When angels invest
Two years ago, Emir Aboulhosn was elated to see his startup Roam Mobility drawing in customers, but worried as the company’s expenses and bills stacked up.
The Vancouver-based company, which sells lower-cost cellphone roaming service packages to Canadians travelling to the United States, had just a few hundred thousand dollars in seed money — far less than the $2-million minimum typically needed to launch a venture of this kind.
Mr. Aboulhosn, who wasn’t taking a salary, had already put in more than $120,000, and counting, of his own money. Potential investors came calling, but the offers were “terrible,” he said, calling for too large a stake or lowballing the company’s potential.
His fortunes changed last year when an angel (investor) swooped in to help his venture take flight. Mike Volker, a longtime angel investor and technology innovator, together with WUTIF, an angel fund for startups that is based in British Columbia, invested $150,000 in Roam Mobility.
With his reputation, and monetary show of confidence, Mr. Volker’s stamp on the project — and the signing of a term sheet — opened the floodgates for other angels to rush in, Mr. Aboulhosn said.
“It was very key. It’s always the guy that takes the first step … What he’s done is he’s shown where he’s going to put his money, what he thinks the deal is worth, and you’re welcome to come on board,” he said.
Roam Mobility now has more than a dozen investors, and has moved into profitability this year.
Angel investing is not new to Canada, but the number of deals done annually are on the rise, and organized angel investor groups are growing in size, new statistics show.
The number of investments made in 2012 nearly doubled to 139 from 71 in 2011, a survey of 20 angel investor groups across Canada by the National Angel Capital Organization, an independent non-profit association that supports these groups, found. The total invested also rose, but at a far slower pace — up 13% to $40.5-million in 2012 from $35.7-million in 2011.
Yuri Navarro, executive director of NACO, says this reflects a trend toward smaller investments as angel investors look to diversify their portfolios and mitigate their risk.
But the rise of Canadian organized angel groups — NACO estimates that there are now 30 identifiable angel groups or networks, most of which have been formed within the past five years — have also allowed smaller investors to jump in on deals with other angels, he said.
“[For] smaller investors that would like to still participate in the space, but only at a $50,000 or $20,000 at a time basis, that has allowed them to come together, pool resources, and make investments. The advent of the [angel] group really has been, to an extent, a democratization of investing,” Mr. Navarro said.
While it is hard to encompass all of the activity in the angel investing sphere — many deals are done by individuals who prefer to remain anonymous — the latest survey of 20 out of 24 NACO member organizations helps to shed light on underlying trends in this crucial source of early-stage financing for entrepreneurs.
One such trend is the move toward smaller investments, with many more co-investors on deals. Mr. Volker says, now, it’s not unusual to have 15 or 20 investors on a particular venture.
“I know investors who have invested in six or seven companies and they’ve lost money on every single one of them,” he said. “And they’re waking up to that. That the only way to get a return is to be on 15 or 20 or more deals. So, investors are putting in much smaller amounts, and there are more investors for a particular project.”
This tendency to have many hands in the pot is as much about lessening individual risk, as it is about gauging the company’s viability by looking to see who else is putting their cash on the line.
“I used to invest entirely myself in deals,” Mr. Volker said. “I won’t do that anymore, and I think I’m not alone in that. A lot of angel investors, they’re all asking the question: ‘Who else is investing?’… And if there is nobody else, it’s a bit of a red flag.”
Cautiousness, perhaps, also affected the overall amount startups were able to raise last year.
The average funding-round size in 2012 was $313,935, down from $506,679 a year earlier, the NACO survey shows.
In Central Canada, the average investment was about half of the $617,000 in 2011. In Eastern Canada, the downward trajectory was more moderate, falling to $223,000 from $286,000. Investors are putting in much smaller amounts, and there are
more investors for a project. However, the average investment round in Western Canada more than tripled, from $ 118,000 to $ 449,000, as Vancouver slowly emerges as an investment hub.
Mr. Navarro attributed the shrinking average investment, in part, to better valuations of companies. In the past, angels had less information on which to assess what a company was worth, he said. Angel groups can now look at previous deals and valuations, he said.
“In order to be a bit more cautious, some of the valuations have come down a bit more, in line with industry norms,” Mr. Navarro said.
Mr. Volker and many of his peers are looking to invest through angel funds and groups — whose ranks are growing as a result.
In 2011, 70% of the groups surveyed by NACO had 50 members or less. By last year, the balance tipped the other way — 55% of the groups had 51 or more members, NACO said.
The largest angel group, by overall amount invested, was the Golden Triangle Angel Network (GTAN) in Cambridge, Ont. GTAN, which describes itself as a “dating service” for investors and startups, has grown to roughly 100 members since it launched in 2009, said Rob Douglas, founder and president of the group.
Last year, GTAN invested $6.5-million in 16 deals, nine with local companies, and the remainder in Toronto and other parts of southwestern Ontario, he said.
GTAN has benefitted from an “ecosystem” for startups and investors, with local incubators such as Communitech in Waterloo, Ont., helping new ventures get off the ground and sending them to the angel group, Mr. Navarro said.
All the ventures GTAN reviews for investment come through these accelerator hubs, and as a result, roughly 20% of them walk away with funding, Mr. Douglas said.
“It’s a high percentage, actually. What is coming to us is screened, is really wellbuffed and polished and has been through an incubator system,” he said.
As the use of incubators becomes more popular, a growing proportion of the pitches received by angel groups are funded, NACO data shows. Of the total business plans the angel groups received last year, 7.3% were funded — up from 6.5% in 2011 and 4.5% in 2010.
“There are a lot more incubators and accelerators,” Mr. Volker said.
“And they help entrepreneurs have a better read on their business, and be better prepared … When they make approaches, they have had a little bit of coaching. In the past that just hasn’t been the case.”
Among the angel groups surveyed, the bulk of investments were concentrated in Central Canada. While this in part stems from NACO’s strong membership in Ontario, Mr. Navarro said, the results also stem from historical economic dynamics.
“I think it’s probably just a reflection of where a lot of the assets are centralized in Canada, and a lot of the startups are centralized in Canada,” he said.