Angel investment growth continues in 2016 but policy concerns remain unaddressed

The National Angel Capital Organization (NACO) is waiting for a federal policy response to its recommendations to stimulate the investment class as it reports a 15% year-over-year increase of its members’ investment activity for 2016. NACO members comprised of 34 distinct angel groups invested $157.2 million, up from $133.6 million in 2015 when 31 groups reported and the fourth consecutive year of increases.

NACO estimates that its membership accounts for between 10% and 20% of total angel investment activity, meaning 2016 saw between $785 million and $1.6 billion in investments across the country.

Last fall, NACO submitted a policy paper to the government urging the government to consider four recommendations to be included in the spring Budget — a 15% refundable National Investment Tax Credit, accelerated investment write-offs for angel investors, funds that would co-invest with angels in qualified ventures and the issuance of founders’ shares or stock options with no tax liability until shares are sold.

“That paper was part of an ongoing policy dialogue with the federal government. We feel encouraged but it’s not a done deal. There’s no movement yet,” says NACO CEO and executive director Yuri Navarro. “The feds are now looking at scale-up capital and we support it but you still need to engage the rest of the ecosystem. There are a lot of players before scale-up.”

In 2016, NACO members received approximately 5,000 investment applications of which just 418 or 7.8% were ultimately funded, a percentage that has remained fairly static in recent years and is comparable to other investment classes such as venture capital.

Information and communications technology (ICT) remains the single largest sector receiving angel investment but for the first time the number of those investments fell below half to 45% of the total and accounted for 26% of the total amount invested. In contrast, life sciences accounted for 15% of investments but were the largest sector in terms of dollars invested ($70.7 million or 45%). Services, manufacturing and clean tech followed well behind, although 20% of deals and 13% of amount invested is categorized as “other” — amounts that have grown steadily over the past four years..

The report expresses some concern that angel investment was not mentioned in the influential report from Advisory Council on Economic Growth and the government’s Innovation and Skills Plan, which emphasizes scale-up of firms at the expense of the start-up ecosystem. There is also concern over the recent proliferation of incubators and accelerators.

“We don’t see accelerators and incubators as bad. There’s a lot of attention and funding that creates more demand but companies are not being adequately prepared for investment. We need more collaboration,” says Navarro. “There’s a lack of training for companies and we don’t see that improving.”

The report goes even further. “Angels feel that these organizations are competing against their unique investment proposition as the first external investor after 3F (founder, family and friends) money. There is also a view that accelerators and incubators are leading to inflated valuations,” states report lead author Colin Mason, a professor of entrepreneurship at Glasgow Univ.

Angel groups typically invest larger amounts than individual angels and are not limited to the early-stage formation of companies. The report notes that group investments can be part of larger syndicated deals involving investors from other asset classes (venture, strategic partners). Angel groups are also a source of growth funding as they increasingly engage in follow-on investments that are larger than initial rounds.

“The scale and nature of this investment activity underlines the vital importance of the Angel community in the entrepreneurial ecosystem and its need to take a prominent position in entrepreneurship policy debates,” the report states.

Ironically for an asset class that represents wealthy individuals, angel groups are often cash poor when it comes to administrative support. Navarro says angel groups are largely volunteer-run and bootstrapped by the angel community, posing a challenge to data collection and education of members.

Other challenges faced by NACO members include a lack of member engagement in performing due diligence, a lack of angels willing to take the lead on deals and a lack of exits leading to investor fatigue and lack of reinvestment capital.

“It’s hard to predict whether the amount invested (by NACO members) will continue to increase,” says Navarro. “I’m very encouraged and it’s been positive to date but it depends on the growth of the investor ecosystem and investors themselves. Positive returns are also a key factor.”

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