Silicon Valley North #25 November, 2000

The Way I See It… by Michael C. Volker

Angels are Becoming a Mainstream Financial Resource

Getting early stage funding is an entrepreneur's first major challenge. Until recently, venture capital could be attracted only after a company was able to show that it had real products and real customers.

In recent years however, there has been a shift towards earlier stage financing by investment firms. Many have even created so-called "seed" funds intended to address the needs of nascent companies.

In the past decade, Canada's high tech industry has grown by almost two orders of magnitude, spawning an immeasurably valuable new financial resource - the "business angel". Angels are successful entrepreneurs who are keen to invest some of their newly acquired personal wealth in promising new ventures. They stand out from all other funding sources because they know what it takes to build a successful business and they are investing their own capital - not other people's money.

High technology clusters in Ottawa, Kitchener-Waterloo, Calgary, and Vancouver are all endowed with this new resource. In Vancouver, for example, the Vancouver Enterprise Forum created an informal network of angels, Vantec (see www.vef.org). It has already provided millions of dollars in capital to entrepreneurs.

Angels are a godsend. They not only provide financial support but much needed mentoring and coaching. They also take more risks. Since it's their dough that's on the line, they don't "due diligence" a deal to death. Other than doing some background and reference checks, they rely on their instincts. And they do deals quickly. If they don't like a deal, they won't string you along by asking for a business plan or more details.

As for the Angels' motives, it boils down to the four "F's": Fun - it's got to be interesting and exciting, Financial reward - of course there's got to be a healthy return, the expectation being in the 100-fold vicinity, Friendship - i.e. camaraderie with each other, benefiting from each other's insights on both a specific deal and life in general, and Frey - which to me means vicarious entrepreneurship in honor of the god of fertility and fruitfulness.

So, how does one tap into this pool? No, there isn't a "contact list". Angels generally prefer to maintain a low profile and they enjoy their privacy. Although many groups are set up to receive executive summaries (aka "elevator pitch"), in reality few angels actually peruse these. The best bet is to find a "sponsor", i.e. a prospective angel, an advisor, or a board member who can introduce the company to an angel group. Good entrepreneurs are good networkers. They know how to find prospects in a crowd.

Upon finding a supporter to advance his cause, the entrepreneur will get fifteen minutes or so to make a pitch to the network. If little or no interest is garnered, it is a sign that something is wrong. Pitching the same proposal to more investors will likely produce a similar result. In the worst-case scenario, the entrepreneur may have to go back to the drawing board to come up with a new plan and/or new team players.

Angels invest in people. They know that most successful companies today are not doing what they set out to do in their original business plans. The founders' talents, skills, and commitments are often revealed in their articulation of their vision and plan and it is these facets that attract angels.

As an added bonus, those who do get angel funding will find it easier to attract traditional financing because of the reputation and connections of the angel backers. VCs like co-investing with angels. In some cases, VC's have co-invested with angels after having initially rejected a submission.

The way I see it, raising equity capital from angels boils down to nothing more than making a new friend - specifically one who's been there and one who's done it. Finding startup cash need no longer be an insurmountable task. Angels are everywhere!

Michael Volker is a high technology entrepreneur and director of Simon Fraser U's University/Industry Liaison Office. He is a former executive director of the BC Advanced Systems Institute and chair of the Vancouver Enterprise Forum. He may be reached at mike@risktaker.com.