Excerpt from NACO (2020) Entrepreneurial Capital Action Plan: National Policy Consultation on Sustaining Canada’s Innovation Economy (14) Co-Investment or “Matching Funds” Initiatives RESOURCES
investors from the Scottish market. By relying on an angel investor to write the first cheque, business co- investment initiatives address concerns of adverse selection, government ineffectiveness, and the critique that governments should not ‘pick winners’.
Co-investment initiatives are a common approach that governments in various countries have used to increase the supply of equity finance. 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 first 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
The design of co-investment initiatives is critical. There are two basic models.
1. In the first 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.
(14) NACO (2020) Entrepreneurial Capital Action Plan: National Policy Consultation on Sustaining Canada’s Innovation Economy. https://builtbyangels.com/consultation
50
MOBILIZING ANGEL ACTIVITY IN YUKON
Powered by FlippingBook