2015 Report on Angel Investing Activity in Canada - NACO Canada

2015

Report on Angel Investing Activity in Canada Scaling Up Angel Capital To Drive Canadian Innovation

Released July 2016

Authors

Project Steering Committee

Colin Mason Adam Smith Business School, University of Glasgow, Scotland UK; and Visiting Scholar, Sobey School of Business, Saint Mary’s University, Halifax, Nova Scotia. Colin is the lead author of this report.

Christina Adam, Innovation, Science, and Economic Development Canada

Farhan Zia National Angel Capital Organization Farhan undertook the data analysis and prepared the tables and figures for this report.

Pawan Agnihotri, National Angel Capital Organization Melissa Dodaro, National Angel Capital Organization Shane Dolan, Innovation, Science, and Economic Development Canada Karen Grant, Angel One Investor Network Erika Kurczyn, BDC Capital Sarah Lubik, Simon Fraser University Yuri Navarro, National Angel Capital Organization Jeri Ross, KPMG Enterprise Jim Valerio, Innovation, Science, and Economic Development Canada

Acknowledgments The authors and NACO wish to thank the members of the Project Steering Committee for their advice, direction, time and feedback during formative drafts of the report. Special thanks go to the Angel group managers who volunteered their valuable time and effort in providing the data for the major part of the report – without them there would be no activity to report.

This report was made possible with the financial contributions from:

The Value of Angels In Canada’s Innovation Funding Continuum The National Angel Capital Organization (NACO) is the national industry association championing the development of Angel investing in Canada. We are dedicated to promoting successful and efficient Angel investing to scale up companies. Early-stage capital investment directly supports entrepreneurs across Canada – creating jobs, accelerating wealth creation, and improving the national economy – with Angels filling the gap in the funding continuum between “friends and family” seed capital and the larger-scale investments made by venture capitalists. Collaboration and informed decision-making within private risk capital markets is critical to increasing the number of successful startups and entrepreneurs. We are pleased to present our sixth annual Report on Angel Investing Activity in Canada. Over the last 6 years, this report has captured details of 995 investments in 635 companies totalling more than $403 million. Although this report captures only a fraction of the investment activity accomplished by our more than 2,600 national members, it helps provide a basis for understanding Canada’s Angel community and the broader early stage ecosystem. As the steward of Angel intelligence in Canada, we understand the importance of collecting and disseminating investment research for our members, stakeholders and the innovation community at large. Reports like this help Angel investors and others to benchmark success, learn best practices, recognize leaders within our community, and provide policymakers with important data to make informed decisions. There’s no way of knowing how many Angel investors actually exist in Canada; yet through their financial, intellectual and network capital; their mentorship and their follow-on funding; Angels are critical to the ability of startups to scale their businesses up and contribute to Canada’s economic prosperity. Angels can often operate as “lone wolves,” without the benefit of basic materials and information on early stage investing. At NACO, our mission is to professionalize national Angel investment by providing these investors access to tools, resources and networks that will advance our community. The resulting co-investment, education, transparency and development of Canadian Angel best practices will strengthen the early stage ecosystem and help build the next generation of successful Canadian companies. We would like to acknowledge the efforts of all who contributed to this year’s report – including members of the project Steering Committee, our partners who have supported this initiative, and the Angel group managers who have taken the time to share their data with us. Without their collaboration, cooperation and investment, this report would not be possible. On behalf of NACO, we hope you enjoy learning more about our community and encourage you to participate in future research initiatives as we work to improve the power of Canada’s Angel and early stage investment community.

Ian Bandeen Co-Chair, NACO Board of Directors

Bev Tudhope Co-Chair, NACO Board of Directors

2015 Report on Angel Investing Activity in Canada | 3

4 | 2015 Report on Angel Investing Activity in Canada

Table of Contents Executive Summary

6

1. Introduction

10

2. Angel Group Characteristics

12

3. Investment Activity in 2015

18

4. Investment Trends

22

5. Exits in 2015

39

6. Angel Group Best Practices and Challenges

40

7. Conclusion

42

Annex 1: Survey Glossary

45

Annex 2: Survey Data Tables

46

Annex 3: Top Canadian Angel Groups

50

Annex 4: 2015 Report Steering Committee

54


Executive Summary This is the sixth annual Report on Angel Investment Activity in Canada. It is based on information provided by the managers of 32 Angel groups, out of 40 that were approached. Twenty-four of these groups also participated in the 2014 survey. Five of the eight new groups had been established in the past five years. The survey collected information on three topics: on the Angel groups themselves; on the investments that they made in 2015 (which, in turn, enabled a comparison with previous years); and exits from past investments that occurred in 2015. The members of the 32 Angel groups that responded had made a total of 283 investments in 2015, investing just over $133 million.

Angel Group Characteristics and Investment Activity Angel groups are now a fairly well established part of the Canadian entrepreneurial ecosystem, with 21 (72%) established for five or more years. However, new groups continue to be created: six respondents have been operating for three years or less. Angel groups in Canada are organized in a variety of ways. A majority (67%) report being organized as notfor-profit corporations, with the next most common form being for-profit corporations (20%). Groups ranged in size from less than 10 members to over 100 members.


Just over one-third of groups (11) were free to join, with the remainder (18) charging for membership. A majority of groups also had other sources of revenue, notably sponsorship (60%), the federal government (47%), and provincial governments (43%). Investment activity among the Angel groups surveyed was skewed, with a minority of groups making the majority of investments. Just one Angel group (3%) did not make any investments in 2015, a decline from previous years (14% in 2013, 17% in 2014) while the proportion of groups making 10 or more investments in 2015 was higher than in each of the previous three years. Comparing the 24 groups that provided data in both 2014 and 2015 confirms that the Angel market was significantly more buoyant in 2015 than in 2014. Although their total membership declined by 2%, active membership (members who made at least one investment during the year) increased by 22%. Demand for financing increased, with the number of applications for funding increasing by 39% and the number selected for presentation to members increasing by 31%. Investment activity also increased – the number of investments increased by 18% and the amount invested by 27%.

Investment Selection All Angel groups reported having a geographical focus for their investment activity, typically either a region (western, central, eastern), a single province, or in some cases, a region within a province. Thirteen of the 29 groups that provided information also had a sectoral focus. For a few groups this was very narrow, with Information and Communications Technology (ICT) often being favoured. In other cases, certain sectors were excluded (e.g., Services). The 32 Canadian Angel groups that provided survey data received nearly 4,500 applications for financing from businesses in 2015. Just over one-quarter of them were invited to make a presentation to members, and only one-third of the proposals presented attracted interest from Angels. Consequently, just over 400 proposals were subject to due diligence by Angels who were potentially interested in investing. However, 30% of these were rejected, leaving just 283 businesses that were funded. Comparison with 2014 provides further evidence for the buoyancy of the Angel market in 2015. Applications in 2015 numbered 1,500 higher than in 2014, a 50% increase. However, the much greater number of applications in 2015 did not translate into a proportionate increase in investment activity, which only increased by 19% (from 231 to 283 investments).

The proportion of applications that were selected for presentation to investors in 2015 was marginally higher, at 25%, compared to 23% in 2014. However, the funding rate – the proportion of presentations that result in funding – declined from 34% in 2014 to 25% in 2015, while the application success rate – the applications that attracted funding as a proportion of total applications – declined from 8% to 6%.

Investments Trends Investment activity by Canadian Angel groups has increased substantially, albeit erratically, since 2012. Following a more than doubling of the amount invested between 2012 and 2013, investment was virtually stable between 2013 and 2014 (+2% growth). In 2015, investment resumed its upward trend, with over $130 million invested in 2015, a 48% increase on 2014. . The big increase in the amount invested in 2015 was largely accounted for by follow-on investments, which more than doubled over the previous year. The number of investments per year, however, exhibited a rather different pattern, rising 43% between 2012 and 2013, but rising by only 19% in each of the following two years. Investments in the ICT sector have continued to dominate investment activity, as they have for the past four years, in terms of both the number of investments and the total amount invested. However, in 2015, for the first time, ICT’s share of the number of investments


dropped to just 50%. This decline in ICT’s share of investments has not been paralleled in terms of the amount invested in ICT firms: indeed, ICT’s share in the latter regard increased to 55% in 2015. Investment activity was dominated by Central Canada (Ontario and Quebec), which accounted for more than 70% of investments, a proportion identical to 2014. These regional disparities remain when differences in size of population are taken into account. Four of the five most active Angel groups in terms of the dollar amount invested and the number of investments made, were located in Central Canada. Just under half of the groups reported the deal structures of the investments that their members had made. Equity investments dominated (96%). The most frequent instrument was ordinary shares (45%), followed by convertible debentures (28%) and preferred shares (23%). Co-investment is defined as the situation where more than one investor from the same group participates in the same investment. In 2015, 64% of the investments involved co-investments, a proportion that has remained fairly stable over the past four years. Syndication is defined as the situation where Angel group members invest alongside other partners. Only a limited number of responses are available. These suggest that the median amount invested by syndicate partners has ranged between $400,000 and $500,000 per deal. The 2015 figure was $414,000, a decline from 2014.


Mean, or “average” deal sizes – the amounts invested by Angel group members and any external investors – had been rising between 2012 and 2015 but fell back slightly in 2015 to a mean of $1.16 million, with $635,000 as a median value. Valuations were provided for only a minority of investments. The majority of valuations were under $4 million. The valuation of follow-on investments was only slightly higher. ICT and Life Sciences businesses had the highest valuations. The vast majority of investments by Angel groups – more than 90% – were within their home province. However, the trend since 2012 has been for fewer investments to be within their home city. In both 2014 and 2015, fewer than half of all investments were in the same city as the group was based. Angel groups typically invest in small businesses. Consistently, around 70% of investments have been in businesses with 10 or fewer employees at the time of the investment. Close to half – 52% in 2015 – had 1–5 employees. Group managers reported that 68 of their investee businesses had participated in various government programs. However, the high rate of non-response to this question means that the proportion of funded businesses within the total number of Angel investee firms that this represents is unknown. Provincial programs were the most common, followed by the federal government’s Industrial Research Assistance Program (IRAP) and Scientific Research and Experimental Development Tax Incentive Program (SRED).

Collectively, groups had a fairly positive view of the current investment climate for Angel investing in Canada. On a scale of 1 (very poor) to 10 (excellent), the median was 7 and the mean was 6.22 (n=22). There were no obvious commonalities among those groups with either the highest or lowest evaluations.

Conclusion From this survey, four features of the Canadian Angel market need highlighting. •

First, the responses show that Angel groups are now a fairly well established part of the Canadian entrepreneurial ecosystem. Nevertheless, new groups continue to be created. This is important because as groups mature the proportion of followon investments that they make rises. The creation of new angel groups, therefore, increases the availability of new funding.

•

Second, the Angel market in 2015 was particularly buoyant. Both the number of investments made by groups and the amount invested increased substantially in 2015, while the demand also increased.

•

Third, the visible Angel market is increasing in complexity, with growing evidence of syndication involving other types of investors participating alongside Angel investors.

•

Finally, it is important to recognize the significance of successful exit activity. The importance of Angel investing is not the amount invested but the effect of this money (and the hands-on involvement of Angels) in building successful companies. Successful exits are important not only because they indicate that a successful company has been created but also because the wealth that is created can be recycled into new investments.

Exits in 2015 The groups had 13 exits in 2015, all but one of which was an investment made since 2012. Only one exit was a bankruptcy. Four were sold to existing or new shareholders, six were the subject of sales to exiting business, and two exits were IPOs. Exit activity in 2015 was at the same level as 2014.

Angel Group Best Practices and Challenges Follow-up interviews with Angel group managers identified a number of best practices that they believe have contributed to their success. New topics raised in the 2015 survey are the following: •

Dedicated staffing

•

Investor leadership

•

New membership types


1. Introduction It is now well established that Business Angels play a critical role in the entrepreneurial ecosystem. Typically they fund businesses at their startup and early stages of development that are too small to attract the interest of the venture capital industry. Moreover, Angel investment is often “smart money”: most Business Angels have either an entrepreneurial or a senior corporate background and so are able contribute a wide variety of support to their investee businesses, such as mentoring, connections and expertise. Until recently, Angels operated anonymously, investing on their own or in small ad hoc groups. Their investments were largely below the radar. Hence, it was impossible to estimate the scale of Angel investing or trends in investing, with evidence of the types of investments being based on small, unrepresentative samples. Though many Angels still choose to invest on their own, over the past decade, Angels have increasingly recognized the benefits of organizing into formal or semi-formal groups. This offers several advantages – superior deal flow to what they might see on their own, the opportunity to diversify their investment portfolio, access to the expertise of other members


of the group, and the development of professionalized investment routines and procedures. Moreover, the combined financial resources of Angel groups gives them a greater ability to make follow-on investments. This is one of the vulnerabilities of many solo Angels who, by not being able to “follow their money,” risk being diluted by follow-on investors. Meanwhile, the visibility of Angel groups makes it much easier for entrepreneurs to access Angel investment, thereby reducing one of the major weaknesses of the solo Angel era, when the invisibility of both the entrepreneurs seeking financing and the Angels providing the finance meant their search was often unsuccessful. A by-product of the visibility of Angel groups is that it allows statistics on Angel investment activity to be collected from groups, enabling the identification of key trends and statistics in this critical segment of the entrepreneurial finance market. Canada is one of the few countries to have responded to this opportunity. The 2015 Report on Angel Investing Activity in Canada is

the sixth annual report conducted by the National Angel Capital Organization. Comparison with previous years gives a unique insight into Angel investment trends. The survey instrument used for this report can be found at http://www.nacocanada.com/naco-academy/research/. It is modelled on the instrument used in previous years. However, as in previous years, the survey has been modified to enhance our understanding of Angel groups and their investment activity, with new questions added and others dropped.1 The survey questions were grouped into three sections: •

Questions on the characteristics of Angel groups

•

Questions on the investments made by Angel group members

•

Questions on exits from past investments

The survey went out to 40 Angel groups in the first week of January 2016. Each group was asked to complete the survey and then fill out a separate deal report for each deal made in 2015. Six groups were approached for the first time in 2015. Thirty-two groups responded, an 80% response rate. Eight groups completed the survey for the first time. Twenty-four of the 30 groups that had participated in the 2014 survey participated again this year, enabling a year-on-year comparison to be made that eliminates the effects of new respondents. Following the survey, all groups were asked to participate in a follow-up interview. This was to confirm any survey responses that were unclear, address any unanswered questions, collect additional information on reported exits, and explore best practices in Angel investing. Follow-up interviews were conducted with 21 respondents.

1 This was where the question failed to produce meaningful responses.


Table 1 profiles the 32 Angel groups that participated in the 2015 survey. These groups made a total of 283 investments and invested just over $133 million. The report is structured as follows: Section 2 presents Angel group characteristics. Section 3 looks at the sectoral and geographical investment focuses of Angel groups and the “investment funnel,” which tracks the diminishing number of businesses that originally approached the groups at each stage in the investment process.

Section 4 presents an analysis of the investments that Angel groups made in 2015. This core section discusses the number of deals and investment amounts of Angel groups, details on co-investments and syndicated deals, round size, and company valuations.

Section 5 presents the findings from the analysis of reported exits. Section 6 presents a review of the best practices of Angel groups and the challenges that they currently face. This is based on interviews with Angel group managers. Section 7 concludes the report by highlighting four key themes that emerge strongly from the report.

Table 1: The 2015 Angel Group Survey – Participant Overview

Angel Group Characteristics

In 2014 Group Sample (n=24)

New in 2015 Groups (n=8)

Full Sample (n=32)

Median age (years)

7.0

3.5

6.5

Average age (years)

7.8

3.67

7.0

Median number of members

52.5

26.0

42.0

Average number of members

61.6

24.9

53.3

Groups (n) that made investments in 2015

23

8

31

Investments (k) made by group members in 2015

234

49

283

Median number of investments

7.5

5.0

6.5

Average number of investments

9.8

6.1

8.8

Per Angel group median investment amount

$1,564,326

$1,511,250

$1,564,326

Per Angel group average investment amount

$4,299,708

$3,798,187

$4,174,327

Groups reporting detailed investment information in 2015

n=24, k=234

n=8, k=49

n=32, k=283

Per company median investment amount

$125,000

$900,000

$150,000

Per company average investment amount

$440,996

$620,112

$472,009

Total investment amount (all groups)

$103,192,993

$30,385,500

$133,578,493


2. Angel Group Characteristics 2.1 Organizational Structure

13

2.2 Age

15

2.3 Size – Membership

16

2.4 S ervices Offered, Funding and Level of Activity

21

2.5 T rends in Activity – Groups Reporting in 2014 and 2015

22


2. Angel Group Characteristics 2.1 Organizational Structure Angel groups can organize themselves in a variety of different ways. Sixty-seven per cent of Canadian Angel groups were legally structured as not-for-profit corporations, 20% were structured as for-profit corporations, while the remaining 13% were informal clubs and networks (Figure 1).

Figure 1: Corporate Legal Structure (n=30)

13%

20%

67%

Not legally structured: Informal club/network Not-for-profit corporation For-profit corporation


Follow-up interviews confirmed the continued trend of Angel groups acting as networks, where individual members ultimately make investment decisions based on applicant pitches facilitated by the group itself. The application selection process varies by group; however, most groups attempt to arrange some form of investment leadership, relying on one Angel member to champion an applicant’s financing within the overall Angel group.

2.2 Age Angel groups are now a fairly well established part of the Canadian entrepreneurial ecosystem. Twenty-one of the participating groups had been established for five years or more (72%), with the median age being

six years (Figure 2). Nevertheless, new groups continue to be created. Five of the eight groups that were participating in the survey for the first time were less than five years old.

Figure 2: Years in Operation (n=30) 6

Number of Groups

5 4 3 2 1 0 1 Yr

2 Yrs

3 Yrs

4 Yrs

5 Yrs

6 Yrs

7 Yrs

8 Yrs

9 Yrs

10+Yrs

Number of Years in Operation

Groups that participated in 2014 Groups new to 2015 sample


2.3 Size – Membership One obvious way to measure the size of Angel groups is in terms of their members. The number of active members is defined as members who have been involved in at least one deal in the past 12 months. Groups in the survey ranged in size from one to 10

Figure 3: Number of Group Members 2015 (n=31)

Number of Groups

15

10

5

0 1-10

11-25

26-50

51-100

Over 100

Number of Group Members

Established Angel Groups

New Survey Participants

Young Angel Groups


members to over 100 members (Figure 2). The biggest category had between 26 and 50 members. The larger groups were mainly the ones that had been established for a longer period. Nevertheless, there were three younger groups with 50 or more members (Figure 3).

Defining the size of Angel groups in terms of the number of active members underestimates the total number of investors. As Figure 4 shows, although in the majority of groups the entire membership is active (coloured red and as defined in Figure 4, there were also several

groups with memberships that had non-active members (coloured blue). Of course, for many Angels, their non-active status will be temporary and they will resume investing in the future.

Figure 4: Number of Active Angel Group Members (n=32)

Total Active Members in 2014

180 150 120 90 60 30 0 0

30

60

90

120

150

180

Total Group Members

Active Membership

Total Membership


There is no obvious association between the size of an Angel group and the number of investments made (Figure 5 Panel A). Certainly the groups making the most investments were mainly the large and established

ones, but there were also larger groups, and established groups, that had made relatively few investments. Group size is defined here as the number of total members – both active and inactive – in 2015.

Figure 5: Group Size and Number of Investments Made (n=31) Panel A: By Angel Group Age

Number of Investments Made

35 30 25 20 15 10 5 0 0

30

60

90 Angel Group Size



Young Angel Groups


120

150

180

There is no obvious link between the geographic investment focus of groups and the number of investments they have made (Figure 5 Panel B).

Figure 5: Group Size and Number of Investments Made (n=31) Panel B: By Angel Group Regional Focus

Number of Investments Made

35 30 25 20 15 10 5 0 0

30

60

90

120

150

180

Angel Group Size

Region within a province

Region spanning multiple province/states

Province

Do not invest based on geography

Canada

Other/Unknown


Investment activity among Angel groups was skewed, with a minority of groups making the majority of investments. In 2015, one-third of groups each made more than 10 investments while, at the other extreme, 44% each made between one and five investments (Figure 6).

Percentage of Angel Groups

Figure 6: The Distribution of the Number of Investments by Angel Groups: 2012-2015

100%

25% 25% 45% 5%

24% 10% 52% 14%

30% 23% 30% 17%

3% 31% 19% 44% 3%

2012 (n=20)

2013 (n=29)

2014 (n=30)

2015 (n=32)

80% 60% 40% 20% 0%

Year

0

11-25 investments

1-5

26+

6-10


Comparing with previous years (Figure 6) suggests that Canada’s Angel market in 2015 became more buoyant, with only one group not making any investments in 2015 (3% compared with 14% in 2013 and 17% in 2014), while the proportion making more than 10 investments increased on the 2014 figure.

2.4 Services Offered, Funding and Level of Activity Angel groups continue to offer a variety of services to members. An increasing number of groups are finding ways to offer their members discounted access to legal services, due diligence providers, document or term sheet templates, post-secondary institutions for research, and financial review or advice on either valuation or deal structure. It was clear from the followup interviews that the services Angel groups offer varied according to the needs of each group’s members and applicant-base. Groups that offer the most services to members have often built partner relations with firms in local markets (for example, a local accounting firm or regional office of a national brand with complete due diligence).

Not surprisingly, the level of administrative support also differs quite substantially from group to group. Three groups had no staff. Most of the remainder had just one or two full-time equivalent staff. Just four groups had more than four staff (full-time, part-time or a combination) (Table A1 [See: Annex 2]). These differences are, in turn, reflected in differences in membership fees (Table A1 [See: Annex 2]; Figure 7). Just over one-third of groups were free to join, with the remainder (17) charging a membership fee. Most of the groups that change such fees were established groups. However, there were also some established groups among those that do not charge fees. Sixty percent of groups derived income from sponsorship. Government support programs were also leveraged by a large minority of groups, with 43% reporting financial contributions from a provincial government and 47% reporting support from the federal government (Table A2 [See: Annex]).

Figure 7: 2015 Membership Fees of Angel Groups (n=29) 12

Number of Groups

10 8 6 4 2 0 Free

$1-250 $251-500 $501-750 $751-1,000 $1,000+ Membership Fee



Young Angel Groups


2.5. Trends in Activity – Groups Reporting in 2014 and 2015 A year-on-year comparison of the 24 Angel groups that responded to both the 2014 and 2015 surveys is shown in Table A3 [See: Annex 2]. Collectively, the statistics show that the Canadian Angel market was significantly more vibrant in 2015 compared with 2014. Although total membership of the 24 groups declined by 2%, the number of active members increased by 22%. This is likely contributed, at least in part, by the greater


number of investments made, enabling more investors to invest in 2015 than in the previous year. The number of investments made by angel groups overall in 2015 increased by 18%, while the amount invested increased by 27%. However, as shown in Table A3 [See: Annex 2], there was considerable variation in the performance of individual groups with respect to the number and amount of investments made.

3. Investment Activity in 2015 3.1 Investment Focus: Geographical and Sectoral

24

3.2 Applications, Presentations and Funding

25


3. Investment Activity in 2015 3.1 Investment Focus: Geographical and Sectoral All Angel groups reported that they had a geographical focus for their investment activity, typically either a region (Western, Central or Eastern Canada), a single province or, in some cases, a sub-region within a province. Thirteen of the 29 groups that provided information had a sectoral focus. The vast majority of these groups (17) were based in Central Canada. In a few cases,


the sector was very narrow, with Information and Communications Technology (ICT) often being favoured. In other cases, certain sectors were excluded (e.g., Services), but with these exceptions, the investment focus was fairly broad. However, the majority of groups would consider investing in any of the seven industry groups identified in Table A4 [See: Annex 2].

3.2 Applications, Presentations and Funding In 2015, the 32 Canadian Angel groups that provided survey data received nearly 4,500 applications. Comparison with 2014 provides evidence for the buoyancy of the Angel market in 2015. Applications in 2015 numbered 1,500 higher than in 2014, a 50% increase. However, the much greater number of applications in 2015 did not translate into a proportionate increase in investment activity, which only increased by 19% (from 231 to 283 investments).

Over one-quarter (1,139) of the applicants were invited to make a presentation to members. Just over one-third (407) of the proposals presented were subject to due diligence by Angels who were potentially interested in investing. However, 30% of those were rejected, leaving just 283 businesses that were funded (Figure 8).

Figure 8: Funding Success Funnel (n=32)

4473 A

1139 B

407C 283 D

Applications

Presentations

Due Diligence

Funded

Based on: A 31 of 32 participants B 28 of 32 participants C 30 of 32 participants D 32 of 32 participants


This raises several questions. Why were businesses that were subject to due diligence, yet failed to attract investment, rejected? Could some of those businesses have become investable with further support? Did some of these businesses go on to successfully raise financing from other sources – perhaps based on advice they had received from either the Angel group managers or other Angels they had met?

Table 2. Presentation Rate, Funding Rate and Application Success Rate 2014

2015

Presentation rate

0.23

0.25

Funding rate2

0.34

0.25

0.08

0.06

1

Application success rate

3

Notes: 1 The percentage of presentations to total applications. 2 The percentage of presentations that result in funding. 3 The percentage of applications that attracted funding.


The proportion of applications that were selected for presentation to investors in 2015 was marginally higher, at 25%, compared to 23% in 2014 (Table 2). However, there was a significant decline in the funding rate – the proportion of presentations that result in funding – from 34% in 2014 to 25% in 2015, while the application success rate – the applications that attracted funding as a proportion of total applications – declined from 8% to 6%.

This may suggest that much of the increase in funding applications had been for proposals of relatively poor quality or that were not yet investment-ready. An alternative interpretation is that the increase in applications has enabled network managers to raise the quality threshold for presentations.

There is considerable variation in these rates between groups. Figure 9 shows the presentation rates. Reflecting the different approaches of groups, this shows that some groups have exhibited little or no screening, presenting the majority of their applications to their members, while at the other extreme, there are other groups that have been very selective, showing only a small proportion of applications to their members.

Figure 9: Company Selection by Angel Group (n=27) 100%

Rate Percentage

80% 60% 40% 20% 0% 0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

Angel Group

Presentation Rate (# Presentations/# Applications Application Success Rate (# Funded/# Presentations) Funding Rate (# Funded/# Presentations)


It is also of note that the groups that had the lowest presentation rate (presentations as a percentage of applications) – in other words, groups that were more selective – made the most investments and invested the most (Figure 10).

40

160

35

140

30

120

25

100

20

80

15

60

10

40

5

20 0

$ 0%

1-20%

21-40%

41-60%

61-80% 81-100%

Presentation Rate/Group (# Presentations/# Applications)

Total Dollars Invested

Total Investments


Total Investments

Total Dollar Invested (millions of $)

Figure 10: Group Investments and Presentation Rate

4. Investment Trends 4.1 Overview

30

4.2 Investments by Sector

32

4.3 Investments by Region

34

4.4 Deal Structure

38

4.5 Deal Size

41

4.6 Valuations

44

4.7 Investment Patterns: Distance

46

4.8 Company Size

47

4.9 Use of Government Programs

47

4.10 A ssessment of the Current Investment Climate in Canada

48


4. Investment Trends 4.1. Overview increase on 2014 (Figure 11). The number of investments exhibited a rather different pattern, rising 43% between 2012 and 2013, but rising by only 19% in each of the following two years.

Figure 11: Amounts of Investments: 2012-2015

Figure 12: Growth of the Visible Angel Capital Market in Canada

87.1 46.5

$150

5.7 45.6 37.4

$100

$50

The big increase in the amount invested in 2015 was largely accounted for by follow-on investments, which more than doubled over the previous year (Figure 12).

28.8 61.7

4.3 7.3 28.9

202% Growth Rate

Investment Amount (millions of $)

Investment activity by Canadian Angel groups has increased substantially since 2012. Following a more than doubling of the amount invested that occurred between 2012 and 2013, investment was virtually stable between 2013 and 2014 (+2% growth). However, in the past year, investment has resumed its upward trend, with over $130 million invested in 2015, a 48%

66%

48% 2%

$-

-37%

2012 2013 2014 2015 (n=19, k=139) (n=25, k=199) (n=25, k=237) (n=32, k=283) Year

New

Unspecified

Follow-on


2014 (n=26)

New Follow-on

Unspecified

-25% 2015 (n=32)

This maintains a pattern whereby, in every second year, the growth in dollars invested is in follow-on investing (2015, 2013), while in alternating years, the growth is in new investments (2012, 2014) (Figure 13). The pattern for number of investments is similar but not as marked (Figure 14).

Figure 13: New/Follow-on Composition of Investments by Investment Amount, 2012-2015

11% 18% 71%

32% 68%

65% 35%

100%

Percentage of Investments


100%

6% 51% 42%

Figure 14: Number of Investments: 2012-2015

80% 60% 40% 20% 0%

Follow-on

Unspecified

2% 33% 65%

25% 75%

37% 63%

80% 60% 40% 20% 0%

2012 2013 2014 2015 (n=19, k=139) (n=25, k=199) (n=25, k=237) (n=32, k=283) Year

New

5% 22% 73%

2012 2013 2014 2015 (n=19, k=139) (n=25, k=199) (n=25, k=237) (n=32, k=283) Year

New

Unspecified

Follow-on


4.2 Investments by Sector in ICT’s share of the number of investments in 2015 has not been paralleled in terms of the total amount invested: indeed, ICT’s share in the latter regard increased to 55% in 2015 compared with 2014 (Figure 16). In contrast, Life Science’s share of investment by dollar amount declined sharply in 2015 to 8%. The Other (sectors) category’s share increased to 28%.

Figure 15: Percentage of Investments: Total Number of Investments by Sector: 2012-2015

Figure 16: Percentage of Investments: Total Amount of Investments by Sector: 2012-2015


100%

22% 18% 53% 7%

10% 7% 1% 22% 55% 1% 5%

12% 1% 24% 59% 1% 3%

18% 5% 1% 20% 50% 1% 5%

80% 60% 40% 20% 0% 2012 (k=110)

2013 (k=134)

2014 (k=198)


Investments in the Information and Communications Technology (ICT) sector have continued to dominate investment activity, as they have for the past four years, in terms of both the number of investments and the amount invested. However, in 2015 for the first time, ICT’s share of the number of investments dropped to just 50%, with the shortfall made up with investments in the “Other” sectors category (Figure 15). This decline

100%

21% 21% 50% 8%

7% 1% 33% 45% 1% 13%

10% 2% 1% 41% 42% 1% 3%

28% 1% 1% 8% 55% 5% 2%

2012 (k=110)

2013 (k=134)

2014 (k=197)

2015 (k=237)

80% 60% 40% 20% 0%

2015 (k=237)

Year

Year

Clean Tech

Services

Clean Tech

Services

Energy

Manufacturing

Energy

Manufacturing

ICT

Other

ICT

Other

Life Sciences


Life Sciences

Figure 17 shows the median (Panel A) and mean (average) (Panel B) amount invested per investment by Angel groups across industry groups over the past four years. Both the median and average size of investment in the ICT sector have been declining. For Life Sciences, the average size of investment has increased quite steeply, whereas the median has remained largely unchanged, implying that there have been a small

number of large investments in Life Sciences, and that these large investments themselves have been increasing in size. Clean Tech’s typical size of investment has fluctuated, peaking in 2013. The Other (sectors) category has seen its median size of investment rise and then fall, whereas the average investment has increased gradually every year.

Median Investment Amount (in thousands of $)

Figure 17: Investment Amounts by Industry Sector: 2012-2015 Panel A: Angel Group Medians (per Investment) $750

573

$600 $450 $300

235

$150

250 244 250 250 180

125 125

250 125

118

250 240 125

115

$(k=58, 78, 108, 119) ICT

(k=103, 32, 43, 55) Life Science Industry Sector

(k=8, 5, 9, 12) Clean Tech

(k=18, 19, 37, 67) Other

Panel B: Angel Group Averages (per Investment) 2014

2013 $1800

2015

Average Amount (in thousads of $)

2012

1587

$1500 $1200

1063 810

$900

642 $600 $300

306

368 326

258

348

385

257

386

271 302 323 326

0 (k=58, 78, 108, 119) ICT

2012

2014

2013

2015

(k=103, 32, 43, 55) Life Science Industry Sector

(k=8, 5, 9, 12) Clean Tech

(k=18, 19, 37, 67) Other


4.3 Investments by Region Investment activity measured by the survey data was broken out into the regions of Western, Central and Eastern Canada, and was found to be dominated by Central Canada (Ontario and Quebec), accounting for 70% of investments (Figure 18 Panel A), unchanged

from 2014. While the three regions differ in size, the regional disparity remains when investments are considered on a per capita basis (Figure 18 Panel B), although the position of Western Canada was improved.

Figure 18: Panel A: Number of Investments by Region (n=32)

Figure 18: Panel B: Investment Amounts Per Millions of People (n=32)

Number of Investments

28% 72%

200 150 100

18% 82% 33% 67%

50 0

Investment Value (in millions of $)

$6

250

$3.3 $1.5

$5 $4 $3

$1.3 $1.2

$2 $1

$0.1 $0.1

$Western Canada Central Canada Eastern Canada (23% of Investments) (71% of Investments) (6% of Investments) Year

New

Follow-on


Western Canada (21% of $ Invested)

New

Central Canada Eastern Canada (79% of $ Invested) (0.3% of $ Invested) Region

Follow-on

The most active Angel groups reflect the greater investment activity in Central Canada. Groups in this region account for four of the five most active groups in terms of the dollar amount invested and, the number

of investments made, for both “All Groups” and “Young Groups” (Table 3). Young Angel groups are defined as those that have been established within the past 5 years.

Table 3. Most Active Canadian Angel Groups

A: Top 5 Canadian Angel Groups by Dollar Amount Invested 2015 Rank

1 2 3 4 5

B: Top 5 Canadian Angel Groups by Number of Investments Made 2014 Rank

2015 Rank

1

1

New

2

2

2

New

4

New

5

IGAN Partners Ontario

Omega Star Ontario

Anges Québec Québec

VA Angels Alberta

Maple Leaf Angels Ontario

C: Top 5 Young Canadian Angel Groups by Dollar Amount Invested 2015 Rank

1 2 3 4 5

2014 Rank

2015 Rank

1

1

New

2

New

3

New

4

3

5

Ontario

Mean Eyed Cat Venture Labs Manitoba

China Canada Angels Alliance Ontario

Southeastern Ontario Angel Network Angel One Investor Network Ontario

Northern Ontario Angels Ontario

Anges Québec Québec

VA Angels Alberta

York Angels Ontario

Angel One Investor Network Ontario

1 3 2 New 5

D: Top 5 Young Canadian Angel Groups by Number of Investments Made

iGAN Partners

Ontario

2014 Rank

2014 Rank Angel One Investor Network Ontario

Mean Eyed Cat Venture Labs Manitoba

China Canada Angels Alliance Ontario

iGAN Partners Ontario

New Avenue Capital British Columbia

1 New New 3 New


Figure 19 Panel A shows the median amount invested per investment by Angel groups across Canada over the past four years. Panel B shows the mean investment size per Angel group. This shows that the average size

of investment in Western Canada has been quite volatile, in Central Canada it has been fairly stable, while in Eastern Canada it has also been stable until 2015 when there was a significant drop in investment size.

Figure 19: Angel Group Investment Amounts by Region: 2012-2015 Panel A: Angel Group Medians (per Investment) Amount Invested (in thousands of $)

$600 $500 $400

235

$300

180

$200

125

250

244 250 250

125

$100

125

118 573 125

250 240

115

250

$(k=9) (k=20) (k=43) (k=66) Western Canada

(k=98) (k=135) (k=164) (k=214) Central Canada Region

(k=3) (k=4) (k=3) (k=3) Eastern Canada

(k=110) (k=159) (k=210) (k=283) Canada

Average Amount Invested (in thousands of $)

Panel2012 B : Angel Group Averages (per Investment) 2014 2013 $600

2015

244 $500

250 250

125

240

$400 $300

235

180

250

125 118

$200

115

250

573

125

125 250

$100 $(k=24) (k=60) (k=66) (k=66) Western Canada

2012

2014

2013

2015

(k=112) (k=135) (k=167) (k=214) Central Canada Region


(k=3) (k=4) (k=3) (k=3) Eastern Canada

(k=139) (k=199) (k=236) (k=283) Canada

Investments and Membership by Region in 2015

23%

21%

6%

71%

0.3%

79%

85 Investors $0.43 million in 18 investments

459 Investors $27.5 million in 65 investments

1,109 Investors $105.6 million in 200 investments

Western Canada

= Membership Distribution

Central Canada

Number of Investments Made in 2015

Eastern Canada

Value of Investments Made in 2015


4.4 Deal Structure Just under half of the groups reported the deal structures of the investments that their members had made. Equity investments dominated (96%). The most frequent instrument was common shares (45%), followed by convertible debentures (28%) and preferred shares (23%) (Figure 20).

Co-investment is defined as the situation where more than one investor from the same Angel group participates in the same investment. In 2015, 64% of the investments involved co-investments, a proportion that has remained fairly stable over the past four years. Indeed, the overall distribution of investments by size of co-investment group has exhibited little change (Figure 21).

Figure 20: Deal Structure (n=14, k=93)

Figure 21: Number of Angel Group Members Involved in the Same Deal

23%

45%

3% 1%

28%


100%

6% 20% 6% 1% 6% 11% 17% 33%

5% 8% 13% 4% 9% 9% 12% 40%

2% 7% 18% 4% 8% 5% 21% 35%

5% 6% 13% 5% 10% 7% 18% 34%

2012 (k=93)

2013 (k=128)

2014 (k=136)

2015 (k=201)

80% 60% 40% 20% 0%

Year

Common Shares

Other

1

5

Convertible Debenture

Preferred Shares

2

6 to 10

3

11 to 20

4

21+

Loan (debt)


There is little relationship between the number of co-investors and the amount invested (Figure 22).

Amount Invested (millions of $)

Figure 22: Co-investment Group Size and Angel Group Investment Amount (k=201)

1

2

3

4

5

6-10

11-20

21+

Number of Co-investors


Information on syndication – defined as where the Angel group members invest alongside outside parties in an investment – is quite limited. For those deals where we have information (140), 89% were syndicated, an increase on the proportion in 2014. The most common

type of syndicate partner was other Angel groups (Figure 23 Panel A). Despite a low response in this section, there is strong indication that a majority of deals involved at least some form of syndication (Figure 23 Panel B).

Figure 23: Panel A: Types of Syndication Partners in 2015 (k=46)

Figure 23: Panel B: Types of Syndication Partners in 2015 (k=94)

Not Syndicated

16

30%

2% 2%

57%

Syndicated

9%

Angel Capital

Strategic Partner

Syndicated, Partner(s) unknown

VC

Other

Syndicated, Combination of more than one partner

Government


Not Syndicated

49 29

4.5 Deal Size The median amount invested by syndicate partners has ranged between $400,000 and $500,000 per deal. The 2015 figure was $414,000, which is a decline from 2014, when the figure was $500,000. The average investment by co-investors rose annually from 2012 to 2014 but fell back in 2015 by 29% (Figure 24).

Average deal sizes – the amounts invested by the Angel groups along with that of any other investors – have been rising between 2012 and 2015, although fell back slightly in 2015. Trends in the median deal size have been more variable (Figure 25). Looking just at deals that were syndicated (Figure 24), median and average deal sizes were similar to those of all investments,

Figure 24: Investment by Syndication Partners 2012-2015

Figure 25: Deal Sizes: 2012-2015 $1500

1062

1229

$1000

$1200

789 $800 $600

Deal Size (thousands of $)


$1200

759

553 500

500

415

414

$400 $200 $-

919 825

945

$900

698 $600

625

500

$300 $-

2012 (k=57)

2013 (k=76)

2014 (k=104)

2015 (k=150)

2012 (k=57)

2013 (k=104)

Year

Median

1160

Average

2014 (k=144)

2015 (k=150)

Year

Median

Average


at $795,000 and $1.054 million respectively. However, there is considerable variation in deal size depending on the syndicate partner. Although there were few cases, the biggest deals involved venture capital funds and government. Deals that were syndicated with other Angel groups were also quite substantial (Figure 26).

Figure 26: Deal Sizes for Syndicated Investments in 2015 $2500

2179


$2000

1300 1300

$1500

1054

$1000

1338

792 680

795

698 680

848

389

$500

389

100

$Total Syndicate (k=140)

Angel Capital (k=30)

Non-Angel (k=10)

500 VC (k=3)

Government (k=1) Year

Median

Average


Other (k=4)

100

Unknown Partner Combination (k=44) (k=27)

The median deal size in 2015 was $625,000, while the average of $1.16 million reflected the skewed distribution of investments. Angel groups did not invest significantly more in deals that were syndicated with other investors – although the median size of investment was slightly higher, the average was lower. Follow-on investments were significantly larger than new investments. Similarly, investments in pre-investment companies were smaller

than investments in post-revenue companies. Deal sizes were also related to company size (based on number of employees), with the typical investment in companies with 11 or more employees being twice as great as investments in smaller companies. Finally, there were sectoral differences in deal sizes by sector, with the largest investments in Life Sciences businesses (Table 4).

Table 4: Round Size Statistics (in thousands of $)

Categories

Sample Size

Median

Average

Minimum

Maximum

All investments

k=150

625

1,160

20

22,740

Syndicated

k=140

795

1,054

25

6,000

Non-syndicated

k=2

160

160

20

300

New

k=92

500

708

20

4,750

Follow-on

k=58

935

1,876

77

22,740

ICT

k=70

500

999

20

14,680

Life Sciences

k=29

1,338

2,299

25

22,740

CleanTech

k=10

770

1,032

52

4,000

Other

k=35

500

679

21

2,998

Unknown

k=6

520

548

300

1,000

Pre-revenue companies

k=50

868

1,023

50

4,750

Post-revenue companies

k=27

1,100

1,164

100

5,350

Unknown

k=97

450

1,310

20

22,740

0–5 employees

k=58

485

628

50

2,000

6–10 employees

k=21

620

714

25

3,850

11+ employees

k=25

1,338

1,365

300

4,750

Unknown

k=45

500

1,723

20

22,740


4.6 Valuations Valuations were provided for only a minority of investments. The majority of valuations were under $4 million, with a median of $2.5 million (Figure 27 Panel A). There was surprisingly little difference in the valuations of new and follow-on investments (Figure 27 Panel B). Indeed, median investment sizes were little different at

Figure 27: Company Valuations(k=67) Panel A: Overall Distribution


40

Median: $2.5M Average: $3.3M

30

20

10

0 up to $2M $2-$4M

$4-6M

$6-8M

$8-10M

Valuation (millions of $)


$10+M

$2.3 million and $2.7 million. However, there are some sector variations in valuations, with valuations for Life Sciences businesses being significantly higher than for ICT and other sectors (median valuations of $3.4 million, $2.0 million and $2.5 million, respectively) (Figure 27 Panel C).

Panel B: New Versus Follow-on


25



20 15 10 5 0 up to $2M $2-$4M

$4-6M

$6-8M

$8-10M

$10+M

up to $2M $2-$4M

$4-6M

New Investments (k=49)

$6-8M

$8-10M

$10+M

Investments (k=18)

Follow on

New

Panel C: by Industry Sector




16 12 8 4

M $1 0+

M -8

M

-1 0M $8

$6

4M

-6 $4

M

$2 -$

to

$2

M up

Other Valuation (millions $)

$1 0+

M -8

M

-1 0M $8

$6

-6 $4

4M

M $2 to up

$2 -$

M $1 0+

-1 0M

M

ICT

$8

-8

M

ICT (k=29)

$6

-6 $4

4M

$2 -$

to

$2

M

0

up


20

Life Sciences

Other (k=24)

Life Sciences (k=12)


4.7 Investment Patterns: Distance A feature of Angel investments is that they typically are local. This is commonly attributed to two factors. First, information is subject to distance decay, so investors are more likely to hear of local investment opportunities than of those located further away. Second, it is easier to add value to investee businesses when they are in close geographical proximity. Indeed, for some investors, location is a key investment criteria at the screening stage. However, this evidence is based on the behaviour of solo Angels. We might expect that Angel groups will have a more geographically dispersed membership which, in turn, could result in a more geographically dispersed geography of investments.

Figure 28: Distance of Companies from Angel Groups: 2012-2015

Percentage of Companies

100%

3% 41% 56%

4% 6% 38% 52%

1% 8% 55% 36%

0.4% 4% 53% 43%

2012 (k=92)

2013 (k=139)

2014 (k=168)

2015 (k=225)

80% 60% 40% 20% 0%

Year

Same City

Rest of Canada

Same Province

International


The vast majority of investments by Angel groups – more than 9 out of 10 – were within-province (Figure 28). The proportion of investments in businesses located in a different province to that of the Angel group was well under 10%. However, the trend since 2012 has been for fewer investments to be within the same city that the group is based. In both 2014 and 2015, fewer than half of all investments were in the same city. This confirms the expectation that one of the impacts of the emergence of Angel groups is that their investing is becoming less geographically constrained.

4.8 Company Size

4.9. Use of Government Programs

Angel groups typically invest in small businesses. Consistently, around 70% of investments have been in businesses with 10 or fewer employees at the time of the investment. Close to half – 52% in 2015 – had one to five employees. The size distribution has been fairly stable over the past three years (Figure 29).

Group managers reported that 68 of their investee businesses had participated in various government programs. However, the high non-response rate for this question means that the proportion of funded businesses that this represents is unknown. Provincial programs were the most common (e.g., FedDev IBI, OCE, FIER, NOHFC, IAF, Investor Tax Credit), followed by the federal government’s Industrial Research Assistance Program (IRAP) and Scientific Research and Experimental Development Tax Incentive Program (SRED) (Figure 30).

Figure 29: Company Employees at Investment Moment 2013-2015

Figure 30: Government Programs Leveraged (k=68)

0% 4% 22% 22% 52%

80% 60% 40% 20% 0%

100% Percentage of Companies

Percentage of Companies

100%

1% 5% 24% 25% 45%

1% 24% 31% 44%

80% 60% 40% 20% 0%

2013 (k=55)

2014 (k=111) Year

1 to 5

26 to 50

6 to 10

51+

2015 (k=117)

Industrial Research Scientific Research Assistance Program and Experimental (IRAP) at the NRC Development (SRED) Year

Programs with Provincial/ Regional Scope

10 to 25


4.10 Assessment of the Current Investment Climate in Canada (mean = 6.77). There were no obvious commonalities between the groups with either the highest or lowest evaluations. This is a valuable measure both to monitor in subsequent reports and also to drill down into.

Collectively, groups had a fairly positive view of the current investment climate for Angel investing in Canada. On a scale of 1 (very poor) to 10 (excellent), the median was 7 and the mean was 6.22 (n=22). The groups in Ontario (n=9) had a slightly more positive assessment

Figure 31: Rating of Investment Climate (n=22)

Number of Companies

8

6

4

2

0 1

2

3

4

5

6

Rating of the Environment


7

8

9

10

5. Exits in 2015


5. Exits in 2015 shareholders – these are likely to have been low-return or loss-making investments. Six were the subject of sales to existing businesses – these are likely to have been profitable exits, although it is possible that they included loss-making investments. Finally two exits were IPOs that are likely to have produced very high returns. Exit activity in 2015 was at the same level as 2014 (Table 5).

The purpose of Angel investing is to build successful companies from which a harvest event – a positive exit – can be achieved. However, as previous studies have shown, a negative exit – the failure of the business and resultant loss of the money invested – is the more common outcome. The groups in the survey reported 13 exits in 2015, all but one being less than four years old (Figure 31). Only one exit was a bankruptcy. Four were sold to existing or new

Although the numbers are small, the data from Figure 32 do not support the claim that “lemons (i.e., failures) ripen before plums (i.e., successes).”

Table 5: Investment Outcomes Occurring in 2012–2015

Year

IPO

M&A

Sale to New or Existing Shareholders

Company Ceased Operations

Total

2015

2

6

4

1

13

2014

1

9

0

3

13

2013

1

4*

3**

4

12

2012

1**

2

4

2

9

Figure 32: Length of Time to Exit or Bankruptcy (k=13)

2 3 1

6

1 2 1

Number of Exits

5 4 3 2 1

2 1

0 2011 and prior

2012

2013

2014

Year of Original Investment

IPO

Sales to New or Existing Shareholders

M&A

Company Ceased Operations

Notes: * This number represents three companies, as one exit was reported by two distinct Angel groups. ** Including one sale to new or existing share shareholders discovered after the release of the 2013 report. ** Discovered after the release of the 2012 report.


6. Angel Group Best Practices and Challenges


6. Angel Group Best Practices and Challenges In the survey follow-up, interviews with Angel group managers revealed a number of best practices that respondents believed to have contributed to their success. New to the 2015 survey are the following factors: •

Dedicated staffing

•

Investor leadership

•

New membership types

Building/Leveraging a Support Network: Partnering with vendors that are both reputable and local can provide resources to entrepreneurs, including accountants, lawyers, due diligence providers, universities and other advisors/experts. This allows companies to achieve investment-ready status by focusing on their own core competencies and through allowing experts to take a deep-dive in their respective fields. Dedicated Staff Roles: Assigning staff to dedicated business operations allows group managers to focus their time and effort where needed. Dedicated staff roles may include member engagement and recruitment, business analysis (for due diligence or investment tracking/reporting), or administrative staff (for facilitating meetings, pitches, communication and events). New on the horizon are roles dedicated to identifying M&A-style exits for companies. Formalized Internal Processes: Operations are structured and methodical to ensure a degree of consistency in every instance, saving time and resources while reducing error. This can include formalizing processes (e.g., selection process, investment process), pre-packaging due diligence requirements, or creating templates for repetitive procedures (e.g., term sheets). Another common theme is assigning teams to address a process as needed.


Investor Leadership and Collaboration: Introduction to entrepreneurs at an early stage lets a lead investor learn and tell the entrepreneur/ business story when championing the investment among other group members. Lead investors are then able to recruit other group members or syndicate partners, selling both the company and risk mitigation. More and more groups are turning to digital or tele-meetings to save members’ time.

Funding Support: Although several groups receive membership fees, government funding, and corporate sponsorships to support operations, the vast majority still consider themselves either underfunded or under-resourced. Group managers are calling for new, increased and/or long-term government funding, arguing that this is justified by the potential benefits that will arise for both local and national economics.

Member Communication and Events: Many groups host regular events or communication channels (e.g., newsletters, online group chats, webinars) to keep members active, engaged, informed, and networked. Events can also be dedicated to the education of the greater community to build industry awareness.

International Competition: As the value of the Canadian dollar falls far below that of the US dollar, the spending power of Canadian Angel capital is diminished compared to US venture capital. Additionally, entrepreneurs who either pitch to the US VC market or work out of US accelerators often have inflated expectations or exceptionally high company valuations.

New Membership Types: To experiment with recruitment and as a means for industry experts to interface directly with investors, many groups are now expanding on the types of membership offered to allow for trial investment experiences, short-term membership periods, participation by non-investing members with specialized skill sets, or access to entrepreneur supply.

Localized Expertise: Skills and industry experience can be limited in local markets. Difficulty in finding a supply of either employees or investors who understand the requirements of business outside of popular regional industries can be a barrier to growth. An example is finding expertise in mobile gaming in a rural market where fishing has been the top economic driver for multiple generations.


Market Education: Angel groups typically struggle with expressing a lack of awareness and understanding of the role Angels play in the greater ecosystem. Many have reported they repeatedly have to explain the purpose of Angels, the benefits/ services provided by Angels, and the availability of Angel capital within local markets. Member Engagement and Investment Fatigue: Common for nearly all Angel groups is the difficulty to maintain member engagement, recruit new members and win the battle with investor fatigue. An estimated 20% of members take on approximately 80% of the investment workload, while a lack of volunteer time, a lack of investment leadership, a lack of exits, the high costs of event hosting, poor deal flow and fund circulation, a lack of member/investment diversity, and a lack of Angel group resources are all cited as reasons for the ongoing struggle. Quality of Supply: Many groups attract a high volume of applications, but few businesses are investment-ready, due to being at an early stage or a lack of preparation. Since leading companies toward faster and greater exits would solve many other challenges faced by Angels (e.g., investor fatigue, deal flow), groups are turning to stricter selection processes, increased member collaboration and strategic partnerships as application funnels to try to increase the quality of deals.


7. Conclusion


7. Conclusion This is the sixth annual report on investment activity in the visible part of the Canadian Angel market. It is based 32 respondents out of the 40 Angel groups that were approached.

to the survey for the first time. The 24 groups that responded in both 2014 and 2015 reported an 18% increase in the number of their investments, and a 27% increase in the amount invested.

In concluding the report, we wish to highlight four aspects of the Canadian Angel market that emerge from this response.

Demand for Angel funding has also grown, with an increase of 1,500 applications to the responding groups. However, the presentation rate increased only marginally, while the funding rate and the application success rate both fell in 2015, compared with 2014.

First, the responses show that Angel groups are now a fairly well established part of the Canadian entrepreneurial ecosystem, with 72% of responding groups having been established for five or more years. Nevertheless, new groups continue to be created. Indeed, there is an ongoing need for new groups to be created, because there is what seems to be a natural trend for groups, as they become established, to allocate an increasing proportion of their investments to follow-on investments. Moreover, as follow-on deals are larger than initial investments, they absorb an increasing amount of a group’s available financing. The ongoing creation of new Angel groups is required to maintain the level of first-round investing. Angel groups and their associated investment activity (over 70%) are disproportionately in Central Canada. The regional differences among Western, Central, and Eastern Canada persist after controlling for population size. Hence, there is a particular need for new groups to be created in Western and Eastern Canada Second, it is clear from a number of the statistics presented here that the Angel market in 2015 was particularly buoyant. The number of investments made by group members increased by 19% (n=46) between 2014 and 2015, while the amount invested increased by 48% to $130 million, largely driven by a big growth in follow-on investment. Moreover, this increase is not attributable simply to the groups that have responded

•

The presentation rate (number selected for presentation to investors as a proportion of the number of applications) increased from 0.23 to 0.25

•

The funding rate (number of investments made to the number that presented to investors) declined from 0.34 to 0.25

•

The application success rate (the proportion of applications that attracted funding) fell from 0.08 to 0.06.

There are three possible explanations for these trends: much of the increased demand was not investmentready, or groups were able to raise their quality threshold, or they lacked the financial capacity to invest in the increased demand. Interviews with the group managers suggests that investment readiness is a major issue. This might, in turn, suggest a need for investment readiness programs to be developed.2 Third, the visible Angel market is growing in complexity. There are, of course, multiple Angels involved in most deals – this is the purpose of the Angel groups. However, there is also growing evidence of syndication involving other investors participating alongside Angel investors. In these cases, the deal sizes are quite large. This is transforming the traditional funding escalator.

2 For a discussion of the design of investment readiness programs, see the following: (i) Mason, C.M. and Harrison, R.T. (2001) ‘Investment readiness: a critique of government proposals to increase the demand for venture capital,’ Regional Studies, 35, 663–668. (ii) Mason, C. and Kwok, J. (2010) ‘Investment readiness programmes and access to finance: a critical review of design issues,’ Local Economy, 25 (4) 269–292.


Finally, it is important to flag successful exit activity. The importance of Angel investing is not the amount invested but the effect of this money (and the hands-on involvement of Angels) in building successful companies. However, successful exits are important not only because they indicate that a successful company has been created but also because they provide investors with the wealth to recycle into new investments, encourage the now-cashed-out entrepreneurs into the Angel community, and provide a signal of the returns that are possible, which raises the enthusiasm of existing Angels and attracts new Angels. Information on the financial returns is not available. However, in 2015, there were two IPOs, six M&As and only one bankruptcy out of a total of 13 exits, suggesting that 2015 has also been a relatively good year for exit activity, albeit not quite as good as 2014, which had one IPO and nine M&As.


Annex 1 Survey Glossary Active members: Angel group members that participated in at least one deal during the year.

Funding rate: The reported number of deals divided by the reported number of presentations.

Application success rate: The reported number of investments made by the Angel group divided by the reported number of funding applications received by the Angel group.

Investment amount: For each deal, the amount invested by a specific Angel group into a single company by group members. This does not account for other sources of capital received in the deal.

Co-investment: When two or more Angel investors from the same group participate in the investment.

New Angel groups: Angel groups that participated for the first time in the survey.

Comparison sample: In each year, all Angel groups that participated in the survey in the current as well as previous year.

New investment: An investment made in a company that has never received prior financing from the Angel group.

Deal: An investment round in a single company.

Pre-money valuation (Valuation): The value of a company’s equity as imputed from the investment or the deal (not including the round amount which will be transferred to the company).

Deal size: The total amount of financing received by a company from all sources in a financing round, including from co-investors and syndicate partners. Deal size was only available for those deals for which Angel groups provided the information. Established Angel groups: Angel groups that were established at least six years ago. Exit: When Angel investors divest ownership from a company. For the purposes of this report, only positive exits are reported, including initial public offerings (IPOs) on a stock market and mergers and acquisitions (M&As). Follow-on investment: An investment made by an Angel group into a company that has received prior funding from the Angel group.


Presentation rate: The reported number of firms that presented to Angel groups divided by the reported number of firms that requested to be considered for funding from that group. Syndication: When investors from outside of the Angel group are involved in a deal. Young Angel groups: Angel groups that have been established within the past five years.

Annex 2 2015 Survey Data Tables Table A1: Angel Group Size, Investment Per Member and Employment (n=30) Membership Region Fee ($) of the Angel Group

Age of the Angel Group

Group Has a Formal Selection Process

Number of Angel Group Members

Number of Amount Investments Invested ($) Made

Amount Invested per Member ($)

Number of Full-Time Staff

Number of Part-Time Staff

Angel Group Negotiates with Firms for Interested Members

0

1

No

Free

Central

Young

Yes

40

3

335,000

111,667

Free

Western

New

Yes

30

5

17,665,000

3,533,000

Free

Central

Established

Yes

42

3

1,395,448

465,149

1

4

No

Free

Western

Established

Yes

2

1

75,000

75,000

0

2

No

Free

Western

Established

Yes

65

4

1,521,153

380,288

2

2

Yes

Free

Western

New

Yes

1

0

0

0

0

1

No

Free

Central

Young

No

115

3

275,000

91,667

0

0

No

Free

Central

Young

No

52

12

16,500,000

1,375,000

1

0

No

Free

Central

Established

No

32

3

950,000

316,667

Free

Western

New

Yes

56

7

843,552

120,507

0

0

No

Free

Central

Young

Yes

127

23

8,628,550

375,154

0

8

No

1–250

Central

Established

No

12

1

100,000

100,000

0

0

No

1–250

Western

Established

Yes

46

18

4,879,996

271,111

0

3

No

1–250

Western

Young

Yes

21

9

1,607,500

178,611

1

0

No

251–500

Western

Established

Yes

57

3

4,600,000

1,533,333

0

3

No

251–500

Central

Established

No

26

4

2,372,500

593,125

0

2

No

251–500

Central

Established

Yes

68

34

6,550,000

192,647

1

3

No

251–500

Central

New

Yes

49

3

764,235

254,745

2

0

No

501–750

Central

Young

Yes

70

14

7,398,000

528,429

2

0

No

501–750

Central

Established

Yes

90

13

2,622,500

201,731

1

3

No

501–750

Central

Established

Yes

35

14

3,600,500

257,179

1

2

No

501–750

Central

Established

Yes

41

14

1,867,044

133,360

0

3

No

751–1000

Central

Established

Yes

90

17

1,452,200

85,424

2

2

No

751–1000

Eastern

Established

Yes

21

3

202,500

67,500

0

4

No

751–1000

Western

Established

Yes

85

3

430,000

143,333

3

0

Yes

751–1000

Central

New

Yes

174

23

11,505,845

500,254

7

3

No

751–1000

Central

Young

Yes

23

9

1,470

163

0

1

No

751–1000

Western

New

Yes

28

2

650,000

325,000

1

4

No

1001+

Central

Established

Yes

110

8

24,200,000

3,025,000

4

1

Yes

Central

Established

No

15

6

200,000

33,333

1

2

Yes

Central

New

30

9

4778000

530,889

Central

New

12

5607500

467,292

Yes

No


Table A2: Angel Group Sources of Revenue

Angel Group Operational Funding Sources Member-ship fee ($)

Age of the Angel Group

Region of the Angel Group

Number of Angel Group Members

Member Fees

Sponsor-ships

Free

Young

Central

42

X

Free

New

Western

2

Free

Established Central

65

Free

Established Western

1

Free

Established Western

115

Free

New

Western

52

Free

Young

Central

12

Free

Young

Central

57

Free

Established Central

68

Free

New

Western

28

Free

Young

Central

110

1–250

Established Central

32

X

1–250

Established Western

23

X

X

1–250

Young

Western

40

X

X

251–500

Established Western

56

X

X

251–500

Established Central

21

251–500

Established Central

49

X

251–500

New

Central

21

501–750

Young

Central

501–750

Established Central

501–750 501–750

Funding Received From a Separate Parent Entity

Provincial Government Funding

Federal Government Funding

Revenue Generated

Revenue Generated From Events

Revenue Generated From Prospective Investee Firms

One or More Members’ Personal Funds

X X X X

X

X X

X X

X

X

X X

X

X

X

X X

X

X

X

X

X

X

X

X

X

X

X

41

X

X

X

70

X

X

X

X

Established Central

90

X

X

X

X

Established Central

35

X

X

X

X

751–1000

Established Central

46

X

X

X

X

751–1000

Established Eastern

85

X

X

751–1000

Established Western

127

X

X

751–1000

New

Central

26

X

751–1000

Young

Central

90

X

751–1000

New

Western

15

1001+

Established Central

X

X

X

X

X X

X

X

X

X

X

X

174

X

X

TOTAL

17

18


X 1

13

14

2

4

2

7

Table A3: Recent Developments to Angel Groups

Location

Age

Members

Active Members

Applications

Presentations


Value of Investments

Central

Young

-5%

-34%

-21%

-15%

0%

-65%

Central

Established

5%

34%

20%

14%

5%

1%

Central

Young

0%

Central

Established

30%

0%

115%

Central

Young

16%

0%

0%

0%

14%

11%

Central

Young

27%

27%

67%

0%

-25%

-8%

Central

Young

0%

0%

20%

0%

-22%

7%

Central

Established

119%

-9%

50%

6%

133%

362%

Central

Established

-4%

-3%

21%

-13%

-43%

Central

Established

21%

8%

25%

20%

133%

155%

Central

Established

-6%

-76%

96%

8%

-50%

-83%

Central

Established

0%

0%

38%

84%

36%

-24%

Central

Established

-73%

0%

0%

10%

29%

-62%

Central

Established

31%

163%

75%

26%

125%

120%

Central

Young

256%

50%

50%

Central

Established

-3%

35%

-75%

-83%

Central

Established

-27%

Eastern

Established

0%

-20%

Western

Established

-65%

75%

Western

Established

-25%

Western

Established

-80%

0%

Western

Young

0%

Western

Established

0%

Western

Established

0%

-40%

-100%

25%

435%

0%

0%

0%

-29%

3%

-31%

-100%

0%

0%

0%

0%

75%

70%

50%

-25%

-24%

0%

5%

-23%

-4%

209%

0%

61%

-53%

50%

106%

# change: +10% or more

7

5

10

6

9

8

# change: -10%