Canada's venture-capital industry is far from healthy, particularly if you're a start-up looking for investment to turn an idea or a prototype into a product and a business.
For entrepreneurs, there is reason for optimism as angel investors are slowly starting to emerge as an alternative source of financing. While far from abundant or easy to find, angel investors are stepping into the fray. Many of these angels are successful entrepreneurs who appreciate and understand the challenges facing new business owners looking for growth capital.
One of the more active angels these days is Jordan Banks, who spent years as general manager of eBay Canada before becoming moving to JumpTV. After leaving JumpTV, Mr. Banks took some time off and, in the process, discovered his interest and passion for helping start-ups as an adviser and angel investor.
He says many of his investment opportunities have come through personal connections. Of the 10 companies in his portfolio, he says nine are operated by people he already knew, or people who were well known by close friends and business colleagues.
"At the end of the day, early stage investing is almost all about the people at the company and their character, integrity and work ethic," he says. "If you get that right, good things will happen. One of the ways to get it right is to have lots of points of reference on the people you are investing in through friends or colleagues."
In evaluating investment opportunities, Mr. Banks says he tries to keep the process as simple as possible by using three-criteria process:
• He has to believe and have great confidence in the founder of the business and a proven history of showing a bias for action.
• The company needs a simple business model that he can easily understand and explain.
• The business can't require more than one more subsequent round of financing. Mr. Banks says one of the biggest perils of angel investing is getting materially diluted by institutional money in future rounds. By reducing the requirement of future rounds, he says it reduces dilution and increases the return upon exit.
Since angel investing is often a personal and financial exercise, Mr. Banks says the most important consideration between an investor and a founder is making sure both sides have the same expectations from the beginning. "In my experience, the most successful companies who have secured angel funding have mapped out the skill sets they'd ideally like or need from an investor group and then mapped the angel investors to those skills," he says.
"Getting money is the easy part; getting money that can be leveraged many times over after the initial check has been cut is the hard part. By setting expectations from the beginning about level of expected involvement and skill sets required, the chances for a future positive outcome are dramatically increased. Unfortunately, the flip side is also true."
Other than money, Mr. Banks says angels can also provide value to investments by attracting quality investors to board, providing advice about structure, process and strategic priorities, making introductions, and helping attract excellent talent.
As for the things that angel investors should avoid, Mr. Banks says he stays away from getting involved simply because other "smart" investors have committed to investing. He also avoids companies that are in a rush to raise money because competitors have done so at high valuations. Finally, he places no value in financial projections that extend for more than 12 months.
Mr. Banks says he's excited about the growing number of angels getting involved, particularly because the community is evolving from simply writing cheques to playing an active role in helping accelerate a company's growth
"Having said that, our terrific budding entrepreneurs in Canada certainly need more help and support at an early stage," he says. "We need more financial incentives for talented and experienced business people to become angels. We can't lose sight of how risky angel investing is and we need more programs in place to help offset that risk."
This is the second installment of a three-part series on raising growth capital. Read part one here.
Special to the Globe and Mail
Mark Evans is a principal with ME Consulting, a content and social media strategic and tactical consultancy that creates and delivers 'stories' for companies looking to capture the attention of customers, bloggers, the media, business partners, employees and investors. Mark has worked with three start-ups – Blanketware, b5Media and PlanetEye – so he understands how they operate and what they need to do to be successful. He was a technology reporter for more than a decade with The Globe and Mail, Bloomberg News and the Financial Post. Mark is also one of the co-organizers of the mesh, meshUniversity and meshmarketing conferences .