Thinking about starting a business or funding an expansion of one you've already got off the ground?
The first sources that entrepreneurs usually tap are friends and family, but you can burn through their money and goodwill pretty quickly. Who do you turn to next? The good news is that you can rent friends, but in a more costly and intelligent form. These venture capitalists are called angel investors.
Angels are practically the only helpful source of venture capital left in Canada these days. Why? Because governments attempted to create big pools of money for new businesses and it was a disaster. Back in the 1980s and 1990s, Ottawa and some of the provinces created labour-sponsored venture capital funds (LSVC). The idea was that individuals would receive fat tax breaks for investing in diversified funds endorsed by labour groups or other champions of the little guy.
Managers of those funds would then dole out the money to budding geniuses. Dozens of LSVCs jumped into the market in the 1990s and raised hundreds of millions of dollars. Governments didn't want that dough sitting in cash, so they required the funds to deploy a substantial percentage within a few years.
Investing in a hurry is rarely a good strategy. Some LSVCs funded some winners, including a then-small outfit called Research In Motion, but they also threw money into a lot of shaky deals and some downright rotten ones. Returns ranged from bad to brutal. By 2005, LSVCs were getting scarce. Burnt leaves leave lasting scars, and the experience soured many Canadians on the structured venture capital space.
Worse, LSVCs ended up pushing a lot of institutions out of the venture capital business. Historically, pension funds had been active in the area, but for nearly 15 years they couldn't compete with the “dumb money” most LSVCs threw at small businesses.
Now, angel investors and private venture capitalists are the only solid option left for start-ups and early-stage companies. Simply put, angels are usually rich entrepreneurs who like to back new businesses. A few U.S. angels received press lately because they hit gargantuan jackpots with start-ups such as Groupon and Facebook. Those are classic examples of “survivor bias.” Angel investors typically put $25,000 to $250,000 into a fund or invest it themselves. Very rarely, one of those investments gushes out $500 million or so a few years later. Good luck finding more of those.
I've started two major technology-based businesses, and was lucky enough to find smart and interested angels to invest in both. Savvy angels are a tolerant bunch. They make lots of investments, and know that most of them won't do that well. My angels did very well in my first go-round, but then got smoked the second time. They're still my friends. I wouldn't consider another venture without including them, mostly because if I was successful and hadn't invited them in at the start, I'd never hear the end of it.
I found my best and most focused angels through my accountant, who specializes in business owners and self-employed clients. One immediate bonus is that if you land one angel investor, chances are you'll end up with a gaggle. These men (and occasionally women) usually travel in packs.
There are also a few angel investing clubs kicking around. GreenAngel Energy, a public VC angel fund focused on clean technology, was launched in 2008 in B.C. by a bunch of seasoned entrepreneurs. Mike Volker, the chairman, is well known in Vancouver, having started the Vantec angel group in 2000. There are similar groups in Toronto, Quebec and out east. They aren't hard to find if you use an Internet search engine.
If you're pitching to one of those groups, make sure they want to catch. Most of them have specialties, such as software-as-a-service, engineering or patent-protected businesses. If you've already got a business up and running, and are organized enough to make the approach, there are bigger, more seasoned VC outfits that might help. They usually stick between $1 million and $10 million into a venture, often over several stages.
Two of the better remaining diversified funds that invest in early-stage companies are Covington Capital and Albright Talbot Partners (formerly JLA Ventures), both based in Toronto. Among other things, Covington administers the Ontario government's $250-million Ontario Emerging Technologies Fund. That fund is an interesting hybrid that co-invests with angels. VC John Albright is one of the co-managing partners of the BlackBerry Partners Fund. Before approaching any VC outfit, read its website and see if your business fits. These guys are successful because they know where and when to add value.
Other outfits, such as Celtic House Venture Partners and Business Development Bank of Canada, also seed start-ups, but you'd better have a track record or a lot of experience working in the space you're trying to crack or they won't give you much time. As always, do your homework, widen your circle of prospective investors and try to maintain the “uninformed optimism” that everybody needs to really go for it in a new business.
Doug Steiner has a real job in the financial services business in Toronto.
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