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A Literature Review and Industry Analysis of Informal Investment in Canada: A Research Agenda on Angels

1. Introduction

The purpose of this study is to present a review of the existing information which has been conducted in Canada and about Canadian angels. This literature review presents the existing Canadian research and commentary in a framework which:

• Encompasses elements of the industry and its competitiveness;
• Encompasses the decision making process typically used by formal venture capitalists;
• Highlights notable regional variations based on geography, sociological or economic factors, and Recognises and accounts for different types of angels.

The Porter's Five Forces Model of Competitiveness is a management tool used to systematically analyse the competitive forces within an industry. The collection of individuals making informal investments cannot yet be called an industry. In order to develop functions, processes, understanding and policies that would allow angel investments to be referred to as an industry, more understanding is needed. By analysing this fledgling industry using standards that are normally applied to growing and mature industries this study aims to highlight the gaps in current knowledge. Over the eight-week period of this study I have attempted to identify propositions and advance tentative hypotheses which will reduce these gaps and promote understanding and the interests of informal investors.

For context, in many places, explanation is addressed by comparing elements or effects as they appear in the formal venture capital industry. In particular, reference is made to various stages of the decision making process as originally outlined by Tyebjee and Bruno (1984). Generally, the stages of investment include deal search and generation, screening, evaluation and due diligence, deal structuring and negotiation, and post-investment activities such as monitoring and exit.

There are expected to be differences between various regions in the country. These differences have been largely accounted for in the works of the primary large scale studies which have been conducted to date. These studies include the Ottawa-Carleton area by Riding, Haines and others at Carleton University, Quebec City and area French angels by Suret, Arnoux and Dorval at the University of Laval, the Cape Breton area by Lionaise and Johnstone at the University of the College of Cape Breton, and the Atlantic Region by Farrell at Saint Mary's University. Amit at the University of British Columbia represents western Canada. As the number of large scale studies is small, the reader can infer the region by the authors as they are cited during the text of this report.

Lastly, a variety of differing types of angels have been considered. Those referred to include family angels, arms – length angels, large-investment angels, small-investment angels, habitual angels, novice angels and corporate angels. As an exploration of our knowledge is the purpose of this report, it is not wise to define our perimeter too narrowly as a breadth of focus gives us room to make comparisons and explore subtle differences and similarities.

Readers should be advised that there is considerable literature about informal investors beyond the work conducted by and about Canadians. Since much of it is developing from theory arising from disciplines such as psychology, economics, and management, the reader is advised to consult the wider literature for a full account of developments in the field of informal investing. As requested, the Canadian journalistic and academic literature has formed the basis for the work presented here. Occasionally, reference is made to notable developments in the literature beyond Canadian researchers though exhaustive efforts have not been made to document each of these sources. These efforts are conducted in a manner that highlights findings, identifies areas that have not been explored, and suggests new directions for research.

The study proceeds with the following format. First, the industry is examined using typical industry profile characteristics such as investor and investment characteristics, market size, consolidation, and investment preferences (Section 2). This is followed by Porter's Five Forces Model of Competitiveness analyses (Section 3). Porter's Model of Competitiveness (Porter 1980) is a powerful, systematic tool for examining the forces at work within an industry and has been used to study the formal venture capital industry (Wright, Robbie and Chiplin 1997 ). Systematically examining customers, suppliers, rivalry, new entrants and substitutes develops understanding about informal investment by comparing it to standard industry scrutiny. Gaps in our knowledge are outlined (Section 4) and recommendations are made for future research. The Bibliography includes works associated with the subject, but not necessarily cited. The Appendices outline sources convened, lists of informal investors and investees, and an index. An extensive collection of sources directly related to the Canadian context accompany the report. Their bulk is significant and so they should be regarded as support reference materials.

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