Increased angel investment key to unlocking potential of Canadian innovation

NAO targets commercialization funding gap

The National Angel Organization (NAO) is recommending the creation of a new credit for angel investors and an national angel co-investment fund as part of a package of initiatives to boost the single largest source of capital for seed and early-stage investments and overcome what it says is a $5-billion pre-commercialization funding gap.

The recommendations were unveiled in the NAO's presentation to the Standing Committee on Industry, Science and Technology in May and are contained in a fleshed out briefing document released earlier this month. It calls for approximately $250 million annually from the federal government as well as $150 million from the provinces.

The recommendations also include a national angel network program to facilitate angel groups across the country and a program for international angel network outreach to share best practices, establish cross-border co-investment mechanisms and boost foreign direct investment.

"The Canadian economy is being driven by the resource industries and it should be diversifying, especially intellectual property. Angel investment is currently two times that of venture capital," says Andrew Wilkes, NAO chairman and partner in Management Initiatives Inc., a Toronto-based business advisory and investment firm. "Capital is required to commercialize the potential innovation we have … There are examples around the world of other programs where tax incentives are working."

angel investment double that of VC

It's estimated that angel investment is currently double the $1.6 billion invested by venture capital (VC) firms this year. It's well known that VC tends to be far more risk averse than prior to the collapse of the dot com and tech bubbles, with the majority going into follow-on and late-stage financings. That leaves many firms seeking seed and early-stage stranded, prompting the NAO to call for public support to increase the amount of angel funding going into emerging innovative and tech-based plays.

"The venture capital industry with the exception of BDC (Business Development Bank of Canada) has all but abandoned pre-commercialization, seed and even series-A financing stages for small- and medium-sized enterprises," states the NAO brief. "VCs are increasingly sticking with companies they already know and providing little capital to new high-potential ventures. There is a shortage of venture capital at every stage of business development in Canada."

The NAO argues that the suite of programs it is recommending will help to increase the quality, quantity and success of angel investment while simultaneously addressing the seed and early-stage bottleneck in the current financing environment.

The proposed Innovation and Productivity Tax Credit (IPTC) would involve a 50% federal match to existing and future provincial tax credit programs. The funding would provide a 30% refundable tax credit to investors in eligible companies.

"While large investments in research have been made by all levels of government in Canada, the bottleneck holding back the benefits of these investments has been a shortage of coordinated capital for commercialization. Properly incenting Angels can help overcome this bottleneck."

— NAO Briefing to Industry, S&T Standing Committee

"Canadian Angel investors are best suited to the early-stage environment, but their mechanisms for making these investments are underdeveloped," states the brief. "At the same time, banks, venture capital firms and BDC are structurally impeded from properly servicing this market. There is a critical need for government intervention."

The most established and successful of the provincial programs is in British Columbia, where it has been in operation since 1985. The program's annual budget is capped and investments are directed towards industrial sectors considered key to BC's future competitiveness and economic well-being. The NAO brief says the BC government is willing to share the program's structure, data and statistics to assist in the creation of a national program — an offer that has been on the table for several years. Wilkes says Ontario could particularly benefit from a provincial tax credit program given the decision to withdrawn from labour-sponsored venture capital corporations (LSVCCs).

"LSVCCs are being wound down and there is currently no replacement program so IPTCs are a good way to go," he says. "Ontario does not encourage angel investors and its new fund of funds (R$, November 28/07) will not engage angels."

The NAO claims widespread support for IPTCs from numerous financial organization, business associations, advisory councils and angel groups.

Federal investment into IPTCs would be directed through a co-investment fund capitalized with $100 million in a fund of funds arrangement directed towards angel groups.

The brief notes that its recommendations will augment the work being done by existing federal VC programs such as those run by BDC and Sustainable Development Technology Canada (SDTC). It also contains information on a similar and successful UK Enterprise Investment Scheme.

The non-profit NAO is five years old and now represents 30 formal angel groups and 4,000 individual angel investors. A copy of its brief is available at www.angel investor.ca.

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