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Nurturing Canada’s angel infrastructure should make a meaningful dent in closing the country’s perennial productivity gap. (paisan191/Getty Images/iStockphoto)
Nurturing Canada’s angel infrastructure should make a meaningful dent in closing the country’s perennial productivity gap. (paisan191/Getty Images/iStockphoto)

BANDEEN and TUDHOPE

For a fraction of the price, angel investors can pay huge dividends Add to ...

Ian Bandeen and Bev Tudhope are co-chairs of the National Angel Capital Organization.

It seems now to be dogma that Canada is suffering innovation and productivity gaps resulting from its deficit of stable, growing, vibrant next-generation companies. While everyone seems to agree about the hugely positive employment roles played by small and medium enterprises, very few have articulated comprehensive solutions to the perceived problems.

Instead, we’ve seen a wide array of government-backed initiatives designed to foster high- and bio-tech commercialization activities at universities and hospitals; to encourage a stronger entrepreneurial spirit among our young; to focus on promoting early-stage tech companies in priority sectors; to develop regional growth and innovation strategies; and to fund and promote the development of early-stage incubators, accelerators and venture capital funds. All are well-meaning, but hold varying prospects of long-term success.

Few have actually stepped back to follow the evolutionary course of an entrepreneurial idea from the proverbial garage or lab through to building a business case and core team, attracting founding capital, developing a proof of concept, making some course adjustments, finding the additional capital needed for the refined strategy, securing customers, generating sales and ultimately raising the substantive operational funding required to become a striving, growing, self-sustaining and profitable business that creates the high-value jobs Canadians want.

This entire process can take quite a bit of time, with unexpected twists and turns along the way. The needs of startups change as they evolve and continued growth is predicated on access to the mentorship and capital that will help them reach the next plateau. Past government initiatives have focused on one or two stages of growth, but without a comprehensive plan to strengthen the entire ecosystem, we have been prone to bottlenecks and failures. Aside from a few so-called high-tech unicorns, most startups must grow into proven businesses before venture capitalists, traditional lenders or the public markets will invest in them. Hence the conundrum.

Throughout the idea life cycle described above, there is a key group of players who lend help and money at the most critical evolutionary stages – namely, angel investors.

Who are angel investors? Typically, they are high-net-worth individuals who enjoy backing nascent opportunities and mentoring young entrepreneurs. They are very patient, long-term investors who are generally keen to support Canada’s economic prosperity. Critically, angel investors fill the gap in the funding continuum between “friends and family” seed capital and the larger-scale investments made by venture capitalists. If funding is not available through this often lengthy interim development phase, many startups wither on the vine, reducing the pipeline of businesses for later-stage growth and development.

Most angels operate as “lone wolves,” and often lack the benefit of basic educational materials and best practices. Their lack of visibility creates a problem for our most senior policy makers and advocates. No one really knows how many angels exist in Canada, and yet everyone assumes they will be there to invest, mentor and deliver follow-on funding.

The first goal should be to help this group self-identify and to conduct some basic empirical analysis of their activities. Co-ordination between these investors and more effective financing practices would be another laudable objective. The resulting transparency, education, co-investment and development of Canadian angel best practices will only strengthen the early-stage ecosystem and lead to more private-sector money and mentorship being made available to build the next generation of successful Canadian companies. Addressing this critical phase of the innovation evolution cycle should make a meaningful dent in closing Canada’s perennial productivity gap.

The pleasant surprise is that much of this can be accomplished with a fraction of the public money currently targeted for the innovation agenda. Instead of relying on large government initiatives, a small investment in developing and informing our angel infrastructure will help leverage some of the billions in private Canadian capital currently sitting dormant. Early efforts in this direction through the FedDev Investing in Business Innovation (IBI) programs, focused on Southwestern Ontario, have shown leverage ratios in excess of 35-to-1 private-to-public dollars. Instead of relying on the long-disproved theory that governments can pick winners, this innovative program trusted the initial due diligence and continuing mentorship conducted by angel investors (whose money was directly at stake) to identify and expand the companies with the greatest potential for success.

The National Angel Capital Organization is a non-profit entity dedicated to promoting better and more efficient angel investing across Canada. We represent almost 2,000 members, including 31 groups dedicated to funding and mentoring entrepreneurs. Even as we focus on developing this important asset class, our best estimates about the size of the Canadian angel community (50,000 plus) is a guess. Supporting a self-identification program coupled with angel best practices, educational materials and networking opportunities for deal flow and syndication could prove to be the highest-yielding investment currently available to address the need for building a functioning innovation continuum and producing more successful results.

Spending a fraction of the money earmarked for general innovation initiatives on growing and professionalizing the angel investment community will yield huge dividends and significantly enhance the efficacy of new and existing public-sector development programs. The resulting increase in successful Canadian SMEs, associated employment growth, and improved national productivity and innovation metrics will benefit all Canadians.

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