Early deliverables Manage expectations Ensure buy-in (Internal and external) Phase 1 (FY 06 -07) Develop a SME database with tombstone info (approx. 2. 3 M businesses) using administrative data from Canada Revenue Agency (T 1 / T 2 tax, GST, payroll data) NAICS, revenue, employment (full time, part time, turnover), geography Create current SME demographic profile by industry, business size and geography (provincial / sub-provincial when possible) Agreed upon size classes for reporting Will include non-employers – size class 0 26

Phased Approach Phase 1 (FY 06 -07) Cont’d Work towards agreement on a definition for small and medium sized businesses Phase 2 (FY 07 -08) Derive SME performance indicators Detailed micro data for every SME in Canada Indicators will include measures such as financial characteristics, job creation / loss, survival rates, profit ratios, fast growth enterprises, business life cycle Expand the demographic profile to include data back to 1999 using new inputs and definitions Statistics Canada

Ø • • • Phase 3 (FY 08 » » ) Create meta data on STC data holdings on SMEs to assist users in knowing what is available; where; and what the data limitations are Data is based on survey estimates so will have limitations on the industries covered, business size classes covered, geographic detail available and quality of the estimate Introduce standard SME size class definitions in STC core business statistics programs as applicable Address SME data gaps Priorities identified by external stakeholders External funding 28