Angel Investors Deserve a Tax Break
Comment by Tony Humble Financial Post – September 2005 For almost eight years through the 1990s, I wrote about mortgages for the Financial Post. That was quite a time for the Baby Boom generation. Many Boomers, enjoying peak earning years, paid off their mortgages, and then set about investing their increased cash flow in technology startups and highly touted tech growth stocks (OK, I won’t remind you any more). Personally, having left a major Canadian bank at 40, and co-founded Northwood Mortgage in 1990, I joined the Internet boom by investing in my own mortgage tech startup in 1995. Online Mortgage Explorer, which I had co-founded with tech strategy with Jason Smith, became Basis 100 Inc. and went public in 1999 largely on the strength of the panting giant’s last gasp. And that’s how I became an angel investor. For those of you haven’t heard that term before, angel investing is early-stage investing in startup companies. It usually happens between the time the entrepreneur and his family and friends get a company off the ground and venture capitalists get interested. In other works, it is the “funding gap” between the sweat equity and love money, and the venture capital that takes it into the big leagues. After my first success in building a company, I set out on my next path, amassing a portfolio of six angel investments – all of them into six figures and one into the millions – in companies where I could have a great deal of say, but would not be the day-to-day operator. I thought of it as “spreading the wealth” to promising companies whose goals and values were similar to my own – the essence of what is now the practice of angel investing. However, the lack of discipline in my approach, coupled with the rapidly retreating capital markets, plucked more than a few “feathers” from my wings. In retrospect, I could certainly have used the collective wisdom now getting together regularly in every major city in Canada, for example the Toronto Angel Group, Ottawa’s Purple Angels (started by ex-Nortel employees), the Vancouver Angel Group and the Calgary Angel Network. These “bands of angels” are evidently forming their own squadrons, and are looking for recruits. Statistically, according to one of the “squadron leaders,” experienced angel Bruce Gitelman of the only Canada-wide angel group, the National Angel Organization (NAO), successful Canadian individuals put their cash into 20 to 40 times the number of early-stage companies that venture capitalists invest in – a remarkable and important number, considering that early-stage companies with their energy and intensity, create the majority of the net new jobs in our economy. However, this is still not enough. The NAO, co-founded in 2003 by Toronto businessman Henry Vehovec and a handful of other successful and like-minded investor, together with policy analysts such as Dr. Daniel Muzyka, dean of UBC’s Sauder
School of Business, are beating the drums loudly about finding a way to bridge a $5billion short-fall in early-stage funding. The $64K question is: “Why would an affluent investor take the relatively high risk of betting on an early stage entrepreneur with after tax dollars?” In addressing this key issue the NAO, whose third national convention is to take place in Ottawa Oct. 24 and 25, has put forward a tax credit initiative that is so timely the script seems almost Hollywood North. It is called the Innovation and Productivity Tax Credit (IPTC), and appears to be the ideal replacement for the fading Labour Sponsored Fund (LSF) vehicle. The point men for this important initiative are Gitelman, and Jim Fletcher, and experienced Vancouverbased angel. The IPTC would echo the LSF’s 30% total tax credit for qualified early stage investments, but would allow significantly larger amounts to be invested based on the investor’s accredited status, and would place the onus on the smart investor to make a wise decision. The tax credit would lower the risk up front by reducing the net initial cost of the investment, and would certainly generate many times the tax credits in the amount of taxes collected on newly created jobs. Like the wildly successful (at least in terms of dollars invested) LSF’s of the 90’s, the mobilization of much larger chunks of early stage funds through the IPTC also has the potential to carry hot young companies across the bridge to commercial success without having to line up outside a towering VC’s door, cap in hand. There are thousands of successful Canadian who qualify for accredited status. As their nest eggs grow, they will all be looking for bigger, better, and more controllable investment opportunities, having upsides commensurate with those of a true insider. Tony Humble is chairman of Synxx Energy Solutions Inc., is an active angel investor, and a Founding 100 Member of the National Angel Organization. thumble@synxxenergy.com. His next column is two weeks from today.