Written by Gerard Buckley with Hilary Green
In the shadows of Bay Street, Canada’s established financial district, and communities across Canada, Canada’s newest entrepreneurs are feeling the impact of new funding. Partnering with innovators since early 2000 and looking for tomorrow’s next billion-dollar company, Angel Networks in Canada and members of Accredited Investors have invested personal funds and created further financing opportunities for these promising young founders. These accredited investors are usually people who are looking to give back to the community and help budding entrepreneurs achieve their goals, with an expectation for a positive return on investment.
Angel investing – The who, what, when, why, where and how?
When asking if Angel investors are an important contributor to capital formation in Canada, the questions are Who, What, When, Why, Where and How. However, it is first important to clear up a few contrived and distributed myths.
Angels are not people who do small venture capital (VC) deals. They are not people who donate their money to entrepreneurs, nor are they waiting for crowdfunding to be enacted to find investment opportunities, and they are surely not people who give their money to fee-based investment advisors and venture capitalists.
Who: An angel investor is a high net-worth individual or accredited investor who invests their personal money in the early stages of a business in the form of equity (convertible debt, common or preferred shares). This financing enables the company to develop a product, build a business model, develop a go-to market strategy, accelerate its growth, etc.
The profile of the average angel investor in the U.S. is: nine years investing, 10 investments made, two exits, 14.5 years as an entrepreneur, 2.7 ventures founded, 57 years of age, invest 10 per cent of their net worth in angel deals and has a master’s degree.[1]
Although comparable data has not been collected in Canada, we can assume the profile to be similar. However, it is clear based on anecdotal evidence that this average age of an angel investor has decreased in the last several years. I can report in our own angel group, we are seeing several members who are less than 35 years old. Therefore, the effect of company exits is having an influence as these young founders are walking the talk and paying it forward as angel investors themselves.
What: An angel investor is usually an active investor who would like to get engaged with a business and its founders as a mentor, coach, or advisor. Angels have both free time and access to investable capital. They have most likely come to this position as a result of an exit from a company they built, or a rewarding career as an executive in a large multinational corporation. They represent many walks of life, from entrepreneurs who have sold their businesses, university professors, and PhD holders, to retired executives, capital market and investment professionals. The common ground is that they all have a passion for youth, innovation and entrepreneurialism.
When: An angel investor is often the first professional investment a founder attracts after they have either bootstrapped the business, attracted investment from family and friends, or received government grants. The angel round or seed round of investment, which often ranges from $200,000 to $1.5 million, can come in multiple tranches or investment rounds. The angel generally invests prior to a Series “A” Financing, and tends to leave raises above $2 million to boutique investment dealers and venture capitalists.
Why: From an angel investor’s perspective, there are many advantages to this asset class, including: qualified investment opportunities, opportunity referral, capital diversification, seeking higher returns, more favourable valuation and terms, and networking. Other advantages include company mentoring and engagement, participation on the advisory board, board of director roles, and so on.
Where: There are many angel investors in Canada, and many more in other countries; however, over 85 per cent are individual investors, many investing in one venture their entire life. Some angels are organized into networks such as Maple Leaf Angels in Toronto, while other angels meet companies online through platforms such as Angel List and The Funders’ Club.
How: A founder or entrepreneur will network with angels through the various ecosystem events that occur. They may also work with the staff of the over 30 private and not for profit angel groups in Canada. The entrepreneur will then go through an application process that will place them in front of an investment review committee with the intention of presenting to the network’s membership at a regularly held investment meeting. This is where interested angels come forth and start a process of volunteer due-diligence that culminates in the angels either offering a company a term sheet, or passing on the investment.
Angel Groups: Helping Entrepreneurs and Angels Succeed
Angel groups provide entrepreneurs with big advantages. They can hone their presentation skills, get support from government, and pitch to a captive audience without having to find these angels individually. When the company is selected for investment, other benefits accrue such as mentorship, and experienced investors stepping forward to sit on their board of directors. Plus, a great advantage of angel investment is the value proposition for the entrepreneur.
The industries that angels invest in are diverse; however, they tend to cluster in technology, life sciences, information communication tech, healthcare, and financial tech, which are industries that easily scalable. I frequently hear entrepreneurs state that that the connections and industry experience of the angel are often more important than the money they invest. By connecting investment, experience and a network of partners, angel groups enable high potential companies to grow and realize their goals.
For accredited investors, angel groups provide an opportunity for members to collaborate and provide valued mentorship and acceleration to startups and growth companies in Canada. Angel investment is growing in Canada with over 30 angel groups representing over 2,100 investors active across the country. Extrapolating OECD data, in 2012, the National Angel Capital Organization estimated angels invest over $1 billion in early stage companies in Canada.[2]
Federal and provincial government programs also support angel groups. For example, there’s FedDev Ontario’s Investing in Business Innovation program, National Research Council Industrial Research Assistant Program grants, and various provincial government development agencies with funding and tax incentives across Canada. These programs provide both operational funding to angel groups and matching funds for investments made by the groups. In Canada, less than five per cent of applications to angel networks get funded, so it is a quality versus. quantity game.[3]
The angel investment arena is in a constant state of change as a result of improvements in tech, the consolidation of accelerators, and the introduction of new regulatory measures such as crowdfunding exemptions. For angels, the landscape is a competitive one – they have to be more responsive to entrepreneurs and ensure they have a unique value proposition to offer founders and startups alike. As a result, the strategies of various angel groups are evolving to respond.
Maple Leaf Angels Corporation is Canada’s first not-for-profit corporation, and the only angel group, to be registered as an exempt market dealer with a Securities Regulator in Canada. In addition to its ongoing operations, Maple Leaf Angels has a strategy for member diversification, and is helping to drive investment in women-led businesses. Every fall, Maple Leaf Angels hosts a women-led investment event in partnership with Women in Capital Markets and CanWIT, where companies led by female founders have an opportunity to present to investors.
More information can be found at www.mapleleafangels.com
[1] Angel Resource Institute Source: Wiltbank Study 2007
[2] NACO 2012 Canadian Angel Survey
[3] NACO 2013 Canadian Angel Survey
By way of disclosure I am Chairperson, The Board of Directors; Maple Leaf Angels Corporation and CEO and Founder of Jaguar Capital, a commercially based advisory practice to growth companies.
