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If you’ve been hearing more about angel investing lately, you’re not alone. Because of widespread digitization, the process of starting a company has changed dramatically in the past 15 years. The time and costs related to developing a tech product — even one with significant potential consumer appeal — have dropped, as has the amount of seed money needed to get a company off the ground.
That’s where angel investors come in. They’re typically experienced entrepreneurs willing to provide somewhere between $10,000 and $2 million to finance an early-stage company. They’re comfortable with risk, and have plenty of advice to share.
We talked to a group of angel investors, and the organization that’s helping them, about the state of angel investing in Canada, and what can be done to spur more of it. Here are some takeaways:
Angel investors fill a critical funding gap.
As many as 9 in 10 startups fail, according to some estimates. And for those that don’t, survival isn’t assured. Around half of Canadian firms with up to four employees post zero or negative growth, the Business Development Bank of Canada says. In starting a business, entrepreneurs typically use their own funds, or rely on support from family and friends. But when the demands of scaling-up mean that’s no longer enough, many find it difficult to access external financing, or are too small to catch the interest of venture-capital investors.
In Canada, they’re getting more help from angels. Angel groups made investments totaling $134 million last year, up 48% from 2014, according to the National Angel Capital Organization. That’s a good sign, because venture-capital investment in the country continues to favour later-stage companies. NACO, which represents some 2,000 investors and 32 formal angel groups, is at the forefront of efforts to foster angel investing in Canada.
The growth of the industry comes at a critical time for Canada: the number of people starting businesses is growing. Early-stage entrepreneurs made up some 14.7% of the population aged 18–64 last year — putting Canada ahead of the U.S. and Australia when it comes to the rate of early-stage entrepreneurship, according to the Global Entrepreneurship Monitor’s 2015 report on Canada.
Angels provide more than money.
The angels we spoke to say mentorship is a key motivation. In many cases, they created their wealth, retired and now want to give back. They’re looking for a return, sure, but are often animated by something more. As Gil Penchina, a U.S.-based angel who’s had a hand in companies ranging from eBay to Indiegogo, notes, many are enthusiasts who want to help fellow entrepreneurs.
Early-stage companies can benefit from the experience, and business networks, an angel investor brings. That’s especially helpful given what many entrepreneurs say is a dearth of scale-up talent in Canada.
In providing more than money, angel investors are also contributing to the development of local economies. The Northern Ontario Angels, for instance, focus on connecting angel investors and businesses with the aim of boosting growth in that region.
The time is right.
Canada has a robust early-stage ecosystem. Several Canadian universities have set up technology incubators — and they’re attracting global recognition. The country’s Industrial Research Assistance Program provides a range of services to innovative businesses — including grants to help firms commercialize technology products or build digital skills. Canada’s R&D tax incentive program is also a plus.
These factors make for some pretty fertile grounds for the growing angel investor industry. In terms of headcount, Canada’s angel population is three times bigger than its venture-capital sector, and it already invests in 27 times more startups than venture capital firms do, NACO says.
Angels need support too.
NACO is trying to build up the angel community. It says more could be done to “professionalize” the group, through education and coordination.
But angels say Ottawa can help, by providing more incentives to boost the pool of investment capital. NACO would also like to see a refundable federal tax credit for investments in startup ventures. British Columbia has one — and the province provided some $26 million to startups in 2014 because angels invested $86 million in eligible businesses.
Another idea: Ottawa should create funds to co-invest with angels. Quebec’s government has done something like this in its support for Anges Québec, that province’s main angel group.
Yet another wish: changing the tax regime to allow angels to take accelerated write-offs on their investments, instead of making them wait for years as they do now. That, angels say, would free up capital for other early-stage investments.
Sources:
https://www.bdc.ca/en/Documents/analysis_research/challenges-winning-strategies.pdf
http://www.nacocanada.com/wp-content/uploads/2016/08/NACO_Insights_Aug2016.pdf
http://boastcapital.com/everything-you-need-to-know-about-irap-funding/
http://www.nacocanada.com/the-top-four-benefits-of-angel-investment/
http://thecis.ca/wp-content/uploads/2016/04/GEM-Canada-Report-5.2015.pdf
Carolyn King researches and writes the Thought Leadership team’s daily news feed. Before joining RBC, she spent two decades as a business journalist in Toronto, most recently serving as The Wall Street Journal’s deputy bureau chief for Canada.
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