Practices and Patterns of Informal Investors

Investor Profiles

A total of 61 individuals participated in the roundtable discussions held in 11 venues across Canada. In addition to the targeted investors, a number of other individuals also participated in the discussion groups. These included, for example, the ten participants in the Halifax discussion group, most of whom represented institutional venture capital firms and were not private investors. In addition, participants in several groups included representatives from local agencies and banks. A total of 51 investors completed the questionnaire. The findings that follow are taken from quantitative data in the questionnaire as well as from the qualitative data comprising the roundtable discussions.

The geographic distribution of questionnaire respondents was as follows:

CCIP Site	Proportion of Respondents (% of Total)
* Halifax participants did not include private equity investors.
Mt. Pearl	8.2
Halifax	0.0*
Moncton	4.9
Fredericton	14.7
Ste. Hyacinthe	4.9
Ste. Therese	14.7
Niagara	8.2
London	9.8
Waterloo	14.7
Canmore	9.8
Victoria	9.8
Total	100.0

Region	Proportion of Respondents (% of Total)
Atlantic	28
Quebec	20
Ontario	33
Western Canada	20

Investor Personal Characteristics

The investor respondents were well educated, with more than 44 percent of respondents reporting a post-graduate degree and another 24 percent having an undergraduate university degree. Forty-five percent of investors held professional designations, most frequently C.A.'s and Professional Engineers. Chart 1 provides a breakdown of the responses from when investors were asked to identify their full-time occupation. What is interesting to note here is that the vast majority of investor respondents held other jobs. Investing and managing their investments was not their primary occupation. This observation holds implications for how much time informal investors can accord due diligence, post-investment management, and other aspects of private investment. Almost all respondents (91%) were currently business owners or had been business owners at some point in their lives.

Chart 1: Investors' Occupations

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Chart 2: Frequency of Private Investments

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Investment Patterns

The 45 investor respondents who reported when they had started to invest represent a collective total of 522 years of experience as investors, an average of 11.6 years. As shown in Chart 2, Canadian angels tend to be repeat investors in the informal marketplace; with more than 70 percent of respondents reporting at least one investment every two or three years with one-third of respondents investing several times annually. Together, the 51 respondents report having a total of more than $47 million available "for the purpose of making private investments in Canadian SMEs" an average of slightly less than $1 million each.

Charts 3 and 4 break down the sectoral and stage of investment distributions of the deals reported by investor respondents. While software deals were the most frequent investments, the average size of such deals tended to be small. Of the 142 deals, 60 (42 percent) were to businesses described as being in knowledge-based enterprises. Deals in the finance and real estate sector accounted for a disproportionate amount of the capital invested. Most investors reported deals in multiple sectors. Also, as has been found in previous research, investments were predominantly placed in early stages, usually at the seed and start-up stages. As shown in Chart 4, below, more than 60 percent of investors had invested at the start-up stage and 50 percent of investors responded that they had invested at the seed stage of projects.

Chart 3: Investment Patterns: Sectoral Breakdown

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Chart 4: Investment Patterns: Stage of Investments

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The 51 investors who completed the questionnaires and who participated in the roundtable discussions had been involved in 142 deals during the last two years, collectively investing more than $107 million in these investments. In making these deals, the investors reviewed a total of approximately 1,200 proposals per year (on average, about 24 proposals per year each), resulting in an estimated acceptance rate of approximately 6%. Investments tend to be local, with 68% of the deals being located within 50 km of the investors' home or office.

Investor's Experience Re: Availability of Investment Opportunities

Investors were split on the issue of whether or not they experienced a sufficient deal flow: 55% of respondents reported that they have a sufficient deal flow; 45% reported to the contrary ("Nous avons peu de projets bien montés."). To achieve this deal flow, the questionnaire data reveal that each investor reviews, on average, 24 proposals per year. However, the roundtable sessions suggest that most investors are exposed to considerably more projects than this. Most potential deals are not pursued beyond very preliminary discussions before it becomes apparent that either the investor or the entrepreneur (would-be entrepreneur) is not interested in pursuing discussion further. A general finding was that entrepreneurs are not well-prepared for investment.

"A guy phoned the other day and asked me to consider a project. I said 'I'll look at the venture, but I'll tell you right now, I'll want between 20 and 25% on my money.' The guy said 'we can go to the bank and get better money than that'. I said 'what did you call me for?' They don't realize the venture capital is looking for 20-25% return."

"For every 20 proposals I look at, there might be one I look at really closely. Everybody wants to be in business, but few know how to be in business. There are an amazing number of people who get into business because they have expertise in one little area whether its making something or selling something, but they really don't understand how to make a profit – that the biggest thing, knowing how to make money. I find people put all their focus on how they are going to develop the portal or idea without figuring out how they are going to make money off it."