There were angels all over town last week looking to the federal government to work a bit of magic on their risk management equation.
While venture capitalists get most of the press with their multi-million dollar funding announcements, angels do all the heavy lifting with little recognition and few avenues to lessen their tremendous risk.
That was one of the main themes during the National Angel Organization's (NAO) Annual Angel Investor Summit last week.
"We are trying to encourage the government to come up with ways to help entrepreneurs and to help companies find these early investors," said angel investor and NAO public policy co-chair Bruce Gitelman.
"Many people who could be angel investors aren't because of the risk."
The vast majority of funding of early stage companies comes from individuals — typically from the "three Fs:" founders, families, and friends, with the fourth source being angel investors.
The federal government and most of the provinces need to pass legislation to make it more attractive to invest early, Mr. Gitelman said. Other than British Colombia and Nova Scotia, there are no concrete programs in place to give tax credits to encourage angels.
Mr. Gitelman used the example of the U.K. where angel tax breaks have worked effectively. The U.K. has a combination of upfront tax credits and the possibility of capital gains reductions when the shares are ultimately sold. And the result is more ideas getting to market, he insisted.
"We have done a great deal in improving innovation in Canada and government has spent billions of dollars to reverse the brain drain, but the taxpayers aren't getting any return on it because it is not being turned into businesses at the rate that it should be. The real trick for the future is putting our innovation to use," he said.
"The other half of it is productivity. The majority of these small businesses don't have the cash they need in order to make the productivity investment. This tax credit would allow these companies to raise funds to allow them to buy equipment and adopt new technology that would make them more productive."
The NAO's proposed innovation and productivity tax credit (IPTC) idea was explored by a University of British Colombia's Sauder School of Business.
Its Canadian Task Force on Early Stage Funding found that tax credits a better use of taxpayer dollars because they generate more investment per tax dollar than capital gains exemptions.
Over the first seven years of the U.K.'s similar Enterprise Investment Scheme (EIS), the program has helped raise about $5 billion in investment at a cost of roughly $1.7 billion in foregone tax.
"For every (POUNDS)1 million in tax forgone, EIS companies are estimated to have increased their sales turnover by (POUNDS)3.3 million and their employment by 65 jobs," the task force reported in June 2004.
"The IPTC model not only creates incremental investment for commercialization, but also increases the chances of success by attracting individual investors. The model mobilizes individual investors whose expertise, skill, and contacts help improve the chances of the SME's success."
Serial entrepreneur and high-tech billionaire Terry Matthews lent his voice to the cause, telling NOA conference attendees early last week that the federal government isn't doing enough on the tax break side for angels.
On Thursday, Ottawa Centre for Research and Innovation president Jeffrey Dale championed the angel tax break at the House of Common's Standing Committee on Finance.
"History has proven that early stage investment is high risk but these investments are critical to the creation of a pool of young innovative companies and to having the return on investment of our R&D commitment maximized in Canada," Mr. Dale told the finance committee.
"OCRI supports the NAO's recommendation of the IPTC, which would allow individual angel investors to claim up to a 30 per cent tax credit on investments in eligible companies and has the potential to influence a dramatic increase in the rate of capital formation for early-stage companies in Canada."
The proposal puts half the tax break burden on the federal government with the rest taken by the particular province where the cash is invested.
While entrepreneurs wait for the government to act, a small business tool kit unveiled by RBC Financial Group executive vice-president of government affairs and business development Charles Coffey might offer some useful tips for getting to the point where an angel investor is needed.
The kit was developed through collaboration between the CATAAlliance, LaBarge Weinstein, NAO and RBC Financial.
"It's – and I say this with great respect – a paint-by-numbers set that helps entrepreneurs deal with the issues getting set up. One of the key messages is that the support of trusted advisors – bankers, lawyers, accountants, and perhaps an angel, can make all the difference in the world," he said.
"It should reduce the risk significantly. At the end of the day the tool kit will enhance the entrepreneur or business owner's success rate."
Mr. Coffey also insisted that angels, entrepreneurs, and other interested parties must do their part in ensuring the right leaders and circles of influence understand the opportunities facing entrepreneurs in the joint mission of "breaking through the barriers to growth."
At about the same time as Mr. Coffey presented his tool kit, Linda Hohol, president of the TSX Venture Exchange, spoke at the Entrepreneurial Bootcamp: Raising Public Venture Capital about the benefits of getting companies to the public markets at the Brookstreet Hotel in Kanata.
While the U.S. Sarbanes-Oxley legislation following the Enron, Tyco, and Worldcom scandals soured many non-U.S. companies to the New York Stock Exchange and NASDAQ, the TSX hasn't really seen a pull back as entrepreneurs continue to see the exchange as a viable exit.
"We have been successful in Canada in asking the regulators to take their time and really thoughtfully consider the kind of governance regime that they want to create. I think the regulators are listening," she said.
Ms. Hohol attended the bootcamp to help explain the avenues available to a young company and to help early stage companies prepare for the alternatives that will become available once the enterprise moves out of the startup stage.
"One of the distinct advantages we relate is that if you do go public on the venture exchange, you can retain 80 per cent of the company and control and stay in Canada if you want and employ people in Canada but still have a market around the world."
By Jeff Pappone
Special to the Ottawa Business Journal
