The need to invest by different groups of people and bodies has facilitated changes in different countries. Some of the affected states are Canada and the US. The main effects are due to sidebar investment strategy whereby one investor in an industry allows another investor to be in control of where as well as how to invest the available capital. Such cases mostly arise when the initial investors may face several challenges such as lack of either the ability or confidence to make the investment by themselves. In return, the strategy places trust in another investors’ ability to make profits out of the business activities involved (Angel Summit 2013 Session Notes 1).
Canada is one of the countries that are associated with significant strides regarding the development of the macroeconomic conditions for the purpose of improved growth and prosperity. However, the primary task of Canada is the ability to sustain a high standard of living by becoming better at introducing innovation and making the business profitable. Canada lags in both research and development in ensuring commercialization and the growth of new companies and viable enterprises characterized by scale and scope required for success. Across the world and locally, Canadians are well known as excellent researchers, entrepreneurs, and resourceful innovators (Mothersill et al. 9). Despite the fact that these attributes result in profits in the regions involved, one of the biggest challenges faced by these people is their ability to commercialize innovation together with creating new and growing companies that provide good jobs to Canadians, and, as a result, generate wealth that can sustain their quality of life (Angel Investor 3).
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On the other hand, the US is a beneficiary of the sidebar investment program. Although the nation is growing, the account deficit usually absorbs the majority of funds from the world’s capital outflow. To cover the deficit, the nation amasses trillions of dollars through foreign debt, which in return leaves it vulnerable to changes that take place in the business sentiment of investors across the world. The economists believe that the only way to sustain the deficit is by making a significant contribution through the sidebar. It is considered that the problem is inevitable and would continue to grow over years, and the world would be expected to have enough capital to sustain it. Today’s imbalances, as well as pressure on the dollar, remain significant although there would be no sudden large depreciation in the currency. Generally, the US goods and services will then be competitive when availed in the global economy, and thus foreign companies find the US an attractive location to conduct several activities such building of manufacturing and R&D facilities. For instance, the European countries would be characterized by increased demand for various types of both financial and business services from the US. As a result, the trade deficit would result to trade surplus with Asian countries, Canada, and Mexico (Farrell and Lund 1).
Fullsail events through the support of the New Brunswick Securities Commission realized the need to establish a committed source of capital that can invest with other bodies during the early stages of the ventures. It is described as a Sidecar Fund that aids the investor to run different activities. These Sidecar Funds help to stimulate investments especially in high-growth early-stage companies, the number of which raises significantly. The global financial concerns result to tightening of the credit offered by traditional lenders and reduction in venture capital funding, which results in increased interest and demand for Sidecar Funds. For instance, the US has launched state funds known as Maryland Venture Fund, City Funds referred to as the New York Investment Fund, as well other funds with no geographical base referred to as the Common Angels Fund situated in Boston. They are funded by different bodies such as the state, institutions, and accredited individual investors as in the case of the Common Angels. Similarly, in Canada, there are also co-investment and venture capital funds launched in different locations such as British Columbia whereby there is Renaissance Capital Fund, Ontario with Emerging Technologies Fund, and Alberta associated with the Enterprise Corporation (University of New Brunswick 1).
Apart from Emerging Technologies Fund, Ontario has another fund known as Venture Capital Fund (OVCF), which is provided by the province together with institutional investors. They invest mainly in Ontario-based as well as Ontario-focused venture capital together with growth equity funds that are given to fund innovative, high-growth companies. All these funds apart from OVCF are financed by the provincial governments. In locations like Ontario, there exist some interests of the members in the available funds who manage and operate them. However, since these funds only support specific projects in energy and environmental technologies, information and communications technologies, value-added natural resource technologies, as well as advanced-level manufacturing, it is vital to include additional funding to support small and medium-sized high-growth innovative ventures. Thus, the sidebar acts as a source of additional capital, which could lever other parts such as private sector funds and in return result in substantial returns realized on the investments involved (University of New Brunswick 1).
Terms and Structures of Sidecar Funds
The Sidecar Funds fall under the fund model that is based on design principle and consistent with achieving specific objectives. Some of these goals involve the role of the funds as a catalyst for the activity involved. The fund acts as a catalyst that leverages private sector capital. Secondly, it focuses on the main sectors to New Brunswick. It means that the focus of the investments is in areas that are vital to the province. Thirdly is the efficient deployment of the funds. The capital provided ensures that the investments are efficient and direct within a short duration. Fourthly, there are market-based investment decisions whereby the qualified personnel conducts the identification and assessment of investment opportunities involved. It has proven a successful track record. Another important aspect is that there is an ability to make other investments. These funds make initial and other follow-on investments that are used to support ongoing growth (University of New Brunswick 2).
The sidebar funds are characterized by varying structures. These structures are defined by different terms that explain more the sidebar funds. Firstly, an accredited investor is one of the terms. It refers to an investor who is defined under securities laws as one who possesses the knowledge as well as financial ability to either assess or make risk investments. This person purchases securities under exemption provisions defined to them. Secondly, an administrator refers to an organization or entity that has the capability of managing the daily operations of the Sidecar Fund. Its primary function is to manage the funds. Thirdly, co-investor is an individual that is involved in investment activities with others. The co-investor invests with the Sidecar Fund. Fourthly, the contributor may refer to an individual, government or organization providing money for the fund through either direct contribution or making pledges. The capital is used to make investments in private equities, which are termed as early-stage ventures together with external investors. Furthermore, proponents are individuals or government agencies, which make their contribution to supporting the establishment of the funding by Sidecar Fund. Also, the venture is a new business opportunity for the existing business or one at the initial stage, which exhibits a strong potential for growth. Lastly, the stakeholder or participants are individuals and organizations participating in the development of the investment activity (University of New Brunswick 3). Specifically, the funds in Ontario are managed by Ontario Capital Growth Corporation, which is an agency dealing with research and innovation. The city business leaders who participate in identifying and supporting promising entrepreneurs manage The New York Investment Fund. A large number of business leaders contributes during sector advisory boards. In Common Angels Fund, the investors are the serial entrepreneurs and wealthy families. The Renaissance Capital Fund invests as a limited partner. The fund managers offer diversity in relation to investment options for high technology companies. Enterprise Corporation Fund acts as a non-profit corporation. The funds usually assist various businesses in Canada.
The structure of the sidebar fund is associated with administration, fund contributors, and exit strategies for all private sector contributors. In this case, the administration is assigned to a body such as an organization that has the ability to provide all the necessary resources required in case an investment opportunity is realized. The administrator is independent of the government, and agencies show some compliance with applicable laws and have own good governance practices. Moreover, this system is held in high regard within the province and prepares annual reports that represent the fund investments (University of New Brunswick 6).
The Sidecar Fund involves fund contributors whereby these bodies include both the federal as well as provincial governments and agencies. Also, private sector businesses and institutions are included as individual accredited investors termed as potential contributors. These individuals make promises and pledges to invest over a certain duration. However, the funding is governed by exit strategies for these private sector contributors. They are established in some documents of Sidecar Fund. For instance, public sector contributors are entitled to contribution and earned returns when there is liquidation and windup of the fund. The contributor can exit from the fund with just a portion of the contribution made with respect to their part found in the investment’s exit proceeds (University of New Brunswick 7).
Number and Size of Investment
As stated earlier, Sidecar Fund is provided by the individuals and other identities who invest in business activities whereby they prove an active involvement in these activities after making the investment. To understand the size and number of investments, a survey was done restricted to Sidecar Fund in the provinces and states named in this work. Questionnaires and telephone interviews were distributed to the groups across Canada and the US. Some of the few questions that enabled the collection of the relevant information were the value of investments, the total value to various groups from exits experienced, the government programs involved to support any ongoing investment, and the types of co-investors involved in different investment activities (Global Advantage Consulting Group 5). For instance, the Ontario Emerging Technologies Fund is a co-investment fund offered directly to the province of Ontario. In 2009, it was announced by the government that $250 million was to be afforded by this fund and co-invest with other co-investors into innovation and high-growth companies. New York Investment Fund is termed as evergreen fund and has always realized gains that are later reinvested. The fund has invested large funds amounting to excess of $135 million. Common Angels Fund raised to $13 million in 2010 as it began its transition from being an angel-network model to seed-stage venture model. The Renaissance Capital Fund invests in a range of technology sectors such as those offering Internet technologies, life sciences and digital media. These investments are made from seed funding to finance the services offered for expansion. Enterprise Corporation Fund promotes economic development by providing funds that increase employment and revitalize business districts. The fund has approved more than $845,000,000 assigned to 504 loan projects.
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From the groups involved in the data collection process, there was available full and partial information about investments although some had no reports to give. For instance, it was noted that a total number of 134 investments were reported in Canada, which was about 50% increase in recorded investments in the previous year. On the other hand, the US recorded 150 investments in the same year. This data indicated that the US attracted more investors compared to Canada within the same duration. These investments amounted to $82.4 million in Canada and $ 90 million in the US. All these investments were broken down into two main parts namely new and follow-on. The new ones represented those investing for the first time while the other made a subsequent investment in their original business. These investments are split into two categories whereby in Canada there are +23 new and +21 follow-on while in the US there are +25 new and +21 follow-on. As investment matured, there was a natural shift, which resulted in an increase in follow-on investments (Global Advantage Consulting Group 12). Canada recorded an increase in the investments as many investors showed an interest in investigating in the locations in this state (Collins and Harrison 3).
Typical Return on Investment for Sidecar Funds
From the survey done, the total investment from the companies in Canada and the US was about $1.25M and $1.50M, respectively. From these investments, the companies in the provinces named in this paper made soe returns of a total of $2.101M and $2.502M in Canada and US, respectively, to the investors. This activity is skewed as a company returns more than 50% of the amount invested. Some of the investments recorded positive returns while others had a negative return. This statement is supported by the fact that failures emerge before successes are realized in Sidecar Funds. The total gain on investments was $851K and $890K in Canada and the US respectively while recording an average gain as $142K and $150K, in Canada and the US respectively. Although the data set was small, it was realized that returns in the US skewed with a value more than 50% of exists who never returned the invested capital while less than 10% of the invested funds deals were the primary source of return on investment in the provinces involved (Global Advantage Consulting Group 21). Maryland Venture Fund invests $80 million and makes available $15 million for new investments. Also, Common Angels’ $45 million are set as evergreen funds with the returns being used for other investments. New York Investment Fund records a return on investment of about $2 billion used to fund new investments.
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Cost and Benefit Analysis of Sidecar Funds
In Sidecar Funds, there is an account of the aspect of risk pooling together with intermediation functions that occur when the investors are estimating the cost function of their investment (Cummins et al. 6). For instance, the Canadian firms have access to these financing sources, which result in numerous benefits such as the growth of the areas. Most of the companies enjoy financing success, which has attracted many investors across the world (Lorinc par 2). The investors are able to benefit from these investments as noted in their high return on investment, which means that the members of the affected provinces also benefit. The successes of the projects done are important as they tend to benefit the entire community. The high return on investment also attracts other investors since they can view the region as a potential source of their success.
Advantages and Disadvantages of Sidecar Fund
Sidecar Fund has numerous advantages and disadvantages to all the provinces in Canada and the U.S states. The Maryland Venture, New York Investment Fund, Common Angels, Renaissance Capital Fund, Emerging Technologies Fund and Enterprise Corporation Fund have benefitted the people in these regions. Firstly, the fund acts as the largest source of risk capital at an early stage of any business as it outstrips the venture capital industry regarding investments and dollars involved in the investment. In fact, the funds are the potential sources of external seed to the activities and either start-up or growth funds after the personal and family sources are exhausted. These pools of capital can be invested alongside the regular investment of the group. The investor participates in different activities without the formal membership as the fund acts as a source of portfolio diversification with the aim of complementing the discretionary investments. Another advantage is that those involved in Sidecar Fund network seek to increase the efficiency of their market as they connect with their partners. It helps them to evaluate opportunities and exchange ideas. In return, the investors can make investment decisions (Global Advantage Consulting Group 21).
Apart from these advantages, there are also few disadvantages of these funds. One of them is that they are invisible, and most of them have the desire to protect their existence. Thus, investment details are not documented in a way that can be analyzed easily. It results in a consequence whereby these data limitations lead to the identification of the fund by using imperfect sources. The bias emerges from the fact that there are Sidecar Funds, making small investments compared to those making large investments (Global Advantage Consulting Group 2).
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Investments are vital for the development of any region across the world. However, in some circumstances, the initiators of the business or income generating activities may have limited resources to enhance them to make the profit out of their activities. Thus, with the help of Sidecar Funds, both Canada and the US are able to raise their numbers of investments, which increases the return on these investments. The high number of investments contributes to a large capital in different provinces as the businesses can be run smoothly with the help of funds from investors who may not have original membership in the group. Sidecar Fund acts as a pool of capital for these activities.