Start-Ups With Larger Social Networks Receive More Venture Capital Funding Ryerson University Study Finds

October 24, 2011 at 7:49 pm | Posted in Uncategorized | Leave a comment
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Click here to download the full report!

There is a positive link between social networking outside of Canada and innovation, reveals the initial results of the Ontario Cross-border Technology Innovation Ecosystem (OCTIE), a first-of-its-kind research study supervised by Ryerson University.

Released today, the preliminary report, finds Ontario technology start-up organizations with larger social networks are associated with more start-up funding, at an average rate of $1.7 million more per relationship. Findings of the report also revealed that nearly half of network connections in the best funded companies come from San Francisco, Boston or New York.

Initiated by Cdling Capital Services Inc. and co-funded by Federal and Provincial governments across Canada through the MITACS-Accelerate Program, the first-ever analysis of social networks of Ontario venture capital funded technology start-up companies was led by Wendy Cukier, Vice President of Research and Innovation, Ryerson University and coauthor of the best selling book, Innovation Nation: From Java to Jurassic Park, with Professor Charles Davis, Associate Dean of the Faculty of Communications and Design contributing as co-investigator. More than 400 individuals involved in the building of 50 Ontario technology start-up companies since 2006 with total funding of $1 billion were identified in the study.

“New social network analysis tools make it possible for us to study the role of strong and weak ties among financiers, startups, universities, incubators and other players,” said lead researcher Saif Al-Naib, a recent Ryerson MBA graduate. “We know a lot about how the strong ties of clusters help sharing. This study is shedding light on the equally important role of weak, international market and capital connections that are critical to creating a globally competitive technology leader.”

There is a strong demand for insights into improving innovation and start-up funding in Ontario and across Canada. Previous research shows that Canada ranks very low in areas of open innovation and collaboration and the Canadian Venture Capital and Private Equity Association recently reported that the country is currently experiencing a period of contraction in terms of total amount of funds being invested in start-ups.

“I have been in the technology and research industry for more than twenty years and we have had many reports identifying drivers and impediments to innovation in the province and in the country,” said Cukier. “Millions of dollars are spent annually in an effort to advance Canada’s Innovation Agenda.  But with increased global competition, our international position is slipping. At Ryerson we are working with partners in industry to better understand the complex eco-system that fuels innovation. This study will be another piece of the puzzle.”

John Ruffolo, CEO of OMERS Ventures agrees, “The OCTIE study is very informative and beneficial to early-stage companies and investors. We know that access to capital is a big issue for startups and domestic VCs.  We need to change how we network to better position our local community for international success.”

Craig Hayashi, Founding Board Member of Maple Leaf Angels and Managing Director of Click Capital, commented “In addition to capital, Angel investors bring operational expertise and connections that can help start-ups in their early stages. This research shows how Angels should orient themselves for open innovation and collaboration that can be key to follow on success.”

OCTIE confirms the need for new innovation solutions, revealing that 57 per cent of investors backing Ontario-based technology start-ups over the last five years are based outside of Canada, 34 per cent are backed by Ontario-based funders and the other nine per cent received funding from other regions across Canada.

In addition to the correlation between extensive social networks and larger funding, a surprising trend emerged from the research — the majority of people involved in Ontario technology start-ups are clustered, but this leads to redundant social networks and less funding. “Our findings illustrate the importance of assembling a cast of players in a startup that have large, diverse and international social networks and the positive effect this has on funding start-ups,” says Al Naib.

Other report findings include:
– A few individuals are highly active in the majority of Ontario start-up funding. This causes bottlenecks. Those individuals have tremendous pressure on them due to their position on the critical path for the rest of the community.
– Investors tend to favour investment in new or unknown entrepreneurs rather than experienced entrepreneurs.

This release of OCTIE’s preliminary findings launches a broader and more in-depth phase of the study that will investigate in greater detail the strengths of relationships, methods of building relationships such as social media and face-to-face as well as analyzing social networks by region.  So far, more than 50 organizations have already signed up including Cisco, OMERS, Communitech, Deloitte and Coral CEA. Those interested in participating can find more information on the Ryerson research and sign up for the OCTIE study at https://octiestudy.wordpress.com or by emailing octiestudy at gmail dot com.

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