Archangel closes fund that seeks to fill startup investment gap
Building Canada’s early-stage VC landscape
A year after launching a network of funds meant to fill a gap in Canada’s early-stage venture capital landscape, a group of investors from the Toronto-waterloo corridor have closed their first $10-million funding round.
The Archangel Network of Funds is spreading the raise across three individual funds, which will identify early-stage and pre-revenue opportunities in which to co-invest under the Archangel umbrella.
The network plans to cut cheques of about $100,000 with investment timelines of roughly five years.
Archangel is designed to attract angel investors who want to build their startup portfolios but may not have the experience or expertise to do it. “We’re reaching into a wider audience in order to allow people who are accredited investors to be able to invest in innovation companies,” said Benton Leong, general partner at Archangel. Leong said licensed partners (LPS) include doctors, lawyers, builders and professionals from other industries who don’t have a tech background and may not be able to do due diligence on startups. “We provide them with intelligence from our network of angel investors and they can draft along,” he said. “They become LPS and provide capital and enjoy the success we’ve been having.”
Archangel’s funds — called Adrenaline, Starforge and Axion — each have their own investment theses. Adrenaline is a sidecar fund which co-invests alongside other accredited angel investors. The fund will come onto deals that have already gone through due diligence. Starforge is an active fund that seeks new companies to invest in through the fund’s own due diligence process. And Axiom looks for opportunities that are still being developed at research labs and universities, where innovators may not necessarily be thinking of commercial potential.
The funds seek out investees independently, but they’ll co-invest with each other if a company fits each of their criteria. The structure lets Archangel share its management fee (about two per cent) between the three funds, while allowing investors to write smaller cheques but more of them. “We knew that we needed a minimal target of $10 million to run this well,” said Leong. “Small funds of $2- or $3-million just aren’t viable. If they’re paying that two-per-cent management fee, they don’t have the assets under management to do a professional job.”
The model helps LPS build a diversified portfolio, which Leong noted is particularly wise for early-stage and pre-commercial investments. The Adrenaline fund alone will invest in eight to 10 companies a year. Starforge will invest in a similar number, though some deals may overlap with Adrenaline, while Axion will invest in fewer.
Interest in angel investing has increased in Canada over the past few years. In 2019, investors spent a record $163.9 million on angel-stage funding, up 15 per cent from the year before and topping the previous record set in 2017, according to the most recent report from the National Angel Capital Organization (NACO). Many angel investors and companies seeking funding have expressed concern about the impact COVID-19 would have on the space. (NACO has yet to release its latest report capturing angel activity during pandemic.) Leong said Archangel’s approach helps de-risk investment decisions for new LPS at a particularly uncertain time in the economy.
Other funds are using similar models to try and make venture capital and angel investing more accessible. Vancouver-based Future Capital, for example, targets new investors from a range of underrepresented groups. The firm made its first investment last week in Heirlume, a women-led Toronto-based startup operating an Ai-powered platform that searches and registers for trademarks.
Separate from its $10-million fund, Archangel made three investments last year in startups using technologies to address problems related to the COVID-19 pandemic. Leong said the firm has identified several startups for its first investments from its current fund, though no deals have yet closed. The firm’s partners anticipate they’ll start raising their next fund this fall for deals in 2022.