Article Tools
Pray really hard, and an angel might come down from on high and invest in your business. But if you don’t believe in miracles — or can’t wait for your prayers to be answered — then do what I recommend to my clients, and get thee in front of one of Canada’s 20 angel investor groups.
Historically, angel investors were as hard to find as a heavenly spirit at a heavy-metal concert. That’s because, as private investors in early-stage companies, typically with long entrepreneurial or executive careers under their belts, angels did not advertise; entrepreneurs usually found them only through extensive networking and professional referrals. In recent years, however, angels have banded together to pool their knowledge of various sectors, share best practices in such investor-critical areas as due diligence, board representation and shareholder agreements, and to spread their risk by making smaller placements in more companies.
How do angel groups work? Consider a typical alliance such as the Toronto-based Maple Leaf Angels, of which I’m a member. It’s a group of 40 or so investors who meet to receive presentations from companies looking for money. Hopeful entrepreneurs fill out an application to make their pitch and submit their business plans online; those proposals are ushered through a committee that selects the three or four companies that will present their investment opportunity at the group’s monthly breakfast meeting. If you have a good management team, a clearly defined product or service that has some sort of defensible competitive advantage and huge revenue potential, you could make the cut.
On the big day, each entrepreneur makes a 15-minute pitch, followed by a Q&A session. The angels discuss the opportunity in private and decide whether it’s worth graduating to a due-diligence committee that further explores the opportunity on behalf of the group. Typically, only a handful of the members will like a particular opportunity, but they are free to move forward as a smaller syndicate or individually.
The committee reviews the firm’s financials and projections, talks to employees and customers, and generally kicks the tires to satisfy the interested investors that they want to move to the next phase: negotiating a term sheet. Analogous to a letter of intent, a term sheet outlines the principal points of the agreement between a company and its potential investors. If a final agreement is reached, the financed company pays 2% of the amount raised to the Maple Leaf Angels, thus funding the group’s operations in part.
Although deals that come out of angel groups typically involve multiple investors, the amounts invested rarely top $1 million. That’s because the angels form a syndicate to spread their risk rather than make bigger investments. However, another trend has evolved: namely, the syndication of the investment to other angel groups across the country. Companies have been known to get funded by members of the Okanagan Angel Network in Kelowna, B.C., and then present in Toronto and get further funding. Once one of the angel groups in one part of the country has voted with their wallets, another angel group is more likely to invest as well. They typically invest on the same terms as previous groups and become signatories of a unanimous shareholders’ agreement that governs the relationship between the angels and the company.
While it seems like a high-potential business would be crazy not to approach an angel group, there is a price to pay. With strength in numbers, angel syndicates are better able to dictate financial and other terms of a deal. They also share the cost of legal counsel and other consultants they might involve in the process, allowing them to dig deeper into your business.
If you can find angels who’ll invest independently, you can avoid the shift in bargaining power. That could not only get you a better valuation, but it may also allow you to avoid a unanimous shareholders’ agreement and, therefore, a lot of potential interference in the day-to-day operation of your business. The challenge with a divide-and-conquer approach is that unless you have a pretty good Rolodex of investors like I do, finding individual angels is like finding a needle in a haystack.
Whichever route you choose, remember what the typical angel investor seeks in an opportunity:
1. A strong management team with a good track record
2. A product that relieves a major “pain” in the market
3. Clear use of proceeds (what you’ll spend the money on)
4. Huge market opportunity (a.k.a. “hockey stick” projections)
 |
 |
 |
Jeff Dennis is a serial entrepreneur and president of Toronto-based Cale Financial Corp., which provides strategic advice and financing to fast-growth companies. He is also a co-author of Lessons from the Edge: Survival Skills for Starting and Growing a Business. |
Rate this article
