C HAPTER 10: T HE I NNOVATION AND P RODUCTIVITY T AX C REDIT – A R ECOMMENDATION FOR C ANADA
Historically, individual investors have been the primary source of capital for seed and start-up companies. As noted in a recent paper by the U.S. Community Development Venture Capital organization: • In the U.S., Jeffrey Sohl, a professor at the University of New Hampshire estimated that in 2002 approximately 200,000 private individuals invested $15 billion into 36,000 entrepreneurial ventures. • Individuals invest at a critical stage generally when the entrepreneur’s family and friends’ money (otherwise known as “love money”) has run out and prior to venture capital money. • Only 2% of venture capital money is invested in seed and early stage companies. Angels are some of the most important (though least understood) players in our entrepreneurial landscape today. In the U.S., angels fund 30 to 40 times as many entrepreneurial firms as the formal venture capital industry , although their total capital commitment may be less because of the stage of the investment . Angels as a class, bring BOTH money and a unique strategic guidance to early stage concepts - seeking to become a business. Canada must encourage more entrepreneurial companies in order to achieve its economic goals. SME’s are the single most important driver of economic growth and job generation in this country. There is a critical shortage of seed and start-up investment in Canada. This shortage, referred to as the Funding Gap in the Innovation Chain, is in the order of $5 billion. Since 2000, there has been an increase in direct research funding of over $4 billion. However, at the same time, early stage funding has decreased by $1.6 billion. Much of Canada’s potential future innovation will not be commercialized, due to these current funding trends and the existing funding gap in the innovation chain, unless something is done. Canadian governments need to focus resources on this Funding Gap (the Pre-VC stage of business development). Without governments’ help, innovation stalls and does not progress to a later stage, where venture capitalists will invest. (See page 56 for further information on the Funding Gap). More distressing is that the failure to better facilitate investments in the early stages of companies could prompt an exodus of Canadians and their enterprises to other jurisdictions with more capital-friendly structures. Seed and start-up investing is a very risky business, but the rewards can be very high for several stakeholders beyond angel investors: owners, employees and their communities benefit when SMEs succeed. There is a need for governments to incent everyday Canadian angels to take the risks necessary to invest in Innovation. Angels help entrepreneurs deal with the inherent execution risk of business development, in a very efficient manner. They operate with low overhead, do not charge for their time and have the patience to wait for a payoff many years hence. Entrepreneurs often refer to angels’ value to their business as being “priceless”.
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