Trends in Angel Investing

January 9, 2018

Author: Dennis Ensing

As we recently turned the calendars to 2018, I was thinking about trends that have become evident in angel investing in the past couple of years. While the data has not been collected for 2017 yet, I believe that the collected data from 2016 together with our collective experience in 2017 illustrates several key trends and definitely demonstrates how important the angel investment class is to the start up and seed funding ecosystem here in Canada.

1. Amount of Money Invested

Angels are investing more money than ever before. The National Angel Capital Organization (NACO) reported that in 2016, 35 Angel groups across Canada, representing 3,300 active Angels, made 418 investments amounting to $157.2 million^[1]. Both the number of investments and the total invested was up significantly from the previous year.
The average deal size that Angel investors participated in was $1.7 million, 49% more than 2015^[2] . Interestingly however in Ontario the average group investment was $350,000, a 10% decrease from the year before^[3]. Clearly this shows the reliance on syndication – especially among affiliated Angel groups (see also below).

2. Term Sheets

There has been a drive toward simpler and cheaper (legal fees) deal structures. This has led to a widespread adoption of SAFE Convertible Notes by entrepreneurs in particular, supported by well-known investors and accelerators like Y-Combinator and 500 Startups. In response to this trend, NACO established a project to develop standards that guide investors and founders to structure deals that align their interests, position the company for future investment and growth, protect the rights of each party and reduce some of the friction inherent in negotiating deal terms^[4]. SWO Angels strongly supports this approach and, while we have entered into many different structures, including SAFEs, we have a preference for straight equity.

3. Syndicating

NACO reported that 58% of syndicated deals involved a combination of multiple syndicate partners^[5]. This is a nominal change from 2015.

Most syndicated deals are with other Angel groups. Central Canada is the hotspot for Angel investment activity with 61% of investments made in the region, which is down from 71% in 2015^[6]. A majority of Angels (80%) are located in Central Canada, with 17.3% in Western Canada and 2.7% in Eastern Canada^[7]. Nine per cent of syndicated deals also involved Venture Capital funds^[8].

4. Bigger is Better

At the NACO’s 2017 World Angel Investment Summit^[9], held in Montreal in October, many angel groups met to share experiences and best practices. What was plainly evident to me is the strength that comes from a significantly larger membership base. Investment capacity is clearly leveraged from a larger member pool, but also are wider bases of business experience and connections, both of which are critical components of the Angel investor offering to our investee companies. An excellent example of this trend is the success of Anges Québec^[10], now with more than 200 members. In addition to direct investing by members, their size also enabled them to establish Anges Québec Capital. Québec-based institutional investors are significant sponsors of this fund to support angel investors who invest in innovative start-up companies in Québec.

5. Diversity

One of the best workshops I attended at NACO’s Summit was called “Leaning In: How Women are Changing the Face of Angel Investing”. A panel of five women who are Angel investors was moderated by Michelle Scarborough, Managing Director Strategic Investments and Women in Tech, BDC Capital. There is no question in my mind that better investment decisions come with greater diversity.
While we don’t yet have data to confirm this opinion, a 10-year study of early stage start up performance First Round Capital found that female founders performed a whopping 63% better^[11]. This is an interesting report to read, as there are also several other diversifying industry trends evident from their study.
The same study found that team founders perform higher than solo founders – a whopping 163%^[12]. This is not surprising as most experienced investors and entrepreneurs know that founders who can let go of their ego and know how to share the pieces of the pie with multiple minds have more successful outcomes growing their ideas into a profitable reality.