On the wings of Angels

If you are an entrepreneur holding out hope for a magic bullet in the upcoming Provincial budget, the news will likely be mixed when all is said and done.

Ontario Research & Innovation Minister Glen Murray has done a fabulous job of reaching out to his many stakeholders since his appointment last year. With that outreach comes the tricky task of assessing the hundreds of perspectives and positions that all of us seem to hold. Even trickier is the job of managing the internal stakeholders at Queen’s Park, all of whom know plenty about the file after many years in office.

To introduce big new programs now is to take responsibility for the current bleak state of Ontario’s start-up and VC industry; an industry that is seeing half as much activity as in the Province of Quebec, despite a huge population and larger economic engine. Who us? It is so much easier to blame greedy fund managers and poor returns, even if the facts don’t support the spin (see prior post “Canadian Venture Stats Top Dow Jones” Jan 17-11).

Minister Murray is up to the revitalization job (see prior post “No sacred cows for Murray” Oct 26-10) and has a wonderful zeal for the role, but that doesn’t mean we’ll all be tickled pink when the upcoming Budget is delivered. Isn’t it thus? The drums are now beating, and rumours persist that the only winners will be the Angel Investors and the firms that are destined to draw on that funding market.

This being an election year, I expect no wholesale changes in either the Ontario Venture Capital Fund or the Emerging Technologies Fund. The former has failed the industry (the Minister referred to it in an October speech in Quebec City as “our struggling but optimistic fund of fund”) as much as the latter has assisted. But governments need a positive message track if they want to get re-elected, and you can’t shutter or retool a program in the face of an election without seeming to have failed at something.

Expect these two initiatives to be around for awhile longer.

The good news, I’m guessing, will be in the form of a new Angel Tax Credit. There’s a program in British Columbia that’s popular with some, and it very much suits the stakeholders at OCRI and Communitech, for example, who have become the Province’s new vehicle of regional development. Something is always better than nothing, the argument will go, and it will be hard to find fault with that.

The devil will be in the details, of course, as deliniating between true professional “Angels” and the traditional “Friends and Family” folks will be tough. In an academic paper delivered last Fall regarding the success of the B.C. Angel tax credit initiative, it struck me to read that 70% of participants in the B.C. Angel Program said they would have made their investment whether the program had existed or not. That meant that about $21 million of incremental capital went into B.C.-based entrepreneurial ventures in a given year as a result of the Tax Credit.

That’s nothing to sneeze at, particularly when OVCF has been unable to actually put out a similar amount of capital, in aggregate, since it was launched in 2007 (see prior post “$165MM MRI Fund: blessing or curse?” Dec 3-07). But if a single fund such as ours can lead between $40 and $80 million a year of new deals, you know that a new Angel Tax Credit can only serve as a building block in a larger Innovation strategy.

Ontario firms raised $575 million of venture capital in 2008, but just $288 million in 2009. Something tells me the angel credit has to catch on like wildfire to backfill even part of that dramatic hole.

And that’s the challenge in Ontario. The financial cupboard is bare. There are plenty of ideas, but an equal number of opinions about what to do to fix the dearth of early stage capital in Ontario. The Labour Sponsored Fund program has — and I’m purely guessing — a 20% chance of returning in an improved form. After that, the list of options gets hazy.

And no one is going to claim that the Ontario government can do a good job of picking individual winners and losers in light of the madness that went on at Redline Communications following EDT Ontario’s $10 million interest free loan (see prior post “Why is Ontario getting into interest free corporate lending?” May 11-09). Redline, a TSX-listed company, ran into revenue-recognition issues seven months later and was cease-traded by the regulators not long after Ontario’s loan. Things are improving there, and new outside directors are a Godsend, but it’s another reminder that the private sector needs to be the one to ultimately make the decisions about allocating scarce capital.

MRM