When it comes to courting investors, start up owners are better off highlighting their management team and proving their product will sell rather than convincing potential investors they have a one-of-a-kind technology in their hands.
Business owners need to realize that investors are concerned about the security of their investment and the potential for gaining profits, according to Rob Kotourbash, managing director of Maple Leaf Angel Investment Group, a Toronto-based angel investment group.
“Traction not technology is what will get investors to open up their wallets,” Kotourbash told ITBusiness.ca shortly after finishing his presentation Seeking Angels: What you need to know to attract angel investment during the Small Business Forum 2010 in Toronto this week.
Kotourbash spoke before an audience of small and medium sized business (SMB) operators and would-be business owners seeking information on how to access funding for their venture.
An angel investor is an influential individual or group who provides capital for business start ups usually in exchange for convertible debt or ownership equity. They are different form venture capitalists (VC) in the sense that VCs typically work for organizations with a specific charter that determines the amount of money they can invest and the types of industries they can invest in. VC firms are less likely to invest in start up companies at the seed stage.
Maple Leaf Angels has over 40 investor members and has closed more than $6 million in financings since 2007. The group’s typical investment ranges from $250,000 to $500,000 and participates in subsequent financing rounds as well. Maple Leaf Angels invests two thirds of its capital in information technology, about less than one thirds in clean technology and the remainder in medical devices.
Apart from capital, angel investors also provide start ups with business guidance, said Kotourbash. “Angle investors as a fantastic source of knowledge and mentorship because these are serial entrepreneurs – people who have gone through the cycle of starting a business, selling it and staring all over again.”
Team and traction
Marnie Walker, owner of 401 Bay Centre agrees with Kotourbash that start ups need to focus on creating a strong management team and proving viability.
Before opening 401 Bay Centre, a full-service business centre that rents out offices, meeting rooms and facilities right at the heart of Toronto, Walker owned Student Express, a school bus company partly financed by her personal credit card. The business soon became a multi-million dollar enterprise which she later sold.
“Investors want to make sure that their money will be secure and that they will get a profit out of their investment,” she said.
Entrepreneurs also have to prove that they’ll put everything they have on their business, she said. “Investors want to see you believe in your business. I maxed my personal credit cards and mortgage my house to get Student Express running.”
But the clincher she said was her proof of viability. “Before I went to the banks for money, I secured a contract from the York District School Board. This proved to I had clients.”
Proof of viability such as contract, letter of intention from potential clients or market research showing sales and projected cash flow, weighs heavily on an angel investor’s decision of whether or not to fund a venture, said Kotourbash.
“In our decision making a good management team accounts for 60 per cent of the points, traction 30 per cent and technology only 10 per cent,” said Kotourbash.
The exit strategy
In many cases entrepreneurs also need to learn to let go of full control of their business, according to Kotourbash.
Since they are putting up the money for the business, angel investors will want a say on how it is managed. This would mean that owners need to be flexible about the formation of their board.
Kotourbash said most angel investors favour a five-member board composed of the owner and his nominee, two members from the investor group and one independent member.
Investors are not going to be with your business forever. “We need to know your exit strategy because someday we intend to get our money back and invest it somewhere else,” said the angel investor.
Angle investment cycle typically involve providing initial capital in a series of installments over the one to three years. Follow up capital will is also provided up to the fourth year.
However, in the fifth to seventh year, angel investors typically release their final tranche of capital and seek an exit from the venture and get their share of the profit.
Learning to let go
Walker said this could be difficult to swallow for many business owners.
“Of course it’s hard to let go because that business is your baby. But there comes a time when you have to say good bye, “she said.
After 14 years of running Student Express, a company she founded when she only had $500 in the bank, Walker sold her $10 million company.
Walker said she was emotionally devastated after the sale because the business had been her life and her 300 employees a part of her family.
“But after about six weeks at home I got bored and started,” Walker said. And so she set up a home office started her journey to becoming one of the founding members of Maple Leaf Angle Investment Group.