The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel...
Transcript of The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel...
![Page 1: The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel Investors I-INC WHITE PAPER SERIES: MAR. 2019 March 30, 2019 Dr. Kenneth A. Grant Dr.](https://reader030.fdocuments.net/reader030/viewer/2022041019/5ecd8a42750b6d03cf3a9925/html5/thumbnails/1.jpg)
The Survival Rate of Startups Funded by Angel Investors
I-INC WHITE PAPER SERIES: MAR. 2019
March 30, 2019
Dr. Kenneth A. GrantDr. Martin CroteauOsama Aziz Ted Rogers School of ManagementRyerson University
PREPARED BY:
![Page 2: The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel Investors I-INC WHITE PAPER SERIES: MAR. 2019 March 30, 2019 Dr. Kenneth A. Grant Dr.](https://reader030.fdocuments.net/reader030/viewer/2022041019/5ecd8a42750b6d03cf3a9925/html5/thumbnails/2.jpg)
Table of Contents
1. Introduction
2. Survival Rates: Fact vs. Fiction
3. Methodology
3.1 Data Source
3.2 Supplemental Data
3.2.1CorporateProfiles
3.2.2SurvivalRates
3.2.3EconomicModels
4. Results
4.1SurvivalRates
4.1.1SurvivalRatesbyAge
4.1.2SurvivalRatesbyIndustry
4.2EconomicImpacts
4.2.1ContributiontoGDP
4.2.2JobCreation
5. Implications
6. Future Work
7. Partners
8. References
3
5
8
8
9
10
10
10
11
11
12
13
15
15
16
17
18
19
20
![Page 3: The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel Investors I-INC WHITE PAPER SERIES: MAR. 2019 March 30, 2019 Dr. Kenneth A. Grant Dr.](https://reader030.fdocuments.net/reader030/viewer/2022041019/5ecd8a42750b6d03cf3a9925/html5/thumbnails/3.jpg)
3
1. Introduction
In developed and developing economies, governments and policy-makers seek to encourage the creation of new firms in order to drive economic development and growth, and to create jobs. In 2013, the Government of Canada spent over $5.4 billion on federal tax and spending programs that support small businesses and entrepreneurship (Carey, Lester, & Luong, 2016).
SinceSchumpeter’searlywork(Schumpeter,1934),theimportanceofentrepreneurshiptoeconomieshasbeenwell-established,withentrepreneurialinnovationanddisruptionseenasamajorcontributortoeconomicgrowth.
Whiletheimportanceofnewfirmstothegenerationofwealthmayseemobvious,itmayseemthatthereislittlelogicingovernmentencouragingthecreationoffirmsifthosefirmsdonotsurvive.But,itcouldbearguedthatevenfailedfirmsareaninvestmentintheentrepreneurialcapacityoftheirfounders,whichcouldleadtofuturesuccessandanimprovementinCanada’sentrepreneurialculture.Thus,itisclearlyineveryone’sbestinterest−entrepreneurs,employees,investorsandsocietyatlarge−formorenewventurestosurvive.
Thisbegsmanyquestions:Howmanystartupssurvivetobecomesuccessfulfirms?Whydosomestartupssurvivewhileothersdonot?Whatcanpolicy-makersdotoimprovethesurvivalrateofstartupsoverall?
Astartupmaynotsurviveforseveralreasons.Forexample,thefoundersmaydecidetonolongerpursueagivenopportunitybecauseofchangingmarketconditions,dynamicswithinthe
foundingteam,personalreasonsorotherfactors.Alternatively,andperhapsmorerelevanttothispaper,astartupmayceasetooperateduetoalackofresources(GlobalEntrepreneurshipMonitor,2016).Putmoreplainly,foundersgenerallystoppursuingagivenopportunitywhentheyrunoutofoperatingcapital.Thiswouldsuggestalinkbetweenthesurvivalrateofnewventuresandaccesstocapitalandotherresources(Coad,Frankish,Roberts,&Storey,2016).Finally,insomecases,thestartupmay beacquiredbyanotherbusinessandceasetoexistasanindependententity.
Notwithstandingthevariousgovernmentfundingprogramsaimedatsmallbusinessesandentrepreneurship,moststartupsarefundedthroughprivateinvestmentmadebytheentrepreneursthemselves,byfriendsandfamily,orbythird-partyinvestors(StatisticsCanada,2018).High-potentialstartupsthatdemonstratethepotentialforexponentialgrowthmaybesuitableforequityinvestmentbyangelinvestors(angels)andventurecapital(VC)firms.VCsinvestotherpeople’smoneyandaretypicallyrequiredtoreportontheiractivities.Therefore,theroleofVCsinthestartupinvestmentecosystem,andtheperformanceoftheirinvestments,isgenerallywellunderstood.
![Page 4: The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel Investors I-INC WHITE PAPER SERIES: MAR. 2019 March 30, 2019 Dr. Kenneth A. Grant Dr.](https://reader030.fdocuments.net/reader030/viewer/2022041019/5ecd8a42750b6d03cf3a9925/html5/thumbnails/4.jpg)
4
Angelsareprivateindividualswhoinvesttheirownmoneyandoftenoperateinformally(Wongetal.,2009).RelativetoVCs,angelsaregenerallybelievedtoinvestearlierinthelifeofastartupandtoinvestsmalleramounts.Yet,thetotalstockofangelinvestmentintheeconomyisbelievedtobemanytimeslargerthanthatofVCinvestment(Riding,2008).Basedontheangels’experienceandnetworks,manyangelsalsoprovidestartupswithhelpaccessingpotentialcustomersorwithoperationalmatters.Doestheaddedvalueprovidedbyangels,ortheearlierstageatwhichtheyinvest,leadtohighersurvivalorgrowthratesforstartups?
Despitetheimportanceofangelsintheinvestmentecosystem,littleisknownabouttheiractivitiesandtheperformanceofthestartupsinwhichtheyinvest−asignificantgapinknowledgeofthisvitalinvestmentactivity(Mason&Harrison,2008).ThisisparticularlyapparentinCanada,whichlacksempiricalresearchinthisarea.
Thegoalofthispaperistofillpartofthatgapbyinvestigatingthepost-investmentsurvivalratesofCanadianstartupsfundedbyangelinvestorsandcomparingthemtothegeneralpopulationofstartupsintheeconomy.
Does the added value provided by angels, or the earlier stage at which they invest, lead to higher survival or growth rates for startups?
![Page 5: The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel Investors I-INC WHITE PAPER SERIES: MAR. 2019 March 30, 2019 Dr. Kenneth A. Grant Dr.](https://reader030.fdocuments.net/reader030/viewer/2022041019/5ecd8a42750b6d03cf3a9925/html5/thumbnails/5.jpg)
5
MuchconflictedinformationhasbeenpublishedonstartupsurvivalratesinCanadaandaroundtheworld.Tradepublications,popularnews andconventionalwisdomwithintheinvestmentcommunitysuggestthatthesurvivalrateof newfirmsisverylow.Survivalratesof1in10 areoftenquoted.
Forexample,apopularTechvibes(2013)articleclaimedthattechstartupsposta90%failurerate,andinsupportofitsclaim,itquoteddatafromaMashablearticle.Inturn,theMashablearticlequotedanobscureinfographicthatwasnotreferencedandcouldnotbeverified.AnarticleinTheIndependent(2014)suggestedthatasmanyas9outof10newbusinessesintheUnitedKingdomdonotsurvivepasttheirsecondyearofoperationbasedonasurveyofonly60startupsthatweresupportedbyan
incubatororaccelerator.Theseexamplesillustratethetendencyofsomepublicationstodrawconclusionsonstartupsurvivalratesbasedonlimited or anecdotal evidence.
Acloseexaminationofdatafromgovernmentagenciesandpeer-reviewedacademicstudiestellsaverydifferentstory,withsurvivalratesinCanadaandothercountriesaveragingover90%afteroneyear,tobetween30–50%after10years.AccordingtoaseminalreportcommissionedbyIndustryCanadaonthestateofentrepreneurshipinCanada(Fisher&Reuber,2010),between85–87%ofnewCanadianbusinessessurvivepasttheirfirstyearofoperation,while62%existafterthreeyears,and51%makeitpasttheirfifthanniversary.AsshowninFigure2.1,survivalratesappeartoberemarkablyconsistentamongmanydevelopednations.
2. Survival Rates: Fact vs. Fiction
Figure 2.1: One-year Survival Rate for 2005 Source: Fisher & Reuber (2010)
90%average survival rate in Canada after one year
30–50%survival rate after 10 years
![Page 6: The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel Investors I-INC WHITE PAPER SERIES: MAR. 2019 March 30, 2019 Dr. Kenneth A. Grant Dr.](https://reader030.fdocuments.net/reader030/viewer/2022041019/5ecd8a42750b6d03cf3a9925/html5/thumbnails/6.jpg)
6
Survivalratesalsoappeartoberelativelystableovertime,regardlessofeconomicboomsorbusts(BureauofLaborStatistics,2018).However,asshowninFigure2.2,morerecentevidencesuggeststhatsurvivalratesinCanadahave“exhibitedasteadyandgradualincreasefrom2002to2014”(IndustryCanada,2018).Intheperiodfrom2002to2011,three-yearsurvivalratesimprovedfrom75%to82%.ThissameIndustryCanadastudyfoundhighersurvivalratesamongfirmsthatlaunchonalargerscale.Anaverageof23%ofnewfirmswith1–4employeesfailedwithinthefirstthreeyears,comparedtoanaverageof14%ofnewfirmswith20–99employees.
Whythediscrepancybetweenthesurvivalratesreportedbyentrepreneursandinvestorscommonlyfoundintradepublications,andthosereportedbygovernmentagenciesandacademic studies?Twopotentialreasonsarerelevanttothispaperand worthyofdiscussion.
First,therearedifferencesinthesamplesusedtoderivethesestatistics.GovernmentdepartmentslikeIndustryCanadapublishthesurvivalratesofallincorporatedfirmsinCanada,orofverylargerepresentativesamplesoffirms.ThevastmajorityofincorporatedfirmsinCanadaaresmallbusinessesthatwouldnotbeappropriatecandidatesforangelinvestmentorventurecapital.Ofthe1.2millionsmallbusinessesinCanada,only1.9%receiveangelinvestmentorventurecapitalfunding(StatisticsCanada,2019).ItisconceivablethattheriskprofileofthisminuteproportionoffirmswouldbedifferentfromtheCanadianaverage,leadingtoalowersurvivalrate.
Figure 2.2: Average Survival Rate by Goods and Services Sector Source: Industry Canada (2018)
Recent evidence suggests that survival rates in Canada have “exhibited a steady and gradual increase from 2002 to 2014”.
![Page 7: The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel Investors I-INC WHITE PAPER SERIES: MAR. 2019 March 30, 2019 Dr. Kenneth A. Grant Dr.](https://reader030.fdocuments.net/reader030/viewer/2022041019/5ecd8a42750b6d03cf3a9925/html5/thumbnails/7.jpg)
7
Second,howsurvivalisdefinedandothermethodologicaldifferencescouldfurtherexplaintheseinconsistencies.Forexample,Headdetal.(2003)foundthatapproximatelyone-thirdofbusinessesthatclosedweresuccessfulatthetimeofclosure.Insuchcases,theclosuresmayhaveresultedfromtheretirementofthebusinessownerortheacquisitionofthefirm.Therefore,thesefirmsmaybeincorrectlyincludedasfailuresinsomedatabasesorstudies.Moreover,somestudiesonstartupsurvivalratesonlyincludedfirmsthatreportedemployees(Fisher&Reuber,2010),whileotherstudiesincludedallfirms(IndustryCanada,2018),whichcouldalsoleadtoconsiderablydifferentresults.
Insummary,thereareseveralreasonswhythesurvivalratescitedbygovernments,academicsandinvestorsmaydiffer.Therefore,itwouldbereasonableforaninvestigationofthesurvivalrateoffirmsfundedbyangelinvestorstobeconsistentwiththelowsurvivalratesclaimedbyinvestorsintradepublicationsratherthanthehighersurvivalratesfoundingovernmentreportsandacademicliterature.
![Page 8: The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel Investors I-INC WHITE PAPER SERIES: MAR. 2019 March 30, 2019 Dr. Kenneth A. Grant Dr.](https://reader030.fdocuments.net/reader030/viewer/2022041019/5ecd8a42750b6d03cf3a9925/html5/thumbnails/8.jpg)
8
3. Methodology
ThequestionofsurvivalrateswasinvestigatedusinghistoricaldataonCanadianfirmsthatreceivedoneormoreinvestmentsfromangelinvestorsoveraperiodofsevenyears.Thisdatawassupplementedwithadditionaldatacollectedfromseveralsourcestocreateauniquedataset.
3.1 Data Source
ThispapermadeuseofdataprovidedbytheNationalAngelCapitalOrganization(NACO).NACOistheonlynationwideindustryassociationforangelinvestorsinCanadaandhasrecentlyextendeditsmembershiptoincludeincubatorsandaccelerators.NACOrepresentsover40angelinvestmentnetworkscomprisedofover4,000angelinvestorsacrossthecountry.NACO’sdataencompassedtheperformanceof775startupsinCanadathatreceivedfundingfromNACOmembersfrom2010to2016.Thedataonthesestartupswasself-reportedtoNACObyitsmembersthroughanextensiveannualsurvey.
TheNACOsampleincludesstartupsthatareoperatinginseveralindustrysectors.Figure3.1showsthedistributionofstartupsbyindustry.
Informationandcommunicationstechnology(ICT)wasthelargestsectorrepresented,with 44%ofthestartupsinthesample.Thiswasfollowedbythelifesciencessectorat15%. Severalsectorshadarelativelysmallrepresentationinthesample,includingcleantechnologies(6%),manufacturing(5%),theservicesector(4%)anddiversifiedconsumerproducts(1%).Aconsiderablenumberofstartupscategorizedtheirindustrysectoras“other”(25%).
Figure 3.1: Startups by Industry Sector Source: National Angel Capital Organization (NACO)
![Page 9: The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel Investors I-INC WHITE PAPER SERIES: MAR. 2019 March 30, 2019 Dr. Kenneth A. Grant Dr.](https://reader030.fdocuments.net/reader030/viewer/2022041019/5ecd8a42750b6d03cf3a9925/html5/thumbnails/9.jpg)
9
Thestartupsinthesamplereceivedfundingfromangelinvestorsatdifferenttimesbetween2010to2016.Figure3.2showsthedistributionofthesamplebytheyearinwhicheachstartupreceivedtheirfirstangelinvestmentbyaNACOmember.Insomecases,theyreceivedseveralinvestmentsduringthatperiod.
ParticipationinNACO’sannualsurveyhasincreasedsteadilysince2010.Therefore,thedatainthesampleisskewedtowardsmorerecentyears.Almosttwo-thirds(63%)ofthestartupsinthesamplereceivedangelinvestmentfrom2014to 2016.
Figure 3.2: Startups by Year of Angel Investment
Source: National Angel Capital Organization (NACO)
3.2 Supplemental Data
TheNACOdatawasthensupplementedwithsecondarydatacollectedfromseveralpublicly-availablesourcestodeterminewhethereachofthe775startupswasstillinoperation.Extensivesearchesforcompanywebsitesorotheronlinereferenceswereconductedforeachstartup.OnlinedatabasessuchasBloomberg1 and Crunchbase2weresearchedforcorporateprofileinformation.ToolssuchasWaybackmachine3 wereusedtoaccessarchivedonlinecontent
relatedtoseveralfirms.Ifnoreferencetoafirm’soperationwasfoundusingthesesources,itwasassumedthatthefirmwasnolongeractive.Somefirmsthatwerenolongeractivemayhavebeenacquiredbyanotherfirmratherthanhavingfailed.Reasonableeffortsweremadetoexcludethembysearchingpubliclyavailableinformationregardingacquisitions,suchaspressreleases.
1Bloombergdeliversbusinessandmarketnews,companyprofiles,dataandanalysis. 2Crunchbaseisanonlineplatformforfindingbusinessinformationaboutprivateandpubliccompanies. 3Waybackmachineisanonlinewebsitewith347billionarchivedwebpages.
![Page 10: The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel Investors I-INC WHITE PAPER SERIES: MAR. 2019 March 30, 2019 Dr. Kenneth A. Grant Dr.](https://reader030.fdocuments.net/reader030/viewer/2022041019/5ecd8a42750b6d03cf3a9925/html5/thumbnails/10.jpg)
10
3.2.1 Corporate Profiles
Corporateprofiledatabasesandothersecondarydatasourceswerealsoused todeterminesalesrevenueandemploymentforeachstartup.Corporateprofiledatawascollectedprimarilyfromtwosources:MergentOnlineandZoomInformationInc.
3.2.2 Survival Rates
Overallsurvivalrateswerecalculatedastheratioofthetotalnumberofactiveandnon-activestartupsintheNACOdataset.Annualsurvivalratesrepresenttheratioofthenumberofactiveandnon-activestartupsbasedontheyearinwhichthefirmfirstreceivedangelinvestment.Survivalratesbyindustryrepresenttheratioofthenumberofactiveandnon-activestartupsineachoftheindustriesreported.Startupsmayhavebeeninoperationforseveralyearsbeforereceivingtheirfirstinvestment.
3.2.3 Economic Models
Nationalinput-outputmultipliers,asshowninTable3.1,wereusedtoestimatetheindirectandinducedeconomicimpactcreatedbythestartupsintheNACOdataset.Directimpactsincludedthestartup’ssalesrevenueandjobscreated.Indirectimpactsincludedsalesrevenueandjobscreatedinthestartups’valuechain,suchassuppliersandothercompanies.Inducedimpactswerethosecreatedwhenstartupemployeesspenthouseholdincomeintheircommunities,thuscontributingtotheirlocaleconomies.Specifically,thisstudyestimatedthecontributionofthestartupsintheNACOdatasettoCanada’sgrossdomesticproduct(GDP)andjobcreation.
Table 3.1: Economic Multipliers Source: Statistics Canada National and provincial multipliers, 2010
Multiplier Indirect Impact Induced Impact Total Impact
Sales Revenue 0.54 0.42 1.96
Jobs Created 0.66 0.47 2.13
Adjustedversionsoftheinput-outputmultipliersdevelopedbyStatisticsCanadafor2010wereused,whichwasthefirstyearrepresentedinthispaper’sdataset(StatisticsCanada,2014).Sincedifferentmultipliersapplytodifferentindustrysectors,themultiplierswereadjustedtoreflecttheweightedsectordistribution ofthestartupsintheNACOdataset.
![Page 11: The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel Investors I-INC WHITE PAPER SERIES: MAR. 2019 March 30, 2019 Dr. Kenneth A. Grant Dr.](https://reader030.fdocuments.net/reader030/viewer/2022041019/5ecd8a42750b6d03cf3a9925/html5/thumbnails/11.jpg)
11
4. Results
Active: 537 (69%)
Not: 238
(31%)Figure 4.1: Survival Rates of Firm Source: National Angel Capital Organization (NACO)
4.1 Survival Rates
Atotalof775startupswereincludedinthestudysamplethatcamefromNACO.AsshowninFigure4.1,69%(537startups)werestillinoperationin2017,while31%(238startups)werenolongeractive.Becausethesampleincludedfirmsacrossvariousindustrysectorsandofvaryingintervalsoftimeelapsedsincereceivingangelinvestment,thesurvivalrateswereexaminedfromeachoftheseperspectivestoprovidegreatercontext.
Thispaperinvestigatedthesurvivalratesofangel-fundedstartupsmeasuredfromtheyearinwhichtheyfirstreceivedinvestmentfromaNACO-affiliatedangelinvestor.Thesurvivalrateswerethencomparedtotheempiricalresultsfromotherstudiestodetermineanysimilaritiesordifferences.
![Page 12: The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel Investors I-INC WHITE PAPER SERIES: MAR. 2019 March 30, 2019 Dr. Kenneth A. Grant Dr.](https://reader030.fdocuments.net/reader030/viewer/2022041019/5ecd8a42750b6d03cf3a9925/html5/thumbnails/12.jpg)
12
4.1.1 Survival Rates by Age
Basedontheresultsofpreviousstudies,whichwerediscussedinSection2,itwasexpectedthatthesurvivalrateofstartupswoulddecreaseastheelapsedtimesincetheyfirstreceivedangel
investmentincreased.Figure4.2showsthetotalnumberofactiveandnot-activefirmsasof2016basedontheyearinwhichthestartupreceivedangelinvestment.
Figure 4.2: Survival Rates by Age Since Angel Investment Source: National Angel Capital Organization (NACO)
Indeed,theresultsfromthispaperconfirmthatthesurvivalratesofstartupsthatreceivedangelinvestmentgenerallydecreasedovertime.Withtheexceptionof2011and2014,thesurvivalratesofstartupsdecreasedconsistentlyovertheelapsedtimesincefirstreceivingangelinvestmentintheperiod from 2010 to 2016.
Thestartupsinthisstudy’ssamplehadaone-yearsurvivalrateof79%.Thisresultismarginallylowerthantheone-yearsurvivalrateofbetween82-85%foundbyFisher&Reuber(2010)intheirreportcommissionedbyIndustryCanada.However,itissignificantlylowerthanIndustryCanada’smostrecentreportthatfoundanaverageone-yearsurvivalrateof98%fromtheperiodbetween2002and2011(IndustryCanada,2018).Thisdifferencemaybeattributabletothefirmhavingafoundingdatethat
wasearlierthanwhentheangelinvestmentwasmade.Despitethedramaticdifferencesintheseone-yearresults,thethree-yearsurvivalrateof78%foundinthispaperisidenticaltothatfoundinIndustryCanada’s(2018)report.Yet,itisconsiderablyhigherthanthethree-yearsurvivalrateofbetween62–65%foundinFisher&Reuber(2010).
Thefive-yearsurvivalrateof54%forthestartupsinthissampledippedunexpectedlybelowthetrendfromotheryears.Thereasonsforthisdifferenceareunknown.Theresultsareinlinewiththefive-yearsurvivalrateof51%foundbyFisherandReuber(2010)butwellbelowthe63%foundbyIndustryCanada(2018).Thedifferencesareevenmorenotablebetweentheseven-yearsurvivalratesof35%foundinthispaperand54%foundinIndustryCanada’s(2018)report.
![Page 13: The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel Investors I-INC WHITE PAPER SERIES: MAR. 2019 March 30, 2019 Dr. Kenneth A. Grant Dr.](https://reader030.fdocuments.net/reader030/viewer/2022041019/5ecd8a42750b6d03cf3a9925/html5/thumbnails/13.jpg)
13
4.1.2 Survival Rates by Industry
Basedontheresultsofpreviousresearch,survivalrateswerealsoexpectedtobedifferentacrossindustrysectors.Figure4.3showsthesurvivalratesineachofthesectorsrepresentedinthispaper’ssample.
TheaveragesurvivalrateoffirmsintheICTsector,whichrepresented44%ofthestartupsinthesample,was74%.Thiswasexceededonlybytheservicessector,withanaveragesurvivalrateof80%.However,sinceservicesectorstartupsrepresentedlessthan4%ofthesample,thisresultshouldbeinterpretedwithcaution.Theaveragesurvivalrateoffirmsinthelifesciences,cleantechnologyandmanufacturingsectorswerealllowerthanthoseintheICTsector,withaveragesurvivalratesof70%,68%and64%,respectively.
Figure 4.3: Survival Rates by Industry Sector Source: National Angel Capital Organization (NACO)
![Page 14: The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel Investors I-INC WHITE PAPER SERIES: MAR. 2019 March 30, 2019 Dr. Kenneth A. Grant Dr.](https://reader030.fdocuments.net/reader030/viewer/2022041019/5ecd8a42750b6d03cf3a9925/html5/thumbnails/14.jpg)
14
Figure4.4showsthesurvivalratebyagesincereceivingangelinvestmentforfirmsintheICTsector.
Theone-yearandthree-yearsurvivalratesofICTcompaniesareidenticalat82%,andslightlyhigherthanthoseofthetotalsample(79%and78%,respectively).IndustryCanada(2018)alsofoundthree-yearsurvivalratesinInformationandCulturalIndustriesof84%.
Thefive-yearsurvivalrateofICTcompanies(62%)issignificantlybetterthanthatofthetotalsample(54%),butlowerthantheIndustryCanada(2018)resultsof69%.Again,theseven-yearsurvivalrateofICTcompaniesisidenticaltothatofthetotalsample(35%).IndustryCanada’s(2018)seven-yearsurvivalrateinInformationandCulturalIndustrieswas58%.
Figure 4.4: Survival Rates by Age Since Receiving Angel Investment in the ICT Sector Source: National Angel Capital Organization (NACO)
![Page 15: The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel Investors I-INC WHITE PAPER SERIES: MAR. 2019 March 30, 2019 Dr. Kenneth A. Grant Dr.](https://reader030.fdocuments.net/reader030/viewer/2022041019/5ecd8a42750b6d03cf3a9925/html5/thumbnails/15.jpg)
15
4.2 Economic Impacts
Thestartupsinthisstudy’ssamplereceivedatotalofCAD$490 millionininvestmentfromangelinvestorsfrom2010to2016. Theseinvestmentshavesignificantlybenefitedthestartupsandtheirfounders,helpingthemtogenerateoverCAD$1.7billioninannualrevenueandtocreate6,856directjobs.Theeconomicactivities madepossiblebytheseinvestmentshavealsohadimportantspill- overbenefitstotheentireCanadianeconomy,whichareestimated inthefollowing.
4.2.1 Contribution to GDP TheinvestmentsmadebyNACO-affiliatedangelinvestorsenabledstartupstodevelopinnovativenewproductsandservicesandtoopennewmarkets.The775startupsinthisstudy’ssamplehavegeneratedtotalannualsalesrevenueofoverCAD$1.7billion.TheestimatedannualgrossvalueaddedtotheCanadianeconomybytheNACO-memberfundedstartups−includingtheindirectandinducedeconomicimpactsoftheiractivities−inthisstudyisoverCAD$3.3billion.
$705Minduced
$920Mindirect
$1.7Bdirect
$3.3Bin total
Figure 4.5: Estimated Annual Gross Value Added to Canadian Economy Source: National Angel Capital Organization (NACO)
![Page 16: The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel Investors I-INC WHITE PAPER SERIES: MAR. 2019 March 30, 2019 Dr. Kenneth A. Grant Dr.](https://reader030.fdocuments.net/reader030/viewer/2022041019/5ecd8a42750b6d03cf3a9925/html5/thumbnails/16.jpg)
16
4.2.2 Job Creation
Between2010and2016,thestartupssurveyedintheNACOdatasetcreated6,856directjobsinCanada.Anestimated4,522additionalindirectjobsinsupplierbusinessescanalsobeattributedtotheeconomicactivityofthesestartups,whileanestimated3,250additionalinducedjobswerecreatedduetoemployeehouseholdspendinginthelocaleconomy.Consequently,theNACO-member-supportedstartupshavecontributed tocreatinganestimatedtotalof14,628jobs.
Figure 4.6: Estimated Jobs Created Source: National Angel Capital Organization (NACO)
![Page 17: The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel Investors I-INC WHITE PAPER SERIES: MAR. 2019 March 30, 2019 Dr. Kenneth A. Grant Dr.](https://reader030.fdocuments.net/reader030/viewer/2022041019/5ecd8a42750b6d03cf3a9925/html5/thumbnails/17.jpg)
17
5. Implications
Thisstudyfoundimportantdifferencesinthesurvivalratesofangel-fundedstartupscomparedtootherempiricalstudiesofsurvivalratesinthegeneralpopulationofstartupsinCanada.
Thesefindingssuggestthattheone-yearsurvivalrateofstartupsfundedbyangelinvestorsislowerthanthatofstartupsintheoveralleconomy.Infact,accordingtothemostrecentreportfromIndustryCanada(2018),theone-yearsurvivalrateofangel-fundedstartupsisconsiderablylowerthantheCanadianaverage.However,thispaperfoundthatthemedium-termsurvivalratesofstartupsfundedbyangelinvestorscomparedbetter.Furtherfindingsindicatethatthelonger-termsurvivalratesofangel-fundedstartupsappeartobesubstantiallylowerthanthoseofstartupsinthegeneraleconomy.
Itshouldbenotedthatthereareimportantdifferencesinthemethodologyusedtodeterminesurvivalratesinthispapercomparedtothoseusedinpreviouslydiscussedreports.BothFisher&Reuber(2010)andIndustryCanada(2018)determinedsurvivalbasedonthefirm’sdateofincorporation.Thisdoesnotnecessarilyrepresentthedatefromwhichafirmbeganoperating,nordoesitfactorinthedateatwhichthefoundersbeganpursuingagivenbusinessopportunity,sowhileitisareliableandconsistentdate,itcouldbeconsideredsomewhatarbitrary.Thisdifferenceismorelikelytohaveaninfluenceonone-yearandtwo-yearcomparisonsbutlesssoinlateryears.
ThispaperinvestigatedsurvivalfromthetimeafirmfirstreceivedangelinvestmentfromaNACOmember.Angelinvestmentisoftenthefirstcapitalreceivedbystartups(Argerich&Cruz-Cázares,2017;White&Dumay,2017).Therefore,itcouldbearguedthatthedateuponwhichafirmreceivedangelinvestmentismorerelevantbecausethefirmhassufficientresourcestobeginoperating
andtopursueagivenbusinessopportunityinearnest.Thesemethodologicaldifferencesshouldbeconsideredcarefullywhencomparingthispaper’sresultswiththoseofotherreports.
Besidesangelinvestmentandassistance,theremaybeseveralotherreasonsforthevarianceinsurvivalrates.Theextantliteraturesuggeststhatpre-entryknowledge(Dencker,Gruber,&Shah,2009)andaccesstoongoingresourcesandcapabilities(Esteve-Pérez&Mañez-Castillejo,2008)mayalsoplayanimportantrole.Indeed,itisreasonabletoassumethattherisk-returnprofileofstartupsthatattractangelinvestmentmaybedifferentfromthegeneralpopulationofstartups,leadingtoagenerallylowersurvivalrate.Lowerlong-termsurvivalratesmayalsosuggestthatgreaterlinkagestootherstakeholders,suchasincubators/acceleratorsandventurecapitalists,arerequiredwithinthestartupecosystemtoappropriatelysupportthesestartupsovertime.Thisstudy’sfindingsalsosuggestthatsurvivalratesinvariousindustrysectorsmaydiffer,requiringsector-specificinvestmentandstartupsupportmechanisms.
Finally,thispaper’sfindings,althoughlimitedinscope,suggestthattheeconomicactivitysupportedbyangelinvestmenthasasignificantandfar-reachingimpactontheeconomy,bothintermsofcontributiontoGDPandjobcreation.
Economic activity supported by angel investment has a significant and far-reaching impact on the economy.
![Page 18: The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel Investors I-INC WHITE PAPER SERIES: MAR. 2019 March 30, 2019 Dr. Kenneth A. Grant Dr.](https://reader030.fdocuments.net/reader030/viewer/2022041019/5ecd8a42750b6d03cf3a9925/html5/thumbnails/18.jpg)
18
6. Future Work
Basedonthesepromisingearlyresults,additionalresearchisneededtofurtherinvestigatethedifferencesinthesurvivalrates ofangel-fundedstartups.
Thispapermeasuredsurvivalratesfromthetimeastartupfirstreceivedangelinvestment,whilemanyotherstudiesmeasuresurvivalratesfromthetimeofthefirm’sincorporation.AdditionaldataontheincorporationdateofthestartupsintheNACOdatasetwouldallowforamorefaithfulcomparisonofthesurvivalratesofstartupsfundedbyangelinvestorsandthoseofthegeneralpopulationofstartups.
Thispaper’sfindingssuggestimportantdifferencesinthesurvivalrateofangel-fundedstartups,andfurtherworkisrequiredtobetterunderstandthereasonsforthesedifferences.Futurestudiesusinghazardmodelscouldinvestigatewhichproduct,marketandinvestmentfactorsarespecificallyassociatedwithhigherorlowersurvivalratesofangel-fundedstartups.
Understandingthefactorsassociatedwithhigherstartupsurvivalratesisimportanttoinvestorsandpolicy-makersalike.However,angelinvestorsareinterestedinfundingstartupsthatnotonlysurvivebutalsothrive.Futurestudiesusingeconometricmodelstoinvestigatethefactorsassociatedwithhighratesofpost-investmentstartupgrowthwouldbeparticularlyusefultoinvestors.
Finally,thisstudy’sfindingssuggestthatthelonger-termsurvivalratesofangel-fundedstartupsislowerthanaverage,andthismaysuggesttheneed,overtime,forgreateraccesstofollow-oncapitalandaccesstootherformsofsupport.Additionalworkisneeded tobetterunderstandtheexistinglinkagesbetweenkeystakeholdersinthestartupsupportecosystem,includingincubators/accelerators,angelinvestorsandventurecapital,andhowtheselinkagesmay beimproved.
![Page 19: The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel Investors I-INC WHITE PAPER SERIES: MAR. 2019 March 30, 2019 Dr. Kenneth A. Grant Dr.](https://reader030.fdocuments.net/reader030/viewer/2022041019/5ecd8a42750b6d03cf3a9925/html5/thumbnails/19.jpg)
19
7. Partners
I-INC
Foundedin2014asatrulynationalnetwork,theIncubate-InnovateNetworkofCanada(I-INC)acceleratesscienceandtechnology-enabledinnovation,productivityandjobcreationthroughprograms,whichenabletheindividualandcollectiveinnovationimpactofitsmemberCanadianresearchuniversities.I-INCmembersworkcloselywithcomplementarylocal,regionalandnationalprogramstodeliveraspectrumofhighqualityprogrammingandsupportrequired tosetnationalbenchmarksandmoveresearchfromthelabtoglobalmarkets.
MITACS
ThispaperwasmadepossibleinpartthroughfinancialsupportprovidedbyMITACS.MITACSisanational,not-for-profitorganizationthathasdesignedanddeliveredresearchandtrainingprogramsinCanadafor20years.Workingwith 60universities,4,000companies,andbothfederalandprovincialgovernments,MITACSbuildspartnershipsthatsupportindustrialandsocialinnovation in Canada.
NACO
TheNationalAngelCapitalOrganizationsupportsAngels,incubators,andacceleratorsastheyhelpentrepreneursturngoodideasintogreatbusinesses.AstheonlynationalindustryassociationforAngelinvestorsinCanada,NACOrepresentsover40networkscomprisedofover3000AngelinvestorsacrossCanada.MembersassistCanadianstartupsineveryregionandindustrytoexecutetheirvisionandcompeteon theglobalstagebyprovidingthemwithpatient riskcapital,expertadvice,andprofessionalnetworkswhentraditionalfinancialandotherinstitutionscannot.
Ted Rogers School of Management, Ryerson University
TheTedRogersSchoolofManagementatRyersonUniversityisCanada’spreeminententrepreneurial-focusedbusinessschoolthatisshapingthecountry’snextgenerationofglobalinnovatorsandleaders.TRSMishometosixschoolsofmanagement,threeinnovativegraduatedegrees–twoMBAdegreesandoneresearch-focusedMasterofScienceinManagement(MScM)–and15cutting-edgeresearchcentres,institutesandlabs.
![Page 20: The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel Investors I-INC WHITE PAPER SERIES: MAR. 2019 March 30, 2019 Dr. Kenneth A. Grant Dr.](https://reader030.fdocuments.net/reader030/viewer/2022041019/5ecd8a42750b6d03cf3a9925/html5/thumbnails/20.jpg)
20
8.References
1. Argerich,J.,&Cruz-Cázares,C.(2017).Definition,samplingandresultsinbusinessangels’research:Towardaconsensus.Management Decision,55(2),310-330.doi:10.1108/MD-07-2016-0487
2. BureauofLaborStatistics.(2018).BusinessEmploymentDynamics.United States Department of Labor. AccessedOctober23,2018:https://www.bls.gov/bdm/entrepreneurship/entrepreneurship.htm
3. Carey,D.,Lester,J.,&Luong,I.(2016).Boostingproductivitythroughgreatersmallbusinessdynamismin Canada. OECD Economics Department Working Papers,1314.doi:10.1787/5jlv23k891r8-en
4. Coad,A.,Frankish,J.S.,Roberts,R.G.,&Storey,D.J.(2016).Predictingnewventuresurvivalandgrowth:Doesthefoglift?Small Business Economics,47(1),217-241.doi:10.1007/s11187-016-9713-1
5. Dencker,J.C.,Gruber,M.,&Shah,S.K.(2009).Pre-entryknowledge,learning,andthesurvivalofnewfirms.Organization Science,20(3),516-537.doi:10.1287/orsc.1080.0387
6. Esteve-Pérez,S.,&Mañez-Castillejo,J.A.(2008).Theresource-basedtheoryofthefirmandfirmsurvival.Small Business Economics,30(3),231-249.doi:10.1007/s11187-006-9011-4
7. Fisher,E.,&Reuber,R.(2010).ThestateofentrepreneurshipinCanada.Industry Canada. Retreived from https://www.ic.gc.ca/eic/site/061.nsf/vwapj/SEC-EEC_eng.pdf/$file/SEC-EEC_eng.pdf
8. GlobalEntrepreneurshipMonitor.(2016).GEM2015/16GlobalReport.RetrievedonOctober24,2018fromhttps://www.gemconsortium.org/report/49480
9. Gremion,N.(2013).YourChancesoffailurearehigherthanyourchancesofsuccess:Howtoreversethat trend. Techvibes. Retrieved from https://techvibes.com/2013/03/06/how-to-avoid-startup-failure-2013-03-06
10. Headd,B.(2003).Redefiningbusinesssuccess:Distinguishingbetweenclosureandfailure.Small Business Economics,21(1),51-61.doi:10.1023/A:1024433630958
11. IndustryCanada.(2018).Canadiannewfirms:Birthandsurvivalratesovertheperiod2002–2014.Government of Canada. Retrieved from https://www.ic.gc.ca/eic/site/061.nsf/vwapj/CNF_BSR-NEC_TNS_2002-2014_May2018_eng.pdf/$file/CNF_BSR-NEC_TNS_2002-2014_May2018_eng.pdf
12. Mason,C.M.,&Harrison,R.T.(2008).MeasuringbusinessangelinvestmentactivityintheUnitedKingdom:Areviewofpotentialdatasources.VentureCapital,10(4),309-330.doi:10.1080/13691060802380098
13. Prosser,D.(2014).Smalltalk:Thehighfailurerateforstart-upscanbereducedbybettersupport.Independent.Retrievedfromhttps://www.independent.co.uk/news/business/analysis-and-features/small-talk-the-high-failure-rate-for-start-ups-can-be-reduced-by-better-support-9924651.html
14. Riding,A.L.(2008).Businessangelsandlovemoneyinvestors:Segmentsoftheinformalmarketforriskcapital.Venture Capital,10(4),355-369.doi:10.1080/13691060802351222
![Page 21: The Survival Rate of Startups Funded by Angel …The Survival Rate of Startups Funded by Angel Investors I-INC WHITE PAPER SERIES: MAR. 2019 March 30, 2019 Dr. Kenneth A. Grant Dr.](https://reader030.fdocuments.net/reader030/viewer/2022041019/5ecd8a42750b6d03cf3a9925/html5/thumbnails/21.jpg)
21
15. Schumpeter,J.A.(1911/1934).Thetheoryofeconomicdevelopment:Aninquiryintoprofits,capital,credit,interest,andthebusinesscycle.Harvard Economic Studies(46).Cambridge,MA.
16. StatisticsCanada.(2014).Nationalandprovincialmultipliers-2010.Catalogueno.15F0046X2014000.RetrievedfromStatisticsCanadaArchivewebsitehttps://www150.statcan.gc.ca/n1/en/catalogue/15F0046X2014000
17.StatisticsCanada.(2019).Surveyonfinancingandgrowthofsmallandmediumenterprises-2017.Catalogueno.11-001-X.RetrievedonJanuary21,2019fromhttp://www.ic.gc.ca/eic/site/061.nsf/eng/03087.html
18. White,B.A.,&Dumay,J.(2017).Businessangels:Aresearchreviewandnewagenda.Venture Capital, 19(3),183-216.doi:10.1080/13691066.2017.1290889
19. Wong,A.,Bhatia,M.,&Freeman,Z.(2009).Angelfinance:Theotherventurecapital.StrategicChange,18,221–230.doi:10.1002/jsc.849