Ian Portsmouth: Welcome to the Business Coach Podcast, an advice-oriented series that tackles the top issues and opportunities facing Canada’s small businesses. I’m your host, Ian Portsmouth, the Editor of Profit Magazine. And we’ve developed this podcast in cooperation with BMO Bank of Montreal.
Start-ups fast growing companies and small businesses with big expansion plans have an appetite for capital that is often hard to satisfy. After all, it doesn’t take long for the typical entrepreneur to tap out of friends and family not to mention her own savings. Most companies are simply not able or inclined to test the public markets or to acquire venture capital. And although traditional lenders provide billions in cash to Canadian small businesses, many entrepreneurial companies simply don’t fall within the risk parameters of the banks. However there is one overlook source of funds on the financing menu and that’s Angel capital. Angel investors form a crucial yet underappreciated part of the entrepreneurial financing market in Canada and thanks to the efforts of people like my guest for this episode of the Business Coach, Angel investors are becoming more effective and easier to find. Bob Chaworth-Musters is the founder of the Angel forum, a semi-annual event where entrepreneurs pick their opportunities to prescreen Angel investors. He is also a director and founding member of the National Angel Organization and runs seminars for entrepreneurs and financial executives on raising investment capital. Bob joins me on the phone from his office in Vancouver. Bob, welcome to the Business Coach Podcast.
Bob Chaworth-Musters” Thank you Ian, glad to be here.
Ian Portsmouth: So Bob, what is an Angel investor?
Bob Chaworth-Musters” It is usually a private individual who is investing their own money in a new company or a company that is expanding. And they typically are successful entrepreneurs or company executives or people that have perhaps inherited money and want to invest a portion of their financial net worth in a private company and help it expand and become the next Google or RIM.
Ian Portsmouth: So one of the biggest differences between Angel investors and venture capitalists is Angels invest their own money whereas VCs invest other people’s money.
Bob Chaworth-Musters” Yeah, that’s right and as well, venture capitalists who are professional money mangers tend to have a portfolio of five, six companies each and they can only devote so much time to each company whereas an Angel may invest in only one or two companies and therefore has more time to help the company and its management team grow it.
Ian Portsmouth: Now, the term Angel investor or angel investment has historically also applied to the category of investors that we sometimes call friends, family and fouls. But really when we talk about the Angel forum and what you do in the circle that you run in, we’re talking about more professionalized Angels, correct?
Bob Chaworth-Musters” Usually family and friends, love money as we call it, already know the entrepreneur whereas the professional Angel, if you want to call it that, usually does not know the entrepreneur and that, they are introduced to them at an event like the Angel forum in Vancouver.
Ian Portsmouth: So what’s your sense of how much these more professional Angels invest in Canadian companies every year?
Bob Chaworth-Musters” The numbers are very hard to track. I’ve heard numbers that are in excess of the venture capital community in Canada and they could be the less, the numbers range anywhere from about 3 billion, although that’s never been verified. But I think they generally acknowledge that they probably invest at least the same amount as the venture capital community does.
Ian Portsmouth: Now individually, how much does the typical Angel plug into any given investment?
Bob Chaworth-Musters” Again, it ranges significantly. We had Angels invest half a million dollars in Vancouver and even some invest as much as a $1 million or more. But I think the average Angel probably is around the $50,000 to $100,000 mark, some are as low as $25,000 or thereabout.
Ian Portsmouth: So what sectors do they like to invest in?
Bob Chaworth-Musters” I think it depends upon the expertise of the community and so, here in Vancouver, we would have Angels that are quite comfortable with the wireless or software, clean tech is coming on pretty quick. Whereas, perhaps if you are in Calgary, the Oil industry would be a sector that people know better and they would be more comfortable investing in that sector.
Ian Portsmouth: And typically, they’re investing based on their experience so you won’t really see former Oil and Gas executives investing in biotech, is that right?
Bob Chaworth-Musters” That’s right. That’s one of the rules of thumb of investing is what you know and branching out into some other areas can cause some mistakes. But having said that, most Angels seem to be genuine business people, they’re opened at looking at anything that makes sense. And when we survey our investors, we typically find that 50% of them have no industry focus at all.
Ian Portsmouth: So Bob, we hear a lot about what VCs expect from their investment and typically, it is, you know, 5 to 10 times return on an investment over a period of 3 to 5 years. What’s the story for Angels?
Bob Chaworth-Musters” Somewhat similar. They’re obviously not in the charity business. So they do want a return on their capital. They are typically betting 5 to 10% of their financial net worth so they do want a return and yes, the rule of thumb is at least 10 times their money on the investment that they make. And that’s because the statistics bear out that probably 5 companies are going to fail and they are not going to get their money back at all. And another 4 are going to be sort of a living dead as we call it and they will limp along and the investor will not get his money back. So they need one to two companies to hit that home run offset all the losses. That’s the rule, 10 times.
Ian Portsmouth: And are they typically investing in early stage companies or will they invest in more mature companies that have some sort of bold expansion plan?
Bob Chaworth-Musters” They do like later stage companies that are in their expansion phase, the issue becomes that the amount of money the expansion companies need is pretty significant, you know, it could be $5 million. And an Angel putting in, let’s say, $50 – $100,000 is really just going to be a drop in the bucket at that stage. So they do like the later stage companies, no doubt about it. But generally speaking they prefer the companies that they can make a material difference to by putting in their time as well as their money.
Ian Portsmouth: Now there is a saying that venture capitalists only invest in companies within a 2-hour flight and Angels invest in companies only within a 2-hour drive. Given how technology, communications technology has really shrunk the world, does that still apply or will Angels go further afield?
Bob Chaworth-Musters” I think a few super Angels will go further afield but the average Angel still likes to add value by meeting with a company perhaps once a week or once a month or something like that. And so the travel issue becomes a major one. And also when you’re investing more than 2 hours away, you’re really relying upon a local investor to kind of keep tabs on what is going on and it is difficult to establish that trust over some distance with another investor perhaps you haven’t met yet. So, I really think that most investors tend to invest locally and here in Vancouver some of them say, even going to Vancouver Island and Victoria is too far away.
Ian Portsmouth: Now, it used to be that Angel investment was very difficult for entrepreneurs to find because, you know, there is no Angel investors section in the Yellow Pages. Angels didn’t have websites. And often they’re, as you said earlier, private individuals who might come across investment opportunities through their own personal networking, through their own personal contacts, but they are becoming a little bit easier to find. Can you explain why that is and where the typical business owner can go to find an Angel?
Bob Chaworth-Musters” I think just doing a Google search will turn up some of the Angel forums, Angel networks in most of the major cities in Canada. There is the National Angel Capital Association here in Canada and similarly in the United State, the US Angel Capital Association. So they have a directory usually of the principal Angel groups in town and that’s quite easy to make that connection with their groups. Obviously, the groups are in effect a buffer between the Angels and the entrepreneurs, partly because a lot of entrepreneurs are not investor-ready yet and they do need some help in getting their business plan to make some sense, as well as to cut away the type of transactions that would not be appealing to an Angel investor.
Ian Portsmouth: So how should one approach an Angel investor, either an individual Angel or through one of these Angel groups. Is it as easy as putting your business plan in an envelop and mailing it off and hoping for a reply?
Bob Chaworth-Musters” That usually doesn’t work at all. The best thing to do is target specific Angels that you are looking for, Angels that understand the business that you are in, you have to have an elevator pitch, PowerPoint presentation ready to go. You should have that business plan obviously, ideally it would be that you are a little bit further along than just at the concept stage, and should be sort of almost going commercial, as we call it. And working through the groups is the way to go, unless you happen to have exemplarily connections with Angel investors already. But you got to target the investors. And the last thing I would say is that raising money is not a stop-go process, you can’t just expect to get the money tomorrow. It’s a continuous process and you need to work at it probably every week for a couple of hours to make progress on connecting with those Angels and presenting to them.
Ian Portsmouth: Bob, for the sake of argument, say that I am a business owner, I’ve got an amazing business plan, and a great investment opportunity and 5 Angels want to do business with me. What should I look for in them? And presumably, it’s, you want to look beyond the money.
Bob Chaworth-Musters” You want smart money. You want people that yes can write you the check, but more importantly that they can bring to bear their understanding of your industry, their business experience and success and essentially guide you or mentor you in the building of the business together. You’re essentially getting married, your ideas together with their money and working together on a partnership basis is the way to make the company grow faster and get bigger and more successful.
Ian Portsmouth: Bob, thanks for helping the Business Coach Podcast audience find their Angel.
Bob Chaworth-Musters” You’re very welcome.
Ian Portsmouth: Bob Chaworth-Musters is the founder of the Angel forum in Vancouver. You can learn more about it at www.angelforum.org.
That’s it for another episode of the Business Coach Podcast. Be sure to check out other episodes which you can download from BMO.com, profitguide.com and iTunes. For other tools to help you build your business, visit BMO.com/coach. And until next time, I am Ian Portsmouth, the Editor of Profit Magazine, wishing you continued success.