It is common for entrepreneurs to receive some modest seed financing from family and friends, but the equity funds which are fueling startup and early-stage technology companies in Canada today are primarily provided by angel investors, with some government program funding and venture capital injections. Angel investors are generally wealthy individuals who wish to utilize a small portion of their financial resources to invest in startup or early-stage business opportunities. The following comments are intended to assist entrepreneurs in sourcing and closing angel investment.
Fundamentally important to the entrepreneur will be not only closing the amount of desired funding, but closing it with the angel or angels who most enhance the team which the entrepreneur is building. When seeking equity funds entrepreneurs will usually receive advice from multiple sources, but regardless of the source it is a disciplined and structured approach to fundraising that will maximize the chances of raising the desired funds from the right angel investor. As experienced legal counsel in this field, we have acted for hundreds of those seeking and providing equity investment. Some of the recommendations that have stood the test of time in both boom and bust fundraising environments are as follows:
- The entrepreneur should prepare a summary of the business plan on 15 pages or less covering the topics of technology (product/ service), market, team, finances (request for funds/cash flow/revenue model) and exit strategy. The summary should serve to excite and inform potential angel investors and must be available both in soft copy and as a slide deck for presentation purposes. Key members of the entrepreneur’s team must review and sign off on the summary before it is provided to potential investors.
- Once finalized the slide deck version of the business plan summary is to be presented to key team members and rehearsed until it can be articulated (not read) in no more than 30 exciting and informative minutes. This process will ensure as much as is reasonably possible that the “pitch” is comprehensive, consistent and exciting. This will in turn maximize the odds that each potential angel investor who receives the pitch for funding has their standard questions and concerns largely addressed prior to their raising them. This will permit the entrepreneur and potential angel investor to engage in a more customized and meaningful discussion about the possibility of an investment “fit.”
- While the “pitch” is being perfected in (b) above, the appropriate team members should prepare a list of potential angel investors from the team’s collective network and research. The team should endeavour to rank the potential investors from most likely to least likely to invest based upon their actual and acquired knowledge of the potential angel investor (i.e., history of investment in technology companies, preferred investment parameters, currently available investment funds, etc.). The most appropriate team member will then approach the first ranked potential angel investor and arrange for execution of a non-disclosure agreement and delivery of a soft copy of the business plan summary. The objective is to arrange an opportunity to pitch the potential angel investor, commence discussions, move to due diligence and the preparation of legal documentation and to ultimately close an equity financing. Multiple potential angel investors are engaged until the desired equity financing is completed.
In our experience abiding by these recommendations will greatly assist in reducing the time required to raise equity funds and increase the chances of closing an acceptable financing from a team enhancing angel investor.
* Excerpt from “The Entrepreneurial Effect: Waterloo,” publication date Fall 2011.