Further design issues concern: the maximum size of investment under the initiative; whether it only applies to businesses raising their frst round of equity fnance; and whether follow-on investments are permitted. The co-investment initiative should be designed with as few exceptions as possible and give businesses as much fnancial runway as possible, suggesting that the maximum matched funding should be no lower than $5m (i.e. total investment of $10m) and that follow-on investments should be permitted. Evaluations of co-investment initiatives have generally been favourable, concluding that they are effective in leveraging investment capital from existing investors. They enable more and larger deals. And they do so in a manner that minimizes the cost to the public purse and the risk to public funds. Moreover, the limited evidence suggests that co-investment initiatives generate a positive return to the government and public over the longer term. The effectiveness of co-investment initiatives is likely to be reduced during the current pandemic because of constraints on the ability of angels and other early stage investors to invest. Hence, these initiatives need to be complemented by other support initiatives.
(ii) Tax incentives
Many countries offer tax incentives to business angels to shift the risk-reward balance of making high risk investments in early stage businesses. The UK’s Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) is one of the most generous, giving 30% tax relief on investments in qualifying businesses as well as a range of other tax breaks (such as loss relief and capital gains tax exemption). Investors can qualify for these tax breaks either by investing directly in qualifying businesses or by investing via professionally managed investment funds (EIS Funds and Venture Capital Trusts). Some governments might be uncomfortable providing tax incentives to ‘wealthy people’. There is plenty of evidence, however, that most investments made by angel investors fail and do not generate a return on investment. Moreover, angels are not typically paid for the value-added contributions they make to their investee businesses. Some studies suggest that tax incentives generate additional economic activity and that the tax revenues generated exceed the cost. Another dimension to consider is the desire of angels to have a positive impact on their communities. This is the rallying cry of Northern Ontario Angels (NOA), North America’s most successful angel group, which had invested over $155 million in the past fve years, protecting over 4,000 jobs. NOA has drawn contributions from investors across a
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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