Canadian angel investors defied economic headwinds and fears from industry leaders to book $102.9 million worth of deals in 2020, a report by the National Angel Capital Organization with input from Entrevestor has found.

The Changing Landscape, this year’s edition of NACO’s annual report on angel investing, was authored by Colin Mason -- a professor of entrepreneurship at the University of Glasgow’s Adam Smith Business School. NACO is an association of angel investor groups, but does not itself make investments. In 2019, it reported that Canadian angels had invested $163.9 million, with 2020 marking about a $61 million contraction -- less than Mason said many observers feared.

"There was a real fear [in the second quarter] that we were going to lose a whole generation of startups because angel investing would drop off a cliff," said Mason, who is currently serving as an Adjunct Professor at Memorial University of Newfoundland.

In the report, Mason wrote that NACO partnered with Entrevestor because Atlantic Canada is one of the few regions in the country that lacks a formal angel network. NACO gathers its data exclusively from those networks, but Entrevestor’s tactic of surveying startup founders offered an alternative source of insight.

“We're missing all the individual stuff,” said Mason in an interview, referring to trends across not just Atlantic Canada but the entire country. “And the question is, well, how much of the market is that?

Check out Entrevestor's Research into Oceantech in 2020

“It's kind of like an iceberg where we're recording what's above sea level, but we don't really know how much is happening below sea level. People have estimated organized angel investing accounts for maybe 10 to 20 percent of overall angel activity, but that’s just a guesstimate.”

When COVID-19 first reached Canada in the second quarter of 2020, experts such as NACO Chief Executive Claudio Rojas worried it could cause angels to halt their activities, potentially hanging young companies out to dry.

“Angel investors are focusing more-so on their existing portfolios,” he said in a May, 2020 interview with BetaKit. “So what that means is that deals that, in a pre-COVID environment would have received funding, are going through a lengthier process or have altogether evaporated.”

Compared to previous years, the number of angel investment deals recorded by NACO increased and the deal size fell, meaning that angel funding was distributed among a wider range of startups.

The mean size of an angel investment in 2020 was $233,000, continuing a trend that has seen it fall from almost $500,000 in 2015. The number of deals rose by about a third, from 299 to 416.

Mason said there are at least three possible explanations for the apparent trend, and that the NACO data is not granular enough to draw a strong conclusion.

It might be the case, he said, that angels are investing in companies earlier in their development. The change in deal sizes could also be explained by angels having made new investments in companies they had already bought into, with the aim of helping them ride out the pandemic. Or the average deal size might reflect a wider variability in the size of investments, with a handful of smaller deals skewing the numbers.

“The averages in all of this are a little bit misleading,” said Mason. “There's so much variability around the average figures in all the data.”

In Atlantic Canada, meanwhile, angel funding rebounded after an almost 30 percent downturn in 2019. In Entrevestor’s annual survey, founders reported that they had raised a total of $27.3 million from angels, making 2020 the region’s second best year for angel funding, after 2018's $29.4 million.

The lack of a formal angel network worries Mason, though.

Members of the local startup community have posited that early-stage venture capital firms like Concrete Ventures and the New Brunswick Innovation Foundation could be acting as de facto angels by helping companies complete the six-figure funding rounds that they would usually raise from private citizens.

But Mason said angel groups are also important for helping investors distribute their risk. In an angel group, members often make joint investments, with each person contributing smaller amounts of money to a wider array of companies.

And angel groups also provide training to their members and help them vet potential deals, allowing less knowledgeable individuals to participate.

A key role of angel groups, he said, is to increase a region’s pool of potential angel investors by lowering barriers to entry.

“And that in turn begs the question, how should angel groups get funded?” said Mason. “If they’re providing this wider benefit to the ecosystem, should the public sector fund these training activities in some way?

“Otherwise, most angel groups rely on volunteer labour, or else they need paid management... So, I think it's an argument that angel groups should get some kind of operational subsidy from government.”