When the team behind Mosaic Manufacturing Ltd. sought out angel investors in 2015, they had little more than a good idea and a prototype – which, says co-founder Chris Labelle, would work "sometimes, for a little while.”
But their idea was a potential knockout. At the time, inexpensive 3-D printers could produce only one kind of material, in one colour. Multi-colour, multi-material printers cost upward of $50,000. But Mosaic had a device that could produce complicated, colourful objects at a fraction of the cost by combining multiple types of filament into one, to be run through any 3-D printer.
With no revenue and an intermittently useful prototype, Mosaic’s founders nonetheless drew $300,000 from five investors. Mr. Labelle doesn’t know whether Mosaic – which ultimately commercialized its prototype as a series of devices called Palette – would exist today without those first angels.
A growing number of businesses are finding success through angel investing. Canada’s National Angel Capital Organization (NACO) reports that investments by its affiliated angels grew to $168-million nationwide in 2017 from $89-million 2013.
How can small businesses position themselves to secure this kind of financing?
One thing to remember is that unlike venture capitalists, says Yuri Navarro, chief executive officer of NACO, angel investors base their decisions as much on relationships and gut feelings as on pitch decks and hard numbers.
“These are people who want to give their money and time to foster new entrepreneurs,” says Mr. Navarro. “They’re not banks, they’re individuals, and that’s how companies should approach them.”
But angel investments don’t come easily. Of more than 8,500 companies that pitched to NACO’s networks in 2017, only 448 received investment. So how can entrepreneurs boost their odds of success?
First, they must find the right investors for their idea, says Mr. Navarro, and then, most crucially, they must foster those relationships.
The first place to look is your own network, says Lynda Brown-Ganzert, founder of Curatio Networks Inc., a Vancouver-based digital-health company. Curatio has created a social network to connect patients with similar conditions; her clients are hospitals and health providers.
Ms. Brown-Ganzert’s first angel financing came in 2014-15 from 10 investors, a combination of personal contacts and angels from established groups in British Columbia.
Entrepreneurs should first ask colleagues for leads on local angels who may have an interest in their company, she says, as well as mentors at accelerators and incubators. They should also try their LinkedIn connections. “The personal connection de-risks things in the eyes of an investor,” says Ms. Brown-Ganzert. “They’re always asking, ‘Can I relate to this person?’”
That personal, relationship-based approach can disadvantage companies that fall outside investors’ comfort zones, however. As a software firm that needed to deal with ethics reviews, privacy compliance and other bureaucratic challenges unique to the health sector, Curatio’s path to commercialization was longer than those of more straightforward tech startups.
Also, being a female founder put Ms. Brown-Ganzert on the periphery of the still-mostly-male angel landscape. “To be one of the only women pitching,” she says, “is definitely additionally challenging.”
Mosaic’s trio of founders had more clear-cut inroads. They were already connected to Kingston-based entrepreneur and venture capitalist John Molloy, whom they had met at the Queen’s Innovation Centre at Queen’s University. Mr. Molloy was then creating the Southeastern Ontario Angel Network, which today is one of more than 40 such groups Canada-wide.
For entrepreneurs without personal or business connections to potential angels, these networks often form the first point of contact with the ecosystem.
Most angel groups vet applicants before they are invited to pitch formally. Business founders typically don’t need the robust documentation and thorough business cases that traditional lenders require, but angels will run through a due diligence process and will want to see as thorough an accounting as possible, and some proof of concept.
In its pitch, Mosaic included evidence of a potential customer base, including market research and a successful Kickstarter campaign. Potential investors also looked at the uniqueness of the company’s intellectual property, and then offered to work out a deal.
For many founders, this is the most confusing part of the process, especially when angels are seeking an ownership stake. Mosaic’s first angels invested in convertible debentures, essentially loans that could later be converted to stock. This is common when a company is too young to pin a valuation on. (NACO offers an explainer on deal structures and investment types on its website.)
“I’ve heard pitches where founders are asking for wildly too-high valuations,” says Mr. Labelle of Mosaic. “But I’ve also talked to founders who are offered terms that are laughably low. Unfortunately, there’s no mathematical formula for valuing an early-stage startup.”
Ultimately, says Mr. Labelle, founders need to trust their gut. He recalls one offer that seemed too good to be true, which they turned down, sensing something amiss. “They were offering too much, and the equity they wanted would mean no one else would ever want to invest in the company,” he says.
An offer isn’t the moment to play hardball, he says: “If you like the people and the terms are acceptable, don’t turn it away. I’ve never spoken to someone who says, ‘I’ll put in $35,000’ and then managed to talk them up. You can mark off $35,000, and keep looking for more.”
Just as important, he says, is keeping the lines of communication open. Mosaic sends monthly updates to investors, which Mr. Labelle hopes will sow the seeds for new rounds of funding, foster new alliances and simply ensure a founder is doing right by his investors.
As well, he says, don’t be afraid to let them know when things are going wrong. Withholding information is a surefire way to damage trust.
That’s a lesson that Topher Kingsley-Williams can vouch for. In 2016, his Moncton-based startup Ongozah Inc. ran into revenue trouble. Its product was an online tool to connect non-profits and private business, helping them discover each other and foster new social-responsibility endeavours. But it became apparent that few non-profits had the internal staff able to manage the platform.
So in 2016 Ongozah became Porpoise, a platform on which companies could celebrate and recognize employees active in the community and better determine the return on investment of their efforts.
“I remember going to one angel and telling him, ‘Okay, this is the pivot we’re making,’” recalls Mr. Kingsley-Williams. “And he said, ‘We’re glad, because we had no idea how you’d make money off of this other idea.’ I asked why he had even invested with us, and he said, ‘We believed in you and your team. We knew you’d figure it out.’”