Special Report: Beyond the BanksThis PROFITguide.com Editorial Report is brought to you by
Benecaid

The hard truth about raising money for a startup is that it has never been easy—at least, not since the dot-com bubble popped in 2001. Nor, given that most new businesses fail within a few years, should you expect it to be.

But don’t despair. To be sure, the fundamental reality of startup financing— namely, that you’re probably in for a tough slog—remains unchanged in 2012. Yet, there is some good news: over the past few years, the two best bets for finding the money needed to launch a company have become even better bets.

You can sum up the most encouraging trend in startup financing in two words: angel investors. Actually, make that three words: angel investor groups.

Typical angel investors are 55- to 65-yearold entrepreneurs who have sold their companies, seasoned executives who are retired or semi-retired, or owners of profitable businesses who are looking to invest some of these profits. What all these people have in common is that they’re sophisticated investors who crave the thrill of participating in a new business. They’re not interested in passive investments but in equity stakes in promising business ideas and a chance to mentor smart, younger entrepreneurs.

This country has enough angel investors to populate a small city. The latest estimate, from the National Angel Capital Organization (NACO), is that in 2008, Canada had 16,000 angels. That year, this group invested at least $1.9 billion in total, or about $120,000 for the average deal. And while venture capitalists are rarely seen at or before a firm’s birth, that’s when angels prefer to invest. “Angels are hugely important in Canada for startup financing,” says David Simpson, a financier and serial entrepreneur who lectures on entrepreneurial finance at the Richard Ivey School of Business in London, Ont. “And with the rise of angel investment networks, they’re becoming even more important.”

These networks—regional groups of angels who co-screen potential deals and each ante up for a small piece of the action—aren’t brand new. But several trends have led to their proliferation.

Read: Accelerate Your Success Through a Startup Incubator

One is an increase in the ranks of angel investors. Jason Sparaga, president and CEO of Spara Capital Partners Inc., an Oakville, Ont.-based investment and merchant banking firm, says the brisk growth in the number of Canadians 55 to 65 and of executives taking retirement packages is deepening the pool of people with business savvy and money to invest. And, he says, NACO and other groups have raised the profile of angels and persuaded more people to become one.

Even more important is the upsurge in the number of angel groups. Dozens of these investor networks now operate across Canada, up from just a handful a decade ago. Sean Wise, a professor of entrepreneurship at Ryerson University in Toronto, says the federal government is fuelling this growth by providing funding through regional economic-development agencies that now operate in every part of the country. For instance, FedDev Ontario, the agency for Southern Ontario, has for the past 18 months provided onetime funding of up to $50,000 for angel groups and up to $2 million for angel industry associations.

“We’re also seeing growth in the number of informal angel groups,” says Wise. “These are people who do deals in a given space that they know well or who invest in companies founded by people they know.”

Read: Angel Group Investment Soars

Simpson points to another key development: angel groups now routinely share information with each other. “I was involved in an angels chapter in Southwestern Ontario, and I’d get an alert from, say, an angel group in Toronto that had already vetted a company and said that it looked good,” he says. None of this has made obtaining angel financing a cakewalk. Like other types of investors, angels turn down far more deals than they approve. Your odds are better if your business is of the right ilk. Sparaga says angels tend to be keen on “20- to 25-yearolds who are the best and brightest at their school, have a great business concept and evidence that what they’re doing is an exciting and credible opportunity.”

  • 1
  • 2
Loading comments, please wait.