VCC Mini-Series Part 1: What is a VCC?

What is a VCC and how can it help me?

Welcome to GreenAngel Energy’s mini-series on Venture Capital Corporations. As you may know, GAE offers investors the opportunity to invest in a number of different VCCs that allow them to reap significant rewards, while investing in innovative technologies that GAE believe show serious promise. The complexity of a VCC however can make it an intimidating investment option for many. We hope to help make a little more sense of it all with this mini-series. We will outline exactly what a VCC is, what the benefits are to the investor, how the VCC has evolved over the years to become a more creditable investment opportunity, and what impact investment in one can have on society as a whole. We hope this three part series helps you better understand VCCs and will allow you to make a better, more educated decision around investing in one.

Part One: What is a VCC?

A VCC is a Venture Capital Corporation and it is a tax-advantaged channel in which an investor can use to strategically place money into early stage companies, helping them get off the ground, or in the case of later stage companies, scale up their operations. It is basically a way to play “angel” with a smaller investment and at more of an arm’s length. However, if getting your hands dirty is something you are looking for in a capital investment then the VCC can also provide this for you as the venture capital firms that manage them often look for some investors who are interested in providing industry expertise in the technology’s field or business mentorship for the often inexperienced entrepreneurs. It really is up to the individual investor and what it is they want from the experience. Furthermore, in British Columbia VCCs can be found for a number of different industries including new media, biotech, medical devices, clean tech, advanced manufacturing, tourism and mining and natural resources, allowing the investor to choose which industry they want to help propel.

A very similar instrument to the VCC we are familiar with British Columbia was first introduced back in the early 1980’s in Quebec as a stimulus type practice to help raise much needs funds for small and medium sized businesses. This venture capital financing was referred as a Labour Sponsored Venture Capital Corporation (LSVCC) (known as an EVCC in British Columbia) and was designed to help small and medium size businesses grow so they could employ more people. This core idea of labour sponsorship is still important to the overall theme of the instrument. According to a recent study conducted by The University of British Columbia and The Ministry of Small Business, Technology and Economic Development titled: An Evaluation of the Venture Capital Program in British Columbia, “companies in the program generated an average of 2.43 new jobs every year. This compares favorably with a broad control sample of BC companies that generated almost no new jobs at all during the sample period. Net job creation remained positive even in the recession years of 2002 and 2008. The vast majority of new jobs were full-time positions”. This type of venture capital financing was introduced in 1985 in BC under the Small Business Venture Capital Act and administered by the Ministry of Small Business and Economic Development.

So how does this all come together?

Venture capital firms (or holding companies) like GreenAngel Energy identify companies they believe have promise and that qualify as eligible for private equity investment from the government’s prospective (since the government will be providing tax credits for the investment in these companies). The venture capital firms then create either a single purpose VCC specifically for one company (like GAE’s Rapid Electric Vehicle VCC) or they aggregate a number of companies into one multipurpose VCC (like GAE’s new GreenAngel Technology VCC). Depending on your personal level of risk you may prefer to diversify your investment by investing in the GreenAngel Technology VCC that will give you exposure to a number of technology firms rather than just one emerging technology. For many, angel investment is something they want to do however the increased risk over more standard, secure investment deters them from making the investment. Investing in an aggregated VCC can often provide the investor with a necessary sense of relief due to its diversification. This, along with the very attractive tax benefits (more in the next chapter: What are the tax benefits of a VCC?), can assist in making the capital investment in a VCC more feasible for many investors.

There are two complex components to investing in a VCC, the first is who is eligible to invest in what types of VCC, and the other is the tax implications. As mentioned above we will address the tax issues in our next installment, eligibility of investors for capital investment in VCCs is simpler however.
It is important to remember that when it comes to investing in VCCs there are two kinds, retail VCCs and non-retail VCCs. The average investor is only able to invest in retail VCCs. A retail VCC is required to produce a prospectus (Link to Investopedia) while a non-retail VCC is not, therefore only accredited investors are qualified to provide venture capital financing to a non-retail VCC. Between 2001 and 2008 in British Columbia about 65% of VCC were non-retail, 16% retail, and 19% mix of both. To see if you qualify as an accredited investor please refer to Mike Volker’s (GreenAngel Energy’s Chairman and Director) website where he outlines what exactly an accredited investor is. The reason for this requirement for non-retail VCCs is that investing in any VCC (even those that are diversified) hold a significant amount of risk and it is crucial that the private equity investor understand, to the best of their ability, this inherent risk when they make their investment. At least with a prospectus an investor can get some access to financial data and management expectations for the future. Allowing only accredited investors to invest in non-retail VCC’s is one strategy for government regulators to mitigate any serious financial distress that may come about from a less educated investor making an investment decision that is not in line with their risk/return profile. Like any investment, the risk/return relationship is the most important component of the deal. Investing in a VCC is risky, however with great risk can come great reward and for many investors, investing in a VCC has provided them with returns beyond what could be observed in regular markets. For the right investor, VCCs can be highly lucrative from a financial return and tax benefit prospective, as well as a great way to invest in future technologies.

We hope this introduction to VCCs has been helpful. Please stay tuned for our next installment coming shortly discussing the tax benefits of investing in a VCC, as well as the impact the angel capital investment makes on society.