CEO of one Canadian VC fund reported that they were spending two days a week supporting 8 portfolio companies, compared with one day a week before the crisis. The implication for angel investors is that the companies in their own portfolios that need to raise follow-on funding from VC funds may not be able to do so, requiring either more angel support or a sub-optimal exit that will generate low returns. Second, VC frms are reducing their valuations, with investment terms and conditions that are shifting in favour of investors. Investments that angel investors made before the onset of the pandemic will see a reduction in their valuations, with negative implications for follow-on fnancing from VC funds. It is likely that future investments will be ‘down-rounds’ which see a decline in market valuation. This scenario raises the possibility of a repeat of the post-2000 dotcom crash in which many angel investors saw their investments wiped out by the predatory behaviour of VCs, driving many angels out of the market. Third, there will be fewer opportunities to exit, and exits which do occur will be at a lower valuation. This will limit the scale of entrepreneurial recycling of capital – a process where cashed-out entrepreneurs become angel investors. In this scenario, the amount invested will be reduced, and angels will have fewer and smaller exits, reducing the capital they have to re-invest. Fourth, some angel groups have announced that they will continue to make new investments. But the likelihood is that most angels will seek to support existing companies rather than making new investments. Finally, the signifcant decline in fnancial markets will reduce the wealth and number of accredited investors. This decline will reduce the discretionary capital available for angel investing. It is therefore likely that there will be less angel fnancing for early-stage entrepreneurial startups. This fnancing constraint will mean fewer innovative start-ups and a less ability to scale-up successful new businesses.
What Should Government Do?
Governments around the world have introduced a wide variety of support measures for the small business sector to help them preserve cash. These efforts include: providing loans and guarantees, both directly though state agencies and through banks; subsidizing employee costs; and deferring taxes and social security payments. These interventions are focused on preventing a cascade of business closures during the immediate crisis as businesses
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