Small Business

2006 Financing Guide: Angel investors

Written by Rick Spence


Intro
| Angel investors |
Asset-based lending
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Private equity
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Public venture capital
|
Venture capital
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Venture debt

More:
Money to burn
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So, what about the banks?

Across Canada, moonlighting entrepreneurs, semi-retired executives and other venturesome high-net-worth individuals are looking to invest in private, early-stage businesses with great growth prospects. They come in earlier than the venture-capital funds, consider relationships to be as important as the business plan, focus less on high-tech businesses than most VCs and invest anywhere from $20,000 to $500,000.

Some angels are mainly after higher returns than they can get from indexed mutual finds. But many others are motivated by the thrill of being involved in a risky, growing business that needs both their expertise and cash. They tend to enter the picture after a firm has burned through its “love money” (from “friends, family and fools”), and well before it can earn the attention of VC funds. They hope to hang in for three to five years, then collect a big payout as the firm starts making hay in its market or attracts venture capital.

While there’s no hard data on angel investing, it’s a much bigger deal than most people suspect. Dan Mothersill, president of the National Angel Organization (NAO), places it at two to three times the total invested by VC funds, which would put it at $4 billion to $6 billion. He and other observers believe the number of angels is growing as successful boomers sell their businesses or retire early and turn to direct equity investing for fun and retirement profits.

Better still, angels are coming out of hiding. Whereas they used to keep a low profile to discourage endless appeals for money, today more and more of them are uniting in “angel networks” to systematize the vetting of potential deals and share the risk with fellow angels. Wise, president of Toronto-based Wise Mentor Capital and a close observer of the equity scene, says this reflects a new mentality: “Before the tech bubble, they were very much more lone wolves, investing in one company at a time. Now they have banded together to share best practices, increase their bandwidth, work together on due diligence and boost deal flow.”

In Halifax, entrepreneurs Brian Lowe and Ross Finlay founded the First Angel Network (FAN) last year, after working way too hard to raise $1 million for their own biotech business. By the end of 2005, FAN had 48 members in Nova Scotia and New Brunswick, each with a net worth of at least $1 million. Its counterparts include the Toronto Angel Group, Ottawa’s Purple Angels, the Winnipeg Angel Organization, Vancouver Angel Group and Keiretsu Forum Calgary/Edmonton. Even some smaller centres are getting in on the act, including Kingston, Ont. and the “Silicon Vineyard” of B.C.’s Okanagan Valley.

These organizations aren’t just luncheon clubs; they’re here to do deals. A typical angel group meets monthly to view pitches from four or more early-stage companies seeking equity investment of $50,000 to $200,000. The petitioners are well coached, and generally pay a hefty fee to appear before the angel groups. That covers pre-screening and a dry-run presentation in which a handful of angels preview their presentation and offer tips to improve their later pitch to the full group. Each angel makes individual investment decisions.

In Calgary, 25 members pay $1,000 a year to join the Keiretsu Forum, part of a North America-wide network (“keiretsu” is a Japanese term for a group of affiliated firms that share objectives and leads). Chapter manager Linda Nummela says businesses as diverse as marble quarries and makers of custom-fitted golf clubs have paid the $1,750 to present to the group. Even if they’re among the 80% who aren’t funded, few leave empty-handed. Besides coaching on strategy and presentation skills, they may receive tips on alternative financiers, potential clients or where to find a CFO.

Mothersill isn’t sure whether the networks have boosted the total capital available, but says they’re bringing entrepreneurs closer to like-minded investors. And the NAO is leading a charge to get venture investors a 30% tax credit, to encourage even more angel activity.

But you don’t have to go through formal organizations to find an angel. They’re all around: a recent U.S. study shows 3% of Canadians invest in private businesses. And most aren’t joiners. Andrew Patricio, a partner in Toronto-based Biz Launch, says many of his clients are accessing relatively large sums from non-aligned angels. Local angels invest after a lot less due diligence than regular VCs, and are generally more open to investing in a variety of sectors. Patricio says he knows one entrepreneur who just scored $500,000 to make fishing rods, and a makeup distributor who raised $250,000.

Originally appeared on PROFITguide.com
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