1.1 The Role of Angel Investors in the Entrepreneurial Ecosystem INTRODUCTION
Angel investors are a key driver in the entrepre- neurial ecosystem, investing at the start of the entrepreneurial pipeline in new and emerging companies. Alongside their capital, angel inves- tors draw upon their experience as entrepreneurs, business managers and business professionals to contribute their knowledge and expertise, networks and psychological and emotional support to their investee businesses. Angel investors help to build client relationships, leveraging their established business networks, all of which contributes to the ability of entrepreneurs to more rapidly scale their operations. Indeed, this non-financial support can be as significant as the capital that they invest. Angel investors are the main source of seed stage capital, investing relatively small amounts in com- panies at their start-up and early growth stages. As such, they play a complementary role to that of the venture capital industry. This has two dimensions. First, angel investors are often the first investors in businesses that go on to raise larger amounts from venture capital funds and participate in innovation and commercialization programs to scale-up their operations. This fund- ing model has been seen as being analogous to a relay race: “angel investment runs the critical first leg of the relay race, passing the baton to venture capital only after a company has begun to find its stride. Venture capitalists focus on expan- sion and later stages of development, when their contribution ismost effective.” 1 Prominent Canadian entrepreneurial successes that have followed this funding pattern include Shopify inOttawa, Solium in Calgary, Skip The Dishes in Saskatoon, Blackber-
ry in Kitchener-Waterloo, Verafin in St John’s, and Enthusiast Gaming in Toronto. Second, angels invest in startups that, while sustainable from an investment perspective, may not be engaged in leading edge innovation and hence do not offer the prospects of sufficiently rapid growth to attract investment from venture capital funds. Nevertheless, in many cases, these angel-backed businesses may provide attractive growth oppor- tunities for larger companies through strategic acquisitions, partnerships, and other arrangements. However, angel investing often occurs under the radar and therefore is not identified and captured by data gathering organizations. The consequence is that the critical role of angel investors in the en- trepreneurial ecosystem is not given the attention that their significance warrants. Angel investors are largely an invisible population, mostly investing informally, resulting in uncertainty about the size of the angel investor population. Estimates of the number of angel investors in Canada vary between 20,000 and 50,000. 2 However, over the past two decades many angels have recognized the benefits of investing together. This has led to the emer- gence of angel groups in which individual angel investors frequently invest together in the same businesses. There is no standardmodel, but typically angel groups will have a manager (either one of the members or a hired professional) to coordi- nate the investment process, undertake the initial screening of investment opportunities and coordi- nate investor engagement, but with the individual members of the group making their own decisions whether or not to invest in specific businesses.
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ANNUAL REPORT ON ANGEL INVESTING IN CANADA
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