1.4 The Impact of the COVID-19 Economic Crisis on Angel Investment Activity INTRODUCTION
This report highlights the vital role that angel investors play as the dominant investors in start- ups. But it refers to a world that no longer exists. As the OECD observes, the COVID-19 pandemic has triggered the most severe economic reces- sion in nearly a century and is causing enormous damage to people’s health, jobs and well-being. 7 It projects that Canada’s annual output will shrink by 8% if recovery is uninterrupted and by 9.4% in 2020 in the event of a second virus outbreak and related shutdown. The rebound will not be dynamic enough for output to attain pre-COVID-19 levels by the end of 2021 under either scenario. 8 The recovery will be driven to a great extent by high growth, equity-backed startups and scale-ups. The disruptions that economic crises cause to existing markets catalyzes innovation by creating an environment for entrepreneurs to launch new products, services and business models. Many successful companies are created in such times. For example, companies started during the 2008/09 recession include WhatsApp, Slack, Airbnb, Stripe, Uber, Waymo, Pinterest and Git Hub. It is therefore critical that angels continue to invest. However, the early evidence that is emerging from North America and Europe suggest that the COVID-19 economic crisis will result in a decline in both angel and venture capital investment activity in the short and medium term, with potentially sig- nificant adverse impacts on entrepreneurial activity.
Five developments seem likely, the combined effect of which will be to reduce angel investment activi- ty over the next 12-24 months. 9 First, most venture capital firms are expected to focus on their existing portfolios, both to extend the financial runway of those firms that they consider to be worth support- ing and because of concerns about their own ability to raise further finance from their Limited Partners. Moreover, they will also need to spend more time supporting the companies in their portfolios and hence will not have the bandwidth to consider new investments. The implication for angel investors is that the investee companies in their own portfolios that need to raise follow-on funding from venture capital funds to scale-up may not be able to do so. This would require the angels to either support their investee companies for longer or to seek a sub-optimal lower return exit, and hence reducing the financial gain available for recycling back into the entrepreneurial ecosystem. Second, some venture capital firms are reducing their valuations, with terms and conditions that have traditionally favoured entrepreneurs now shifting investment in favour of investors. Other in- vestors have expressed an increased focus on the “flight to safety” with lower risk investments attract- ing more attention. This implies that investments made before the onset of the crisis may see a re- duction in their valuation. Some entrepreneurs will
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ANNUAL REPORT ON ANGEL INVESTING IN CANADA
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