WATERLOO REGION — As the Canadian economy slowly emerges from the COVID-19 pandemic, there is growing concern many of this country’s youngest startup companies may lose access to a vital source of early funding.
Companies often rely on so-called angel investors to fund the earliest stages of their growth, and it’s a crucial source of investment for businesses that aren’t yet big enough or have sufficient sales to capture the attention of major investment firms or banks.
With growing global uncertainty over just how quickly the economy will recover from the pandemic, however, and with access to critical U.S. capital largely cut off due to border closures and reductions in travel, there are worries Canadian angel investment may dry up.
Waterloo Region’s tech and innovation sector owes much of its success to angel investors, said Iain Klugman, chief executive of local technology hub Communitech.
“It is the capital that launches almost every successful company in the history of Waterloo Region,” Klugman said, citing local success stories such as OpenText, Vidyard and D2L (formerly Desire2Learn).
“It is the capital that launches innovation-based business; almost always the first (investment) round is driven by angels.”
Angel groups across Canada are calling on the government to create incentives to get Canadian capital off the sidelines and invested into homegrown companies and talent.
And we’re not talking huge amounts of money, either. Klugman said many angels invest perhaps $50,000 to $100,000 of their own cash every year into companies — often in exchange for convertible debt or an early ownership stake.
Yet the pandemic and the economic malaise that has accompanied it could stall future investment as angels put a pause on potentially riskier endeavours in favour of safer bets, like real estate.
Klugman fears this funding freeze will come just as the push for entrepreneurship picks up among university and college students graduating into a weak economy, and people recently laid off from work who may look to self-employment as a more viable option.
“It’s time for the government to put into place some incentives,” Klugman said. One option would be an angel tax credit worth up to 50 per cent of the investment, he said.
Jess Joss is worried companies will lose more than just access to early-stage cash in angels stop investing.
“Think of these companies as seeds, and the angels are the water and fertilizer,” said the chief executive of Equation Angels, an amalgamation of more than 100 angels from Kitchener-Waterloo’s Golden Triangle Angel Network, Burlington’s Angel One group, and London’s Southwestern Ontario Angels.
These investors provide much-needed cash, but they also bring “mentorship and access to their networks,” Joss said.
“It’s not just money, but smart money.”
Ontario’s 13 angel networks are also facing a fight for their survival. These groups help co-ordinate angels and their funding efforts in different regions across the province.
Many operate as not-for-profit agencies, and in March 2019 they lost provincial funding they say was critical for day-to-day operations. Each group received a maximum of $50,000 per year.
They may also soon lose funding made available through the Federal Economic Development Agency for Southern Ontario, Joss said.
The past decade has seen record levels of investment of more than $1 billion into early-stage companies (including a record-setting $163.9 million from angels last year), according to the National Angel Capital Organization, a group of 45 regional angel investment groups and 40 accelerators or incubators across Canada.
Another potential model of angel investment is the Archangel Network of Funds, a consortium of nine investors who pool their resources across three different portfolios in order to diversify the types of projects they fund.
One of the partners in the network is Amber French, and she said angel investors often run their own business — ranging from HVAC operators to patent lawyers — and some have seen their businesses take a hit during the pandemic, which has taken a toll on their willingness to take on new investment opportunities.
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“The Archangel Network is a good example of spreading money out and reducing the risk,” said French, who is also the managing partner of Catalyst Capital in Kitchener.
The long-term impacts of reduced investment into Canada’s earliest startups could be dramatic, Joss said.
“If you lose a generation of angels, you lose a generation of entrepreneurs, and then you lose a generation of economic recovery for our country,” she said.
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