04
Aug

Ontario Emerging Technologies Fund: Good for Investment, Not Good for Angels

The Ontario Emerging Technologies Fund was unveiled last week and I know investors across the country have been anxiously awaiting the details. Here’s the skinny:

  • $250 million fund size
  • Matches investments for qualified investors (more on that later)
  • Invests in Ontario companies
  • Sectoral targets: clean technology, life sciences and advanced health technologies, and digital media and information and communications technology sectors

Most Angels I talked to previously were wondering what the qualification process would be and whether the fund would discriminate against out-of-province investors.

Now that the details (at least version 1.0) have been released, I can say that there’s good news and bad news.

The good news is that, over five years, $250 million will be flowing to early stage tech ventures in Ontario. This is nothing to sneeze at and a much-needed shot in the arm for Ontario entrepreneurs. Will this encourage new investments? Absolutely, especially in clean tech and life sciences where capital needs are greater.

But several aspects of the fund are not great for Angels and other seed-stage investors, especially in ICT or even the earliest stages of clean tech and life sciences.

Investment Round Must Be $1 Million or More(p. 10, Fund Guidelines, link to PDF)

According to the Kauffman Foundation (Appendix to Returns to Angels Investors in Groups) the average Angel investment is less than $200,000. This is consistent with what I’ve seen in Canada. Many Angel groups and seed funds invest in this range. So why the $1million threshold?

If this is a conscious choice by the OETF to favour later stage deals, they may actually draw Angel dollars away from pure startups and towards later-stage entitities. This would be a bad thing for growing the number of startups in Ontario.

If this is a subtle encouragement to Angels to invest more dollars, it ignores the fact that many (I’d say most) pure startups don’t need $1 million. I would personally never invest in a startup whose capital needs from day one were in this range. It’s not exactly “lean”.

Angels Must Re-Apply for Qualification for Each Investment (p. 7, Fund Guidelines, link to PDF)

Venture funds can apply for qualification once and have this remain in place for all future investments. Angels, on the other hand, must re-apply for each investment they make. I’m going to give the OETF the benefit of the doubt and assume that getting qualified once will mean getting qualified again. But this doesn’t exactly reward Angels or Angel groups who have a proven track record. Why not treat them the same as VCs?

Ontario Footprint

OETF is not the only fund tied to a specific geographical region so this is not a new complaint. But it still bothers me to see penalties for a company no longer having “enough” of an Ontario footprint:

  • OETF has the right to force repurchase of its shares at a price set by a 3rd party, or
  • OETF has the right to force refund of its investment + 10% compounded annually

As an investor, I prefer the highest return on my investment no matter where the company needs to grow. These kinds of terms discourage investment from outside the province and outside Canada.

Favouring Ontario-Based Investors

Finally, there are some silly questions in the Angel application about proving that you are dedicated to investing in Ontario. Presumably, this doesn’t apply to Angels who live in Ontario. This is counter-productive. It’s better for Ontario to draw in investment dollars from outside the province. And why do I have to prove that I want to invest in Ontario when I’m already showing that by applying to invest in a specific deal?

The not-invented-hear syndrome is not good for startups and it’s not good for regional investment.

Conclusion

I applaud the Ontario Government for taking steps to encourage early-stage investments in the province. It’s difficult for governments to truly take a back seat to private investors when it comes to investments and the OETF is a good example of this struggle. It’s not really the matching investment fund that we had hoped for, but a new investment entity with specific regional and sectoral focuses. It’s still good to have a new player on the scene and I hope that the model evolves based on market feedback.

Angels and entrepreneurs: what do you think of the OETF?

Comments ( 6 )
  • H. Kumar Thangudu says:

    Texas has a similar fund called the Texas Emerging Technology Fund(TETF). There’s a big application process.

    In any case, to get an idea of what will happen with deals that go through with regards to angel investors it would be good to look at the TETF. TETF has been in place for 4+ years, and as with any program, has its terms and conditions.

    http://www.emergingtechfund.com

  • Albert Lai says:

    I think the most important point you made is:

    ~~~
    “Ontario Footprint

    OETF is not the only fund tied to a specific geographical region so this is not a new complaint. But it still bothers me to see penalties for a company no longer having “enough” of an Ontario footprint:

    OETF has the right to force repurchase of its shares at a price set by a 3rd party, or
    OETF has the right to force refund of its investment + 10% compounded annually
    As an investor, I prefer the highest return on my investment no matter where the company needs to grow. These kinds of terms discourage investment from outside the province and outside Canada.
    ~~~

    That’s a pretty risky killer.

    Basically, you risk being “landlocked” to Ontario. Taking this capital can be pretty risky if it turns out your business requires you to have signfiicant presense across the globe.

    So the real question is… how is this being defined and enforced? Its no longer enough to be a CCPC with this fund, so what is the equivalent? What is “enough” of an Ontario footprint?

    Haven’t had a chance to deep dive into this… but would love it if someone could give me more insights?

  • raymond says:

    Good comment Albert. I like the “landlocked” analogy. As long as the government’s main goal is job creation they’ll never get it right. Support the creation of viable companies and ecosystems and the jobs will follow. We’ll have to wait for OETF to clarify exactly how they intend to treat companies that move out of Ontario. As it stands, it’s too risky.

  • Ian Graham says:

    Hi Raymond, nice post.

    Had an email Friday with the press release and link to the funding guidelines (which didn’t work by the way) and was hopeful.

    While the fund is a step in the right direction and much need shot in the arm for Ontario start-ups I think that it misses the mark. Key areas of concern; funding payload $1M (seed fund should be in the order of $250k round), the Ontario government is your partner in the investment. Looks like they have used a model where the Angel and Fund invest side by side as partners. This is similar to what had been done in New Zealand. No offence intended to our friends in government, however, who wants the government as a partner in your start-up. My preference would have been a flow through model similar to what is done with Scottish Enterprise Investements which has been very successful.

    Perhaps the next iteration or V2.0 will be closer to the mark.

  • raymond says:

    Hi Ian,

    I truly think the Ontario government struggled with the notion of letting the market dictate what is a “good” vs “not good” investment. The result is this weird parallel universe where for some reason Angels and funds need certification. It’s logical on their part but not very helpful in my opinion. Hopefully they’ll listen to reason.

  • Seth Temko says:

    Here is an article on this topic from The Deal Magazine. Maybe this will help with identifying some of the VC players starting to back these province funds.

    http://www.thedeal.com/newsweekly/features/canadian-provinces-dive-into-vc.php

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