By: Robin M. Sundstrom
Best Practices
Angels at Work: Bridging the Funding Gap
A Task Force on Early Stage Funding, led by UBC’s Sauder School of Business and sponsored by the National Research Council, stated in 2005 that Canada suffers a $5-billion “funding gap.” This funding gap is the financing shortfall for new initiatives that lie between the research stage, where government funding and grants are often available, and the growth stage, where traditional venture capital (VC) may be available to innovative businesses. Furthermore, since 2005, venture capital has virtually abandoned early-stage investment in Canada. Ontario, for example, experienced one of the most substantial declines in VC activity in Q3 2008, with a total of $163 million invested in 36 companies, 43 per cent less than the $283 million of Q3 2007. Although VCs are looking more active now that the market is improving, the fact that they pulled in their horns over the past couple of years has widened that $5-billion funding gap. In a related trend, possibly exacerbating the shortfall even more, the Conference Board of Canada (CBC) reports that over the past four decades, Canada’s ranking with respect to global inward investment has steadily dropped. In essence, Canada has lost some of its traditional advantages; natural resources, for example, are now more costly to explore and exploit, so foreign investors have been steering clear. In sum, the financial crisis and economic recession led global investment in Canada to fall by an estimated 20 per cent in 2008, according to CBC. So our VCs have been focused on supporting their existing ventures (when they have money to invest at all) and outside investors have been keeping their cash in their pockets. Although recent reports have indicated that Canada is now, once again, becoming a haven for astute foreign investors because of the strength of our economy and the stability of our banking sector, not much of this money is going towards early-stage, growth companies. The most parched of Canada’s thirsty start-ups are those involved in biotechnology and related areas. These sectors have been identified as key by federal ministries – federal MPs, in June of last year, even formed a ‘BioCaucus’ to promote the new economic opportunities associated with biotechnology in Canada. This group, which included our Minister of Industry, Tony Clement, recognized the emergence of biotechnology companies as “engines of growth,” but offered few solutions to bridge the funding gap. The group’s focus was pouring money into research and educational facilities in order to develop new technologies. 20 BIOTECHNOLOGY FOCUS APRIL 2010
Well, this is possibly useful, but here’s a newsflash – we already have superlative technology. Canadians are really, really good at innovation, engineering, research, and invention. What we don’t have as readily is the funding and expertise that enables companies to commercialize that technology. Especially in biotech, where the path from idea to finished product is long and frequently painful, early-stage companies can wind up with everything in place for success – except the money. How then do smaller, fast-growth companies in this sector access capital? Traditionally, business angels, individuals who invest their own money in early-stage companies, have bridged the gap between the “triple F” investors – Families, Friends, and Fools – and institutional investors such as VCs and purveyors of public equity, who invest OPM (other people’s money) in start-ups. Often serial entrepreneurs, angels usually invest between $10,000 and $250,000 of their own capital for the pleasure of helping a company grow and the hope of involvement in a play that generates lots of cash. Overall, angels’ contribution is not inconsiderable. In Canada, angels have historically invested more than twice what VCs are putting into growing companies. In the recent, desert-dry past, angel investment has totaled, by some estimates, more than four times institutional investment. The most up-to-date studies indicate that Canadian angels have invested about $2.2 billion per year in upwards of 25,000 companies. Moreover, as the gap between family-and-friend investors and the bigger institutions has widened, angel investors have increasingly banded together, both to protect their investments and to provide greater amounts of capital to their investees. Bands of angels can invest as much as $5 million if the three Ts are aligned in their investment target: • Team – 60 per cent of angels’ focus is on management
