Some angel groups have also established sidecar funds that invest alongside the group. This gives members greater opportunity for diversification by enabling them to invest in deals that they do not invest in on an individual basis. It is also a vehicle to attract investors who do not want the respon- sibility of making their own investment decisions. Sidecar funds also enable entrepreneurs to raise larger amounts. 3 This is a very important trend, as angel funds allow capital to be pooled, larger deals to be funded, increases the sophistication of due diligence, and brings efficiency to portfolio management. These developments may attract increased investment from a broader range of community participants. The emergence and expansion in the number of angel groups reflects the need for greater financial resources to make larger investments, including follow-on investments, as venture capi- tal funds have shifted their focus to larger invest- ments. This has been the driver for many angels to band together to create the ‘pooled resources’ needed to make both sizable initial investments and follow-on investments. By having the ability to ‘follow their capital’ it also reduces their vulnera- bility – as early investors – to dilution should their investee businesses need to raise further finance from venture capital funds. An additional driver of angel group expansion is the opportunity for individual angels to spread their investments more widely and thereby achieve greater diversification (which, in turn, minimizes the risk of poor returns 4 ), and to access group skills and knowledge to evaluate investment opportunities andprovidemoreeffectivepost-investment support. Angel groups also offer the attraction of superior deal flow and the opportunity to learn from more experienced investors. Moreover, angel groups have been able to develop efficient routines
for handling investment enquiries and screening opportunities and standardized investment doc- uments. Angel groups are also attractive to high net worth individuals who want to invest in emerging companies but lack the time, referral sources, investment skills or the ability to add value. Indeed, some angel groups have a core-periphery model comprising an active core group of angels who drive the investment process, with the outer core only being invited to invest, on a ‘take-it or leave-it’ basis, in those deals that the core group has decided to invest in. Angel groups also reduce sources of inefficiency in the angel market; in con- trast to invisibility of most solo angels, the visibility of angel groups enables entrepreneurs to approach them directly. An important outcome of the visibility of angel groups and their organization into industry asso- ciations, such as NACO, is that it is now possible to track developments in angel investment activity, which allows for the compiling of statistics to predict and shape future trends and priorities. Although it is likely that the invisible, unorganized market con- tinues to dominate in numerical terms (number of angels, number of investments), angel groups are now a major source of entrepreneurial finance in terms of the amounts invested, increasingly mak- ing investments of up to $500,000 and beyond that were previously the prerogative of venture capital funds. This report is the 10th annual report conducted by the National Angel Capital Organiza- tion. By highlighting both the investment activity of angel groups in 2019 and year-on-year investment trends this report provides unique insights into angel investment trends in Canada that emphasiz- es the importance of angel investing in supporting Canadian entrepreneurs.
1 Benjamin, G. A. and Margulis, J. B. (2000) Angel Financing: How to Find and Invest in Private Equity. Wiley, New York. 2 Gregson, G (2018) Critical Perspectives on Small and Medium-Sized Enterprise (SME) Funding in Canada, NACO. 3 See Gregson (2018) op. cit (note 3), page 65. 4 Gregson, G, Bock, AJ & Harrison, RT 2017, ‘A review and simulation of business angel investment returns’ Venture Capital: an international journal of entrepreneurial finance, 19 (4), 285-311.
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ANNUAL REPORT ON ANGEL INVESTING IN CANADA
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