Good morning, Mr. Chairman and committee members. Thank you for inviting us to speak to you today.
My name is Andrew Wilkes, and I chair the National Angel Capital Organization, a non-profit association of angel investors and investor groups from across Canada. NACO has 5,000 angel investors and 35 angel groups.
Last year we had the pleasure of speaking at some length to the House of Commons Standing Committee on Industry, Science and Technology. During that testimony we outlined many of the policy alternatives available to stimulate early stage enterprise investment and subsequent growth. Our approach is to create jobs and generate revenue for the taxpayer. We appreciate the opportunity to reiterate and expand on these alternatives and to comment on what is working well.
To begin we'd like to briefly establish who we are and on whose behalf we speak. Angel investors are often serial entrepreneurs who have built one or more successful companies. Typically they mentor and invest their own personal capital in early-stage companies to commercialize our Canadian intellectual property. They provide the oldest, largest, and most-often-used outside funds for entrepreneurs. They are the key to the commercialization of innovation by SMEs, our main source of employment growth.
Angels invested roughly $2.2 billion in early-stage companies in 2004--I'm sorry I don't have more data after that--which compares to around $546 million by VCs, venture capitalists, in 2008. Angels are becoming organized, formalized, and professional in their approach.
The problem we are here to address is the $5 billion to $8 billion annual funding gap in the financing of early-stage companies, the number one problem for innovation. Investments by venture capitalists in early-stage companies are declining drastically. Early-stage is the valley-of-death stage; it is the most challenging search for financing that entrepreneurs face. Canada is losing out, as entrepreneurs are seeking financing out of the country.
Our first recommendations are very modest. Traditionally, angels demand that entrepreneurs make the most of what they have and that they run a tight ship. We think the problem can be addressed with well-leveraged, modest expenditures, and we propose the following.
First, we propose an angel community development initiative of half a million dollars a year for four years. The fund would help boost investment through education, best practices, training, networking, and collaboration. It's modelled after Ontario's very successful angel network program.
Second is an innovation productivity tax credit limited to $100 million per year and matched by the provinces. The credit would encourage individuals to take a risk in early-stage SMEs, which could become our economic champions. It's modelled after existing tax credits in five provinces in Canada, the U.S.A., and abroad. These programs have proved to be successful around the world--in over 18 U.S. states, Belgium, Bulgaria, France, Germany, Greece, Ireland, Luxembourg, Russia, Sweden, Switzerland, and I could go on. Studies show that similar investment repays the taxpayers in two to three years.
Let me emphasize that these are programs that provide returns to the taxpayer by accessing further capital to grow our businesses. Indirectly, this is a public-private partnership.
Third, we advocate leverage and emulation of best practices found elsewhere with the national angel co-investment fund: $100 million invested by government and matched by private investors. That would match approved angel group investments in eligible small businesses. This would result in significant leverage to grow businesses. The aim is to achieve Canada's strategic economic goals as set out in the science and technology strategy. This is another proven policy with counterparts in Scotland, Ohio, and so on, and it will harness private interests for public benefit.
This committee has also asked what is working well and what could work better. We're happy to provide a clear answer to both. To begin with, the National Research Council's industrial research assistance program works. Traditional stimulus may only displace private endeavour; however, IRAP's assistance to innovative companies provides leverage that is not matched by traditional programs. Investments in innovation and skills meet future needs for growth and confidence in new markets. Investment in innovation and skills preserves entrepreneurial initiative and accountability.
As to what could work better, we believe research grant funding could have an even greater multiplier effect. Basic research is critical, a catalyst of economic growth.
Present granting funding, however, does not prepare researchers to take on the risks and rewards of commercialization. Thus, few Canadian innovations reach the marketplace. Research granting could achieve an economic multiplier effect if they included requirements for goals and milestones specific to eventual commercialization in their guidelines.
Let me close by saying that the subject of capital formation is important to all sectors, but especially the SMEs, which are the engine of growth in Canada.
Thank you for asking me to appear before your committee. On a personal level, I have a mission to take Canadian intellectual property globally. We are all needed to be aligned in this endeavour.
Thank you.