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NACO Academy Podcast
Government Should Leverage Angel Investors: Michael King, Finance Professor at the Gustavson School of Business, University of Victoria
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National Angel Capital Organization
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Season 1
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Episode 41
“To get to the punchline, the government should set up a co-investment fund that matches angel investments dollar for dollar. It should adopt a national tax incentive scheme that already exists in British Columbia, Saskatchewan and Nova Scotia. And it should consider replacing the loans that are being made available through its support packages with convertible notes. The Canadian government should leverage angel investments to ensure that early-stage, high-growth companies are going to survive and thrive despite the pandemic.”
— Michael King, Finance Professor at the Gustavson School of Business, University of Victoria
0:00
Michael is the Lansdowne chair and finance at the University of Victoria Gustafson School of Business. Prior to joining UVic he held the tangerine chair and finance at Western University's Ivy Business School, where he co founded Canada's first FinTech Research Center, the Scotia Bank digital banking lab. Before joining academia, Michael worked in investment banking in Zurich, New York and London, in central banking as a senior economist at the Bank for International Settlements and in Ottawa at the Bank of Canada. Professor King has a number of insights on the role of entrepreneurs backed by qualified angel investors in contributing to the economic recovery. Michael, welcome. It's great to have you with us.
0:41
Thank you, Claudio. Thanks for having me. I want to talk today about ways the Canadian government can leverage the angel investors who are already helping entrepreneurs and to stimulate the economy as we come out of this pandemic. I'm going to provide some statistics on angel investing You are going to be coming out in the report next month. And I'm going to preview three ways the government can work with angels to increase capital for early stage high growth companies that are going to be included in this recap consultation. To get to the punch line, the government should set up a co investment fund that matches angel investments dollar for dollar. It should adopt a national tax incentive scheme that already exists in BC, Saskatchewan and Nova Scotia. And it should consider replacing the loans that are being made available through support packages with convertible notes. To Claudio, as you mentioned in the Neko consultation with stakeholders, there's going to be a report that's going to provide details on these different initiatives as well as others which so I'm just going to be brief. So we know two things for certain. We know that entrepreneurs like Laura McGee of diversity Oh, who you're going to hear from in a moment, they Building high growth companies that create jobs and wealth for Canadians. And they rely on angel investors for early stage capital, and more importantly for advice, mentorship and access to those initial business networks and contacts. The second thing we know is that the pandemic, as you mentioned, is going to contribute to a shortage of capital for early stage companies. And while the government is doing a lot to help small and medium sized businesses, when you ensure that the entrepreneurial ecosystem in Canada survives to make by making more capital available to those startups who may not qualify. So next month in Nico's report on Angel activity in 2019. We're going to see statistics on what happened over the recent year. Professor calling Mason University of Glasgow, who you mentioned has led this report again for the 10th year, this year 25 angel groups took part in the survey and what he finds is that they have invested 170 million dollars in 318 companies last year alone, the median investment was about $170,000. And while this may not seem like a lot, you need to consider that Nikolas membership actually includes 44 angel groups, not 25. In addition, 4000 individual angels and 45, incubators and accelerators. So that hundred and 70 million is just the visible portion of angel investment. And you can think of it as the tip of the iceberg that we can see above the surface. Professor Mason is estimating that the portion below the surface is 10 to 20 times larger. So on that basis, angels and Angel groups invested from 1.7 to 3.4 million billion or meet $2.4 billion of equity in early stage companies across Canada last year alone. And that's really something that we want people to know about. So the Canadian government should leverage this angel investment to ensure that early stage high growth companies are going to survive and thrive despite the pandemic. And Professor Mason last month he consulted with the EU on steps they can take to help early stage companies. And his ideas are going to be outlined in this document. And they also show that there's a way for taxpayers actually to earn a return on their investment to these companies. So the first idea is to set up a government co Investment Fund, where the government matches each dollar that's invested by angels. And these schemes actually exist already in Scotland, in New Zealand and in Europe. So if you think about it, the angels are doing the work already. So they're finding the promising startups they're doing the due diligence, and they're putting their own savings into these businesses, so they have skin in the game. So by piggybacking on this work of angels, the government through a co invest And funds can direct money where it will have the biggest impact without having to search or screen for companies. co investment is going to leverage the work of angels. And at the same time it will double the equity capital that's available for early stage companies. And studies that have been done to these call investment schemes abroad find that over the long term, these schemes can even generate a return on investment that's positive and will benefit taxpayers.
5:28
Another second idea is that Canada should adopt a national tax incentive program where angels receive a benefit when they invest. So currently, BC, Saskatchewan and Nova Scotia have these programs. So just to take the example of VCs small business venture capital program that provides a tax credit of 30% of the amount that angels invest in the equity of BC startups. So if you invest $100,000, that comes with a $30,000 reduction in taxes. Now, you may think that this is is overly generous. But consider that early stage investing is very risky and the angels stand to lose all of their investment in most of the startups. Only a few will be successful and will grow. So a national tax incentive program could spur angel investing in communities all across the country at a time when it's needed most. The third idea is to consider offering convertible notes instead of loans to early stage companies. And currently much of the government support is being taken the form of a loan that needs to be repaid or a guarantee and alone this made by the private sector. Some of these loans do have a forgivable portion if certain conditions are met, which is great, but alone is still a form of death. And it uses up cash for the company to make the interest payments and it puts the company at risk of default. So if you think of a pre revenue company trying to get off the ground with only its employees and their ideas and no profits, no one is going to lend to To the startup. Well, that's not exactly true because angel investors do lend in these situations using convertible notes, and a convertible note as a type of loan that converts into preferred shares when the founders raise more equity in a subsequent price round such as a series A. So a convertible note can be attractive for both the founders and for the angels. It gives them the owner's capital immediately without diluting their ownership. When they receive it, it conserves cash because the notes do not pay interest instead, the interest is actually repaid in the future in the form of more shares. And for investors to note typically converts into shares at a discount to the price that's paid by the series A investors providing an incentive for them to invest early and take that risk. And the note gives the investor the upside if startups successful, and this could be a win win not only for the entrepreneurs, but for the government and taxpayers if they were to follow History. That's what I wanted to say. And you can read read more about those ideas in the report. And thank you to column Mason for suggesting.
8:08
Thanks, Michael for sharing those insights. It's great to have you collaborating with us on the e cap national consultation. And so I look forward to working with you on that.
Michael is the Lansdowne chair and finance at the University of Victoria Gustafson School of Business. Prior to joining UVic he held the tangerine chair and finance at Western University's Ivy Business School, where he co founded Canada's first FinTech Research Center, the Scotia Bank digital banking lab. Before joining academia, Michael worked in investment banking in Zurich, New York and London, in central banking as a senior economist at the Bank for International Settlements and in Ottawa at the Bank of Canada. Professor King has a number of insights on the role of entrepreneurs backed by qualified angel investors in contributing to the economic recovery. Michael, welcome. It's great to have you with us.
0:41
Thank you, Claudio. Thanks for having me. I want to talk today about ways the Canadian government can leverage the angel investors who are already helping entrepreneurs and to stimulate the economy as we come out of this pandemic. I'm going to provide some statistics on angel investing You are going to be coming out in the report next month. And I'm going to preview three ways the government can work with angels to increase capital for early stage high growth companies that are going to be included in this recap consultation. To get to the punch line, the government should set up a co investment fund that matches angel investments dollar for dollar. It should adopt a national tax incentive scheme that already exists in BC, Saskatchewan and Nova Scotia. And it should consider replacing the loans that are being made available through support packages with convertible notes. To Claudio, as you mentioned in the Neko consultation with stakeholders, there's going to be a report that's going to provide details on these different initiatives as well as others which so I'm just going to be brief. So we know two things for certain. We know that entrepreneurs like Laura McGee of diversity Oh, who you're going to hear from in a moment, they Building high growth companies that create jobs and wealth for Canadians. And they rely on angel investors for early stage capital, and more importantly for advice, mentorship and access to those initial business networks and contacts. The second thing we know is that the pandemic, as you mentioned, is going to contribute to a shortage of capital for early stage companies. And while the government is doing a lot to help small and medium sized businesses, when you ensure that the entrepreneurial ecosystem in Canada survives to make by making more capital available to those startups who may not qualify. So next month in Nico's report on Angel activity in 2019. We're going to see statistics on what happened over the recent year. Professor calling Mason University of Glasgow, who you mentioned has led this report again for the 10th year, this year 25 angel groups took part in the survey and what he finds is that they have invested 170 million dollars in 318 companies last year alone, the median investment was about $170,000. And while this may not seem like a lot, you need to consider that Nikolas membership actually includes 44 angel groups, not 25. In addition, 4000 individual angels and 45, incubators and accelerators. So that hundred and 70 million is just the visible portion of angel investment. And you can think of it as the tip of the iceberg that we can see above the surface. Professor Mason is estimating that the portion below the surface is 10 to 20 times larger. So on that basis, angels and Angel groups invested from 1.7 to 3.4 million billion or meet $2.4 billion of equity in early stage companies across Canada last year alone. And that's really something that we want people to know about. So the Canadian government should leverage this angel investment to ensure that early stage high growth companies are going to survive and thrive despite the pandemic. And Professor Mason last month he consulted with the EU on steps they can take to help early stage companies. And his ideas are going to be outlined in this document. And they also show that there's a way for taxpayers actually to earn a return on their investment to these companies. So the first idea is to set up a government co Investment Fund, where the government matches each dollar that's invested by angels. And these schemes actually exist already in Scotland, in New Zealand and in Europe. So if you think about it, the angels are doing the work already. So they're finding the promising startups they're doing the due diligence, and they're putting their own savings into these businesses, so they have skin in the game. So by piggybacking on this work of angels, the government through a co invest And funds can direct money where it will have the biggest impact without having to search or screen for companies. co investment is going to leverage the work of angels. And at the same time it will double the equity capital that's available for early stage companies. And studies that have been done to these call investment schemes abroad find that over the long term, these schemes can even generate a return on investment that's positive and will benefit taxpayers.
5:28
Another second idea is that Canada should adopt a national tax incentive program where angels receive a benefit when they invest. So currently, BC, Saskatchewan and Nova Scotia have these programs. So just to take the example of VCs small business venture capital program that provides a tax credit of 30% of the amount that angels invest in the equity of BC startups. So if you invest $100,000, that comes with a $30,000 reduction in taxes. Now, you may think that this is is overly generous. But consider that early stage investing is very risky and the angels stand to lose all of their investment in most of the startups. Only a few will be successful and will grow. So a national tax incentive program could spur angel investing in communities all across the country at a time when it's needed most. The third idea is to consider offering convertible notes instead of loans to early stage companies. And currently much of the government support is being taken the form of a loan that needs to be repaid or a guarantee and alone this made by the private sector. Some of these loans do have a forgivable portion if certain conditions are met, which is great, but alone is still a form of death. And it uses up cash for the company to make the interest payments and it puts the company at risk of default. So if you think of a pre revenue company trying to get off the ground with only its employees and their ideas and no profits, no one is going to lend to To the startup. Well, that's not exactly true because angel investors do lend in these situations using convertible notes, and a convertible note as a type of loan that converts into preferred shares when the founders raise more equity in a subsequent price round such as a series A. So a convertible note can be attractive for both the founders and for the angels. It gives them the owner's capital immediately without diluting their ownership. When they receive it, it conserves cash because the notes do not pay interest instead, the interest is actually repaid in the future in the form of more shares. And for investors to note typically converts into shares at a discount to the price that's paid by the series A investors providing an incentive for them to invest early and take that risk. And the note gives the investor the upside if startups successful, and this could be a win win not only for the entrepreneurs, but for the government and taxpayers if they were to follow History. That's what I wanted to say. And you can read read more about those ideas in the report. And thank you to column Mason for suggesting.
8:08
Thanks, Michael for sharing those insights. It's great to have you collaborating with us on the e cap national consultation. And so I look forward to working with you on that.