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The State of Angel Investing

Posted on August 02 2011 | Author: Dave Smardon

I was talking to an entrepreneur (let's call him Bob) the other day about the challenges of starting up a technology business in Canada. Bob raised a number of issues from the Canadian tax system to the difficulty of finding good experienced people. However, it wasn’t long before the subject of venture capital took the spotlight. He said that raising capital was the greatest challenge facing entrepreneurs today. It is hard to argue this point. I remember the crazy Internet period from 1996 through 2000, when Canada had nearly 200 venture capital companies, and the vast majority were competing for early stage investments. They all had surpluses of capital and were anxious to invest it. Today, it’s hard to find any venture capital firm that actually has money to invest, and those that do have gravitated towards more mature companies and management buy-outs. So, who fills the investment space vacated by our once thriving venture capital sector? Well, regrettably the answer must be angels!

Angel investment groups have been around for many years, particularly in Toronto, Ottawa and Vancouver. For a long time, the criticism was that they rarely “pull the trigger” on an investment, spending more time in networking and schmoozing than reviewing investment opportunities. Furthermore, many of the angel groups were comprised of what we called “angel wannabees”, individuals who wanted to be perceived as angel investors, and professionals such a lawyers, accountants, bankers and real estate agents, all looking for future business. Of course, the poor entrepreneur who was presenting to these groups would be unaware that 75% of the room had no interest in investing at all, and in fact they had no capital to invest.

Within the last couple of years, Canada’s angel community seems to have grown and matured. Thanks to government support programs, formal angel groups are springing up all across the country. Many of these angel organizations are still learning how to manage and coordinate their angel investors, not an easy task. However, one would think that the increased angel activity would be good news for entrepreneurs like Bob. I asked Bob if he had approached angel groups. His response was a rather flippant “been there”, “done that” as he had presented to five separate angel organizations in the past six months. Bob described his experience as unfruitful, time consuming and frustrating. In some groups, Bob was able to have private conversations with angel members only to find that several of them were professionals looking to get business from Bob’s company. He also suggested that Canadian angel groups really don’t cooperate or co-invest very often, but rather, they tend to be somewhat self-centred as they invest only within their local geographies. 

Talking to Bob, it sounds like the more things change; the more they stay the same. Perhaps the angel investor community cannot fill the gap left by past venture capital firms. While we wait for our angel community to mature, the lack of investment capital for early stage technology companies continues with no apparent solution on the horizon.

Bob did get the capital for his company. He raised $2 million from investors in the United States.

For your further reading, you might find the NACO’s recent report Investment Activity by Canadian Angel Groups: 2010 Report of interest.

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