The biggest challenge for angel investor groups in Canada is a lack of resources needed to vet and mentor companies, according to a report from the National Angel Capital Organization (NACO).
“A vibrant angel market has positive impacts on the wider entrepreneurial ecosystem.”
The report, released last week, was based on a survey of 32 active angel investment groups across Canada, assessing investment activity in the country. Overall, the report found angel investment groups made 583 investments, amounting to over $142.8 million in early-stage capital being deployed across the country, in 2018.
“Angel group leaders are in favour of further initiatives by the federal and provincial governments to support angel investing,” the report said. “A thriving angel market is required to seed businesses that will go on to seek larger follow-on investments from VC funds, many of which themselves are supported by government programs.”
The report revealed its findings just as it came to light that the Ontario government cut all funding to Angel Investors Ontario (AIO), a public and privately funded organization mandated to support Ontario angel groups. Most of the funding the provincial government was providing went to cover overhead operational costs for the organization’s members, including hiring staff to manage deal flow, organizing events, or helping facilitate investments.
NACO’s report identified three main challenges for angel investor groups. For some, the report found the biggest challenge is a lack of resources to perform due diligence on the businesses seeking finance while also providing mentoring, support, and guidance to the potential businesses they have selected to be put forward to investors.
A significant proportion of financial support for angel groups’ operating expenses involve advising entrepreneurs seeking finance to enable them to become investment ready and the mentoring of new angel investors, the report said. These costs can’t be recovered from the entrepreneurs, so they have to be absorbed by the groups.
In other cases, their key challenge is to attract more angels, and in a smaller number of cases, particularly in less urban communities, the key challenge is the lack of quality investment opportunities.
“A vibrant angel market has positive impacts on the wider entrepreneurial ecosystem. A weak angel market will impact negatively on the wider entrepreneurial ecosystem,” the report said. “This could potentially compromise the effectiveness of other government programs.”
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The report also found a new trend emerged last year around syndicate deals. Syndicate deals more than doubled since 2015, with investments in 2018 amounting to $262.7 million. This trend was correlated with the evolution of the angel investment asset-class in Canada over the past 10 years. Larger syndicated deals and follow-on investments generally fell between $500,000 to $3 million in funding.
Syndicate investments may continue on trend in 2019 as it was recently announced that Jess Joss of York Angels will be acting as CEO of a new alliance of three angel groups, the Golden Triangle Angel Network, Angel One Investor Network, and Southwestern Ontario Angels.
The report also noted that angel capital plays a critical role in the bridge financing stage of the innovation ecosystem allowing scaling companies to focus on building their businesses and avoid early exits.
“In their approach to the angel market, it is important that policy-makers do not adopt a silo approach,” the report said.
Read the full report here