C HAPTER 6: T HE S YNERGY B ETWEEN A NGEL N ETWORKS A ND C ORPORATE V ENTURING
Nonetheless, disbursements levels in Canada were down 35% from $3.8 billion CDN in 2001. This lower level of activity suggests that venture investors are still being impacted by lower stock market valuations, an uncertain economy, and higher market risk which ultimately lead to fewer exit opportunities. Consequently, Canadian angels are likely to face on-going difficulties, despite the recent signs of improvements, and to remain very cautious with new investments. ANGEL NETWORKS TO DIVERSIFY AND DE-RISK If angels are unable to realize necessary returns, they will be unable to fulfill their critical role. For Canadian angels, the pain is real because tax laws prohibit them from writing off the investment without disposing of the equity stake. With the appropriate change in government policy, Canadian angels could at least write off capital losses during down-rounds. Consequently, angels need to explore other ways to improve the opportunity for returns in the current economic climate. In particular, they must guard against excessive dilution, additional down-round valuations and high-risk bets. If, however, angels can focus on investment diversification through networking amongst themselves, their investment risk may be reduced. Small local angel networks in Canada, such as Ottawa’s Band of Scoundrels and the Purple Angels, and larger groups, including the recently established National Angel Organization, have emerged to provide a framework for simplifying, diversifying and reducing the risks inherent in early-stage investment opportunities. California’s Band of Angels is a popular and oft-cited example of a long-running and successful angel group. The group consists of about 150 semi-retired Silicon Valley executives and is regarded as the benchmark for such organizations. Since its founding in 1995, the Band has invested an estimated $75 million of its members' money in over 100 companies. Angel networks can achieve scale and benefits that couldn’t possibly be achieved by a single angel. That being said, negative market pressures may still force nascent angel networks to co-partner with venture capitalists, and in particular, corporate venture capitalists. NEW SYNERGY BETWEEN ANGELS AND CORPORATE VENTURE CAPITALISTS (CVCs) There are major advantages to angel networks in partnering with corporate venture organizations. First, angels can obtain insight into growth markets and corporate spending, which is especially important in periods of reduced capital expenditure. Angel networks must have insight into growth markets and corporate spending to make better investment decisions. This is particularly true in the current economic cycle of reduced capital expenditures, with investors tending to favour traditional technology suppliers over start-ups, due to the latters’ questionable long-term viability. Corporate venture capitalists, in particular, are in a unique position to see where demand will materialize, since they are familiar with their firm’s two-to-three year technology capital expenditure roadmap. Consequently, a CVC can anticipate where real demand will occur and what problems can
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