exhaust their limited cash reserves. However, interventions to support the emergence of high-growth innovative start-ups have been limited. Their main assets are intellectual property and talent. Support for such frms needs to be focused on ensuring that the supply of equity investment, particularly from angel investors, does not dry up.
(i) Co-investment Initiatives (Matching Funds)
Co-investment initiatives are a common approach that governments in various countries have used to increase the supply of equity fnance. Prominent examples include the Scottish Co-Investment Fund, the New Zealand Seed Co-investment Fund, and the European Angels Fund, which is an initiative of the European Investment Fund. Co-investment initiatives are typically structured as a government fund that invests alongside private investors, committing one dollar for every dollar invested by private investors. Most co-investment initiatives partner with angel investors and VC funds. The co-investment fund invests under the same terms and conditions as private investors (i.e. pari passu). The government fund relies on the due diligence work by business angels to reduce costs. The risk of moral hazard is low because angel investors have ‘skin in the game’. The purpose of co-investment funds is to improve early-stage capital available by leveraging angel investors. The frst co-investment initiative -- the Scottish Co-Investment Fund -- emerged in the aftermath of the post-2000 dotcom crash to address the liquidity constraints faced by business angels and angel syndicates due to the withdrawal of existing VC investors from the Scottish market. By relying on an angel investor to write a frst cheque, business co-investment initiatives address concerns of adverse selection, government ineffectiveness, and the critique that governments should not ‘pick winners’.
The design of co-investment initiatives is critical. There are two basic models.
1. In the frst model, the co-investment fund invests alongside approved investment partners – typically angel groups and early-stage funds. Approved partners bring deals to the fund that meet its investment criteria automatically triggering the co-investment. Angel investors prefer this model because of the high level of certainty of matched funding and the speed of decision making. This model also greatly lowers costs for government.
2. In the second model, investors can bring deals where they have made an investment. The co-investment fund undertakes its own investment decision.
National Angel Capital Organization MaRS Centre, West Tower
Tel: +1.416.581.0009 contact@nacocanada.com www.nacocanada.com
101 College St, Suite 120G Toronto, ON M5G 1M1
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