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Practices and Patterns of Informal Investors

Background and Objectives

Private investors are active in equity financing between the stages of owners' personal financing and institutional venture capital or public financing^{Footnote 1}. Private equity investors are also commonly known as "business angels" or as "informal investors". This report documents the findings of the first phase of a specialized research study that sought to learn more about how private investors do business. The work investigated the following issues:

• the role that individual angel investors play in the growth of Canadian SMEs;
• the profiles, investment patterns, practices, and views of informal investors;
• the role played by angel networks, syndication patterns, and other intermediaries in the informal market; and
• how government might further encourage more, and more effective, angel investment in support of SME growth.

The work reported here represents the findings of the first stage of a two-stage study designed to address these research objectives. This first stage involved a preliminary exploration of these issues by means of a series of national roundtablediscussions supplemented by background data and is described in more detail presently. The second stage is expected to involve a national series of interviews with an expanded set of investor respondents. Details of the second stage methodology will depend on the outcomes of this first stage of the research. Accordingly, the purposes of this initial series of roundtable discussions is fourfold:

• to begin the process of developing profiles of private investors;
• to learn about the ways in which private investors conduct their business;
• to obtain preliminary responses of private equity investors to recent initiatives; and,
• to gauge the level of interest among investors with respect to creation of a national panel of investors. The role of the proposed panel would be to provide a means of monitoring private investment activity and to allow governments to engage in consultation with a substantive body of investors.

Specific Research Goals and Objectives

The specific goals of the work described here are intended to yet better inform public policy with respect to the characteristics, practices, patterns and perspectives of Canadian informal investors. Research objectives with respect to investors' characteristics and practices included the following.

1. To update, from empirical data, profiles for typical individual investors. Profiles include breakdowns of, among other attributes:
   • investors' personal characteristics (education, experience, financial attributes, and occupation);
   • investors' investment patterns including their expectations and investment patterns (investment size, sector, stage, frequency of investments, location of businesses);
   • investors' experiences regarding the availability of investment opportunities;
2. To describe the nature of informal investments, with a focus on investors' investment behaviour including:
   • how investors learn about and locate potential investments;
   • how investors evaluate potential investments (including the due diligence process);
   • investors' exit strategies;
   • formal and informal networking and syndication patterns of Canadian informal investors.
3. To identify key parameters of the investment process, including:
   • essential factors prompting investors to make an investment;
   • investors' experience with the level of preparedness of small and medium-sized enterprises (SMEs) with respect to private investment;
4. To report on the investment climate in Canada and the regions, including:
   • angels' comments about the effects of tax changes on their actions, including further suggestions regarding the tax-free rollover of (reduced) capital gains taxes on small business investments;
   • investors' ideas about how equity financing of SMEs might be facilitated.
5. To take the first steps towards establishing a national panel of informal investors such that government can more readily monitor investment activity on an ongoing basis and dialogue with the panel with respect to public policy proposals and related matters.

^{Footnote 1} Private equity investors are commonly known as "business angels" or as "informal investors".

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