NACO report finds SAFEs on the rise in angel investment during record-breaking 2021

Following pandemic dip, Canadian angel investment activity more than doubled.

In 2021, Canadian angel investment and the demand for it rose, according to the National Angel Capital Organization’s (NACO) latest annual report.

The increase in demand came as angel investment surpassed 2019 levels, reaching a record $262 million in 2021, according to the report, the full version of which was released today.

In 2021, Canada saw its “highest recorded participation from women angel investors to date.”
 

This figure is more than double the $103 million in angel investment Canada saw in 2020, as the early-stage investment segment rebounded from a pandemic low fuelled by market uncertainty.

Meanwhile, angel organizations reporting deal flow information received 7,753 approaches from companies for investment last year—an 18 percent increase since 2020, and more than every other year since 2015, excluding 2017.

NACO also found that in 2021, angel organizations reported facing a number of problems, from lacking administrative capacity, to difficulty finding members willing to take on the lead investor role, and a lack of exits, which are necessary to maintain investor enthusiasm and provide capital to support new investments.

According to angel organizations surveyed by NACO, the shift to online events during the pandemic made it more difficult for some organizations to raise sponsorship dollars and recruit new members.

To help address these issues, NACO is calling on governments to do three things: step in and help support the operational costs of angel organizations; create more co-investment funds that invest alongside angel organizations; and offer “carefully designed” tax incentives to encourage more angel investment.

NACO has previously received federal funding as it looks to expand its presence across Canada, including in Atlantic Canada, Alberta, and the Yukon.

Founded in 2002, NACO is Canada’s professional association for angel investors, comprising 4,200 angel investors, 50 incubators and accelerators, and 45 angel groups across the country. During the last 12 years—the period that NACO has been tracking angel investing across the Canadian innovation ecosystem—$1.38 billion has been invested across the country into 2,000 companies.

RELATED: NACO reports angel investment in Canada hit record $262 million in 2021

NACO previously shared highlights from its 2022 report in June, noting that the number of angel investments in the country in 2021 increased 53 percent year-over-year, as angel organizations facilitated 635 investments, up from 416 in 2020.

Notably, the gender balance of Canada’s angel investing landscape shifted last year, as women now comprise 27 percent of the members of Canadian angel organizations. That marks a 13 percent increase compared to 2020, and 60 percent rise relative to 2019 and 2018.

NACO found that in 2021, Canada saw its “highest recorded participation from women angel investors to date,” noting that it also saw a rise in new organizations focused on women investors and other under-served groups.

Overall, NACO saw a sharp increase in investment activity from Q1 to Q2, followed by a slight drop in Q3 and a slight rise in deal activity during Q4. From a sector standpoint, information and communication technology (ICT) companies garnered the largest individual share of investments, followed by firms in the life sciences space.

RELATED: New report shows drop in angel investment during COVID-19 pandemic

According to NACO, the most active angel organizations last year were based in Ontario and Québec. Smaller groups made fewer investments than larger ones.

Geographically speaking, Ontario and Québec received 67 percent of 2021 investments, while Atlantic Canada saw five percent, Western Canada drove 27 percent, and the Yukon led one percent.

The NACO report found that investment size and valuations dropped in 2021. Median investment size last year was $84,000, down from $100,000 in 2020. The median valuation was $5 million, a bit lower than the $6 million it was in 2020, but the same as in 2019.

Meanwhile, follow-on investments only accounted for a fifth of the total amount invested, illustrating a shift away from concentrating on existing portfolio companies during COVID-19 uncertainty back towards new investments. The report also found the use of preferred shares and simple agreements for future equity (SAFEs) continued to increase in 2021, comprising 35 and 15 percent of deals, respectively.

RELATED: Venture investment returning to pre-pandemic levels, shows Q2 2022 CVCA report

NACO’s latest report is based on information provided by 31 angel organizations, supplemented with publicly available data on the investments of 10 organizations that did not respond to a request to provide this information.

As angel investors are often independent, individual investors who make “below the radar” investments, and thus difficult to identify, NACO’s analysis of angel investment activity is restricted to investments made in “the visible market” by angel investors who are members of structured angel organizations. NACO considers as angel organizations as angel groups, family offices, special purpose vehicles, and early-stage funds.

While angel investing activity has bounced back since the pandemic’s early days, amid worsening economic conditions driven by rising inflation, interest rates, and geopolitical tension, the sector could face further challenges in 2022.

Venture capital investment in the country has already fallen in recent months. While the effect this will have on angel investment “remains unclear,” states the report, NACO deems it “inevitable” that this trend will have some impact on angel investing activity.

Feature image courtesy Unsplash. Photo by Rose Butler.

Josh Scott

Josh Scott

Josh Scott is a BetaKit reporter focused on telling and breaking Canadian tech and innovation stories. His coverage is more complete than his moustache.

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