Tuesday, July 20, 2010

Ontario's Investment Accelerator Fund: Phase 2 Begins

For the last four years, Ontario's Investment Accelerator Fund has been a lifeline for many high- growth, early stage companies, providing convertible debenture financing of up to $500k per business. With the movement of the fund's management over to MARs, and the appointment of a new Managing Director (Barry Gekiere), it appears that the IAF may be laying the groundwork for an expanded mandate.

The IAF was formed in 2006, when the Ontario Government annonunced a "Market Readiness Program" to provide early-stage tech companies with "financial support and management expertise". The premise was that this combination would allow promising companies to accelerate growth and attract investment from VCs.

Despite receiving only $29 million to invest(a surprisingly large $17 million was allocated to a "Mentorship and Entrepreneurship Program"), the IAF produced. They get full credit in my books for adjusting to the market realities and assessing investments not only on the basis of whether the business would meet venture capital requirements for later investment.

Now, however, the fund finds itself in a unique position. With sources of follow-on capital low, what approach should it take to its current investments? Should it risk destabilizing businesses by forcing repayment of debentures? Or should it convert its stake and become a shareholder, and (if so) what kind of role should it take as an investor?

And what about future investments? Here, the IAF has always had a tricky path to walk. In an era where many companies build business plans on the assumption that there will be no venture capital, should the IAF assess investment-worthiness based on venture capital metrics, or should it focus more on the ability of a potential investee to create a sustainable, innovative business , i.e., one that may never be sold for millions of dollars and generate a capital gain? (A business that creates innovation economy jobs and is simply profitable is a policy maker's dream, but a VC's nightmare.) Does IAF's investment committee have the right blend of advisors to ensure that decisions reflect both equations, or is it too heavily populated with VCs?

Stay tuned.


Anonymous Greg Boutin said...

The move of the fund to MaRS is nothing but worrying given the track record of the organization in opacity. I expanded my thoughts on that topic here for those interested: http://www.growthtimes.com/2010/04/troubling-facts-about-mars-discovery-district-part-1-of-4/

Having public money delivered in the form of investments is not as bad and unfair as grants, but not as effective and fair as tax credits, whose disbursement ratio is much higher and doesn't require an upfront decision as to whether a business will succeed or not.

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