Canadian angel investments double in quantity but rise only 13 percent in value

• September 12, 2013

By Francis Moran

Angel investors, that group of high-net-worth individuals who are often the first source of external funding for new companies, were a great deal more active in Canada in 2012, making nearly twice as many investments as the year before. However, the total value of those investments rose by only 13 percent, suggesting that individual investments, while perhaps easier to secure, are getting smaller.

That was one conclusion to be drawn from the annual report on angel investing published earlier this week by Canada’s National Angel Capital Organization. The survey of 20 out of NACO’s 24 angel group members revealed that a total of 139 investments were made last year, up 96 percent from the year previous. Just over 100 of these were new investments, 30 were follow-on and the balance were not specifically categorised. However, the total amount invested in 2012 was $40.5-million (all values in Canadian dollars), up only 13 percent over the $35.7-million that angels put into young companies in 2011.

And even though the total number of deals might have nearly doubled, securing angel investment remained an elusive target for most companies seeking it, with angels choosing to back only 7.3 percent of all business plans they looked at in 2012, up from 6.5 percent in 2011. That’s a fair bit better than the one-in-40, or 2.5 percent, success ratio suggested by veteran New York angel David Rose when he spoke to Ottawa’s StartupGrind a month or so back, but still a sobering reality for most entrepreneurs. It does, however, continue a steady trend that sees more business plans securing backing; only 4.5 percent were funded in 2010.

Canadian angels were enthusiastic co-investors with various federal and provincial government programs with the majority of deals also securing backing from programs such as FedDev Ontario’s Investing in Business Innovation program, the Northern Ontario Heritage Fund Corporation and the National Research Council’s Industrial Research Program. Despite government incentive programs that might be expected to foster investment in the more remote regions of the country, however, fewer than one in five investments was made outside Central Canada.

Companies in the ICT, or information and communications technology, sector snagged the lion’s share of angel funding with a total of $17.9-million, followed by life sciences companies that took in $7.5-million and clean technology at $3.2-million.

The survey had data for only four of eight exits reported in 2012 and the numbers were a bit grim, with those four returning just $2.35-million to investors who originally put in $1.87-million. However, with most of those exits taking three years or less from investment to payout, perhaps the roughly 25 percent return isn’t so bad even though high-risk investments such as these more typically seek a multiple of three to 10 times the original investment. The NACO report suggests the actual picture might well have been rosier but that confidentiality issues prevented some angel groups from reporting on their exits or on the value of them. And the report also notes that angel investing is relatively young in Canada and returns can be expected to improve as both angels and entrepreneurs get better at sizing each other up.

The report came out on Tuesday but I didn’t had the chance  this week to solicit opinions about it from angel investors or entrepreneurs in Ottawa or elsewhere. If you are an angel or entrepreneur, let me know in the comments section what you think of the trends we’re seeing in Canada in this investment class.

Image: Profit Guide