While deal count rose, angels disproportionately favoured existing portfolio firms.
Like other investor groups, Canadian angels felt the burn of the market downturn last year, according to data from a forthcoming National Angel Capital Organization (NACO) annual report.
According to NACO, despite record demand, total angel investment in Canada during 2022 fell 37 percent year-over-year to $166 million CAD. Last year, angel organizations facilitated 653 investments in 379 companies. While deal count rose slightly in 2022 compared to 2021, NACO noted a trend towards follow-on angel investments.
“What we see is a risk-averse environment,” NACO CEO Claudio Rojas told BetaKit in an interview.
“Now’s the time to be doubling down, not pulling back.”
-Claudio Rojas, NACO
While this $166 million figure from 2022 represents a significant drop compared to the $262 million invested by Canadian angels during a record-breaking 2021, it remains a sizeable improvement next to 2020, when the pandemic fuelled a steep fall in angel investment activity.
Rojas noted that in some ways, these 2022 results mark “a return to pre-COVID numbers,” as total angel investment last year closely aligns with 2019, when angels invested $164 million.
To a certain degree, this Canadian angel activity mirrors what has happened on the VC side of the startup investment equation. VC investment in Canada declined by nearly 30 percent year-over-year in 2022 amid the market downturn, but still remained high compared to years prior to 2021.
“What’s happening in the macro economy is impacting the private markets, both venture and angel, in a sense that there’s a shift to risk aversion, but there’s also alternative asset classes that have become appealing to investors,” said Rojas.
Total angel dollars invested and deal volume per quarter fell steadily as the year progressed and economic conditions deteriorated. Amid this environment, NACO reported that angels disproportionately favoured existing portfolio companies, as nearly a third of deals were follow-on investments.
RELATED: NACO reports angel investment in Canada hit record $262 million in 2021
To help ensure the long-term health of Canada’s tech ecosystem, NACO has recommended that the Government of Canada help build angel investment capacity by providing matching funds, as it has previously done through FedDev Ontario’s Investing in Business Innovation program, and launching a national angel-stage fund-of-funds program similar to what the Venture Capital Catalyst Initiative is for the VC industry.
Asked why NACO believes such measures are needed now when angel investment still remains relatively strong overall, Rojas cited the disproportionate growth of VC funding relative to angel investment over the past 12 years. Per NACO, from 2010 to 2022, annual VC investment grew by 10x, while angel funding only quintupled.
While the pipeline of firms graduating from angel funding to VC remains strong despite current economic conditions, Rojas said it is not proportionate to the amount of capital flowing towards VC, which he argued hurts early-stage entrepreneurs seeking angel capital and VC investors alike.
“You need proportionate growth, otherwise, the venture capital ecosystem can’t generate the returns that it needs to be self-sustaining,” said Rojas.
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For his part, Rojas believes that the more is invested now, the better off Canada’s innovation economy will be over the long run, noting that some of the country’s best tech companies have been launched or built during economic downturns. “Now’s the time to be doubling down, not pulling back—that applies not just to government, but also to the investor community.”
Despite the drop in total angel funding last year as investors became more risk-averse, there were still some bright spots, including the continued rise of women angel investors and an increase in cleantech angel funding as a proportion of overall investment.
In 2022, 37 percent of Canadian angel organization members were women, up from 27 percent in 2021. Sector-wise, the largest shift came in the form of cleantech’s share of investment, which more than doubled from 2.6 percent in 2021 to 5.6 percent in 2022.
NACO plans to publish its full 2022 report at the end of June.
Feature image courtesy NACO.
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