Cash-strapped entrepreneurs are finding one source of startup capital - angel investors - can be just heaven sent.
"I would recommend angel investors to just about anyone. It was a really positive experience," says Mark Kerbel, CEO of Toronto-based Regen Energy.
"It wasn't just the capital. They were also a great source of advice based on their experience. It was a big help to the company in many different ways."
Kerbel says a group of angel investors, family and friends put together $370,000 for the first round of financing last year. Once certain milestones were achieved, other smaller rounds of financing have been added.
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| Greg Shannon, president of Calgary Enterprise Forum |
The process began when Kerbel approached an angel group in Toronto to pitch his idea for a company that would help large buildings manage their energy costs. The group disbanded for undisclosed reasons, but a few people kept his business card.
Later, when another group was started - the Maple Leaf Angels - he was invited to present to them.
"I wasn't really that nervous when they started asking questions during that first meeting with the Maple Leaf Angels. In retrospect, there were a lot of good questions that they asked for specific reasons," says Kerbel.
Rob Koturbash, managing director for the Maple Leaf Angels, says the group started in February 2007 and has about 40 members.
"We've done about $5 million total in deals during that time. The largest has been $1.25 million and the smallest about $125,000, I believe," he says.
Koturbash didn't divulge details of the $1.25-million investment or who was behind it.
But an online blog entry last April from Ali Asaria, CEO of online drugstore Well.ca, reported it had just received a large investment from Jim Estill, CEO of Synnex Canada, along with members of the Maple Leaf Angels.
"To my knowledge, this is the largest investment the Maple Leaf Angels have made to date," Asaria wrote in his blog called Canadian Startup, at www.aliasaria.ca.
Asaria said Estill is well known in southwestern Ontario for going from selling computer parts from the back of a truck to what is now one of North America's largest computer distributors.
"He's been a supporter of Well.ca for a long time now, and from the very first day I met him in his office, he's been a trusted adviser," he explains.
Koturbash says angel-investment groups across Canada have flourished in recent years, partly because it allows investors to leverage each others' strengths and share best practices. Most angel investors will work with industries with which they are familiar, such as technology or oil and gas. But one angel in a group who has a strong oil and gas focus can share his thoughts on a potential deal with a colleague, or vice versa.
Because angel investments outside formal groups are often private, it's difficult to track how much the deals are worth across Canada every year. But the National Angels Organization (NAO) estimates on its website a $5- billion "funding gap" currently exists in Canada for startup businesses.
Sources at major Canadian banks say lending criteria have been tightened since last year's asset-backed commercial paper scandal and spillover from the U.S. sub-prime mortgage crisis.
That means it has been tougher for entrepreneurs to get conventional forms of financing from banks.
In Toronto, the Maple Leaf Angels regularly meet in a boardroom at law firm Cassels Brock to discuss deals and listen to pitches from entrepreneurs.
Proposals get filtered through Koturbash and a few senior members of the group, who decide which ideas get pitched to the larger group of angels. Then a meeting is arranged.
"The pitches themselves don't usually last that long, but then you have questions," says Koturbash. "I would really suggest to anyone who is thinking of making a pitch to do your homework; make realistic projections and show how you are going to reach those revenue goals. If you can show you already have clients who are willing to buy your product at that point, it's all the better."
Koturbash says when the entrepreneur finally hears the response, however, is when the real work begins.
Angels will do varying amounts of due diligence, ranging from checking the entrepreneur's resumé to having their accountant study the financial numbers.
Many deals fall apart at this stage if the angel believes the entrepreneur has misrepresented anything - or been blatantly dishonest - during their presentation, adds Koturbash.
Another reason why deals can fall apart later, with the entrepreneur walking away from the table, is the ownership stake. Investors will often bring much-needed capital into a business, but insist on a controlling interest.
Entrepreneurs have to decide if they want the money that would help their company really take off, or keep control.
"That's the tough part," says the president of one high-tech startup, who asked not to be named. "Do you want to work so hard to create something and then have someone take a majority of it from you?" On the other hand, he agreed capital is the necessary lifeblood of any business and sometimes tough decisions need to be made.
Greg Shannon, president and chairman of the Calgary Enterprise Forum and a partner with law firm Miller Thomson LLP, says most angel deals are beneficial to both sides.
"Sure, the founder of the business is giving up some amount of control, but they are also gaining so much in return too. There is definitely something in it for both sides," he said.
VentureAlberta is a group of angel investors that originally started in 2003 and is starting to see exactly how much its initial investments are paying off. President Randy Thompson says: "We've done about 35 deals since we started in June 2003. The smallest was about 25,000 and the largest was $2.1 million. Average size (of financing deals) is probably $100-200,000," he said.
Thompson is no stranger to the roller-coaster life of an entrepreneur running a startup company. In 1992, he helped found Alberta Supernet, the first internet service provider (ISP) in Alberta. It was sold to Norsat in 1996. By 1997, he had the digital media rights for Peter Gabriel's RealWorld Studios, as well as starting one of the first online music stores.
He started an Edmonton-based angel group called Deal Generator in 1997 and Keiretsu Forum Calgary, which was affiliated with an international angel organization that had more than 400 investors. "I remember trying to pitch the idea of the internet to investors back in the early '90s. I showed them a flashing icon on a UNIX computer screen and they just shook their heads, saying: 'Sorry, this is not the future.' "Now look at how big the internet is. Those investors are probably kicking themselves they didn't invest in it back then," says Thompson.
Bob Chaworth-Musters is founder of one of the largest and oldest angel investor groups in Canada - the Vancouver-based BC Angels Forum. Since the group began in 1997, he has seen hundreds of entrepreneurs pitch their big ideas to angel investors.
The group will typically hear from two or three dozen companies during each meeting and sign deals ranging from $100,000 up to $500,000 with about three or four deals per meeting. About 100 accredited angel investors are currently registered with the group, Chaworth-Musters said.
"From an investor's perspective, you have to look at how big a return you will be able to get in five years or whatever your exit timeline is. Getting seven times your original investment on exit is a bit on the low side. I tell people to consistently try for 20 or even 30 times their original investment," he says. "You need a portfolio approach. Here's how it works: For every 10 companies you invest in, you're going to get four or five that will be fair. Three or four will be what I call living dead and one will be a home run."
For companies starting to look for funding, angel investors can bring in money, expertise and industry connections, he said. "An angel investor can provide mentoring to a new company, while a venture capitalist will usually be a director on the board," Chaworth-Musters said. "There's a big difference between the two."
He added anyone who is considering talking to the group as an entrepreneur or potential investor should attend one of the workshops they regularly hold in the Vancouver area.
Web Watch: www.angelinvestor.ca
www.angelforum.org (David Hatton can be reached at hatton@businessedge.ca)
