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With credit tightening and IPOs all but out of the question, an increasing number of small and medium-sized businesses are reporting problems finding capital. Twenty-eight per cent of businesses are currently experiencing credit difficulties, up from 18% in September, according to a recent Canadian Federation of Independent Business survey.

For new businesses, receiving from family sources ("love money") and angel investors now promises to be more important than ever. Instead of being the first source of funding, they well prove to be the only source.

On Monday, Andrew Wilkes, chairman of the National Angel Capital Organization, a grassroots association that includes more than 30 formal groups and 4,000 individual investors, was here to offer insights and advice on tapping into the high-net-worth crowd.

Mr. Wilkes is an active angel investor who looks for high-growth opportunities in traditional industries with a technological edge (including manufacturing and distribution, energy, water, financial services and biotechnology). He is a partner in Management Initiatives Inc., a business advisory and investment firm located in Toronto, where he invests, mentors, raises capital and advises business owners and investment funds.

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Dianne Nice, reportonbusiness.com: Welcome, Andrew. Thank you very much for agreeing to participate in this discussion. We have a number of questions from our readers, but first, I would like to ask about coping with tough financial times.

With the credit crunch upon us, small and medium-sized businesses are now increasingly scrambling to find financing, a process that wasn't easy even in the best of times. We know the banks are pulling back, and the public markets are all but out. Are things any better among angel investors? From your perspective, how is the angel community responding? Is this being perceived as an opportunity to jump in?

Andrew Wilkes: These are clearly difficult times. Angel investors allocate a portion of their net worth to their individual private investments. And so their public investments clearly have been impacted. Angel investors, by their nature, look for private investments where they can add value, and yes, they are carefully looking at investment opportunities as we speak.

Dianne Nice: What advice would you give to an entrepreneur trying to secure support from an angel investor? How is the pitch different from one that you'd give to either the banks or VCs?

Andrew Wilkes: Entrepreneurs should work through their existing networks to access angel investors. You need to find investors that would understand your business and be interested in looking at their opportunities. Your network would include family and friends, as well as professional advisers such as lawyers and accountants. You could also contact formal angel groups through the National Angel Capital Organization website. On that website are listed local angel groups across Canada.

The pitch with banks and VCs is both similar and different. Angel investors would like to know that the entrepreneur has a well-thought-out business plan. But they are also looking at how they can add value to the particular investment opportunity. Many angel investors have industry experience, and potential networks including access to customers to help accelerate growth. The angel investors are entrepreneurs themselves and understand what is required to be successful. In many cases, they roll up their sleeves to help the businesses and in some cases are mentors to the entrepreneur.

Michael Armata from Brampton asks: I used to periodically attend the Toronto Venture Group meetings. Why did that organization fold and what would be needed to have another such organization in Toronto succeed?

Andrew Wilkes: The Toronto Venture Group did indeed cease operation a couple of years ago. Since then, a number of angel groups have opened based on geographic, sector (like clean technologies) and, in one case, an alumni angel group. Please see angelinvestor.ca for a list of these angel groups. In fact, the government of Ontario has been very supportive in helping start up angel groups throughout the province over the last two years.

Dean Jeffrey from Peterborough asks: Tirewall Corp. is a new Canadian company that holds the exclusive patent rights to two machines that will lead to over $20-billion in sales annually. The prototypes are built and only $40,000 is needed to design the final production versions. How do I get financing and help to take the business to the next level?

Andrew Wilkes: This sounds like a very interesting opportunity. But I must say $20-billion is sales would seem to be a difficult target for any business. Regarding investment in Peterborough, there is a new angel group that has formed in Peterborough, which I suggest you contact through the angel web site angelinvestor.ca.

M Childs from Barrie asks: With the financial crisis upon us, the talk in the industry is government bailouts. However, companies that produce key high-technology automation are down the food chain, and although these companies are key to competitive manufacturing processes and are the root of innovative technologies that the OEM, Tier 1 and Tier 2 companies use to compete in the world market, these companies are usually the first to be put on hold with respect to being awarded projects, and the last to be kicked off on projects due to the poor liquidity in the industry. It is virtually impossible for privately held Canadian corporations to obtain investment or even working capital to endure the current and upcoming slowdown. Balance sheets are being eroded at unprecedented rates, and although there is a pent-up requirement business for these companies, these projects are not being kicked off. Time is of the essence; small and medium-sized high-tech automation companies cannot hold on much longer. Bankruptcy and restructuring are becoming very real possibilities. These companies require integrated technical knowledge of their staff. If these companies succumb to this manufacturing industry crisis, and these jobs are lost, the technology is gone, and will take years to re-establish, as it has taken many years to establish these companies, with millions spent in R&D in innovative technologies that make automotive and other manufacturing industries competitive. It could be too late by the time liquidity filters down to the technology suppliers of the industry. If there is a bailout, it should not be only for the large OEM and Tier 1, but for technology-based companies as well, or no bailout at all. These companies saw none of the $500-million the Ontario Liberal government spent to attract industry to Ontario.

Andrew Wilkes: M Childs, I agree that these are very difficult times for Canadian entrepreneurs to keep their businesses afloat. And yes, it would be shameful to lose the expertise and knowhow that you describe. Government programs, though, are only part of the answer. All businesses need to become more productive to survive. And the difficulty is to become more productive, that requires an investment in capital. Over the last five years, I have been advocating that governments assist technology and advanced manufacturing sectors like they do with the resource sector (mining and oil and gas) to commercialize this great Canadian resource (in our factories and labs). In five provinces in Canada there are tax incentives to attract investment capital in businesses like yours. I know that the Province of Ontario is considering this as this is a quantum problem in Barrie and other parts of the province. There is further information at angelinvestor.ca on recommendations and access to capital. I would also like to say that last week, I heard the same request at an event sponsored by the Ivey Institute for Entrepreneurship. This event was a terrific success.

Dianne Nice: Andrew, is there anything you haven't been asked that you would like to talk about?

Andrew Wilkes: Yes. It is important that the readers know that unlike venture capitalists, angel investors invest with their own money. Angel investors are high net worth individuals, often entrepreneurs, who have successfully operated companies themselves. Angels are the oldest, largest and most available source of outside funds for entrepreneurial firms. Many successful entrepreneurs want to give back to the community through their angel investment activities. In Canada, some $3-billion is invested by angel investors. The National Angel Capital Organization and its network of private individual investors envisions the development of an entrepreneurial culture in Canada, whereby Canadian companies become more investor ready and more investors band together to develop more great Canadian global companies, like Research In Motion, which we are so proud of.

Due to the current liquidity problem, banks and venture capital investors are pulling back and angel investors are being asked to step in. In some cases, this is to support working capital and to help turn around companies. But the National Angel Capital Organization is also profiling existing angel-backed successful companies for their next round of capital — a "co-investment event." This is an important event that will bring more capital to Canadian companies.

Dianne Nice: What are the key things angel investors look for when assessing an investment?

Andrew Wilkes: First is a well-thought-out business plan with a clear competitive advantage. The second is who is the management team? And what is the likelihood they will be successful? The third is what will the sustainability be of the business. And finally, will the investor be able to partner with the entrepreneur?

Michael Armata from Brampton asks: Of the angel investors you know, why are they angel investors? Obviously money is a motivating factor, but besides that, what else is driving them?

Andrew Wilkes: It depends on the angel investor. Most are being driven by making money. But many just want to help build another great business.

Dianne Nice: That's all the time we have for today. Andrew, I'd like to thank you for your time and insight. I'm sure our readers appreciate the information you've provided about finding alternative sources of investment income for their businesses.