Accessing Capital Who First:Angels, Venture Capital or Neither

Your First Professional InvestmentWho, What, When, Where and How?

Who am I

• I am Gerard Buckley– Founder & CEO of Jaguar Capital an Advisory Practice for Growth

Companies in Governance, Financial Management & Financial Structuring– Chairperson of Board of Directors, Maple Leaf Angels Corporation &

Investor in eight early stage companies– Certified Corporate Director of the Institute of Corporate Directors– Previously Entrepreneur in Residence with Incubes (An Internet Company

Accelerator)– Member of Small & Medium Enterprise Committee of The Ontario

Securities Commission– Investment Committee of Mount Saint Vincent University, Halifax, NS– 32 yr. Career with Scotia Capital as a Financial Risk Management Advisor

to Fortune 200 Companies: Rogers, Irving Group, Empire Co., Four Seasons, Bruce Power, OPG, Province of Ontario, Ford etc.

Agenda• Financing Alternatives• Who Accesses Equity Financing • What is Angel Investing• Who are Angel Investors• Why would someone be an Angel Investor• What type of companies do Angels invest In?• Angel Network in Canada• Halo Report 2013• Angel Investing is a changing• Pros and Cons of Accessing Venture Capital• Some Pitfalls to Avoid• Market Trends• Q & A

Financing Alternatives

• Personal Financing aka: Bootstrapping• Business Loans• SR&ED• Government Grants• Accelerators• Angel Investors• Asset Backed or Receivables Lending• Venture Capital• Bank Debt

Profit Magazine’s Hot 50

Equity Capital Life Cycle

Cash flow

Sale

s a

nd

p

rofi

t

I ntroduction Growth Maturity Decline

Time

R & D Pre-Seed & Seed

Start-Up

Sales

Round 1 Round 2

Grants / Love Money

$

Angel $

VC $ VC $

Exit

Angel $

Concept and product

development

Profit

What is Angel Investing

• Angel Investing is individuals investing their personal money in the equity or debt of a Early or Growth Stage Company

• Often referred to as Smart Money, it is where an individual wishes to invest their time or experience as well money in a start-up company.

• People wishing to give back their experience so others may benefit which is often referred to as mentoring or serving on a company Advisory Board or BOD.

• Angel Investing is Active Investing not Passive

Who is an Angel Investor

• A person prepared to invest their personal or family money• A person who can add value to the company• An accredited investor as defined by OSC• A member of an angel network• The majority of angel investment in Canada is completed by

individuals >85%• Estimate of Cdn Angel Investment is 916mm in approx. 1500

companies (VC about 2b)

Profile of an Angel - Median

• Years investing 9• Number of Investments 10• Total Exits 2• Years as a Entrepreneur 14.5• Number of ventures founded 2.7• Age

57• Percent of net worth 10%• Education

Masters DegreeAngel Resource Institute Source: Wiltbank Study 2007

Why Would Someone be an Angel Investor

• Qualified Opportunities• Opportunity referral• Increased Capital Diversification• High Risk Asset Class …. Seeking High Returns• Favourable Valuation and Terms in comparison to VCs• Networking• Portfolio company mentoring or engagement• Shared Due-Diligence• Advisory Board and Board of Director Roles

What Type of Companies Do Angels Invest In?

• Companies who are in seed and early stage.• In technology, life sciences, ict, health care devices, med

tech, clean tech, power solutions, fin tech, ….. • Solve a Problem, Secret Sauce or technology ....... USP,

validated business model, Great management team

Equity Capital Life Cycle

What Angels Look For

• High anticipated growth rate – Scalability • Experienced management team• Sustainable competitive advantage• Barriers to entry ie. Exclusive IP• Clear strategy for commercialization• Proof of concept or enterprise level validation• Business model anchored in Reality• Investor exit strategy in 5 to 8 years• Investing in what you know – vertical expertise• Coach ability of the entrepreneur• Amount of dilutive capital required

Investment Process

1. Pre-screening – Network Staff2. Curbside Mentoring or Individual Member Mentoring3. Present to Investment Review Committee4. Present at members meeting5. Due-diligence Committee is formed and led by a member6. Term Sheet is negotiated & agreed between parties7. Investment is papered by lawyer8. Member is appointed to board9. Quarterly company reporting

Factors that appear to impact investor outcome

• Due diligence time: More hours of due diligence positively related to greater returns (> 40 hours)

• Experience: An angel investor's expertise in the industry of the venture being invested

• Participation: Angel Investors that interacted with their portfolio companies at least a couple of times per month mentoring, coaching, providing leads and monitoring performance experienced greater returns.

Solo Angel Investing

• Process is time-consuming– Deal sourcing– Reading plans (Networks see 250 Business Plans a year)– Meeting with entrepreneurs

• Due Diligence is difficult– Finding Vertical experience– May require using outside experts

• Legal Support is Expensive• Most have Family Offices – Super Angels

Angel Resource Institute

Angel Network – Membership Benefits• Opportunity to engage with other members with investment insights &

ideas• Give back and make a difference for entrepreneurs through mentoring and

coaching• Access to collaborative investment opportunities through network

presence within the startup ecosystem• Your investment dollars go further through government matching

programs• You can take advantage of standardized initial screening processes and

thereby benefit from a consistent approach to due diligence • You can harness the power of syndication that comes about when multiple

members invest together. • Due diligence support• You have access to a common term sheet that is negotiated by network

members

Angel Network’s in Canada

• NACO – National Angel Capital Organization• 33 Angel Groups in Canada• They have collectively about 2100 investors• Three large groups accounted for 58%• 75% of angel group members - former & current entrepreneurs • The majority have fewer than 50 members• 75% of groups set up since 2007• Vast majority do volunteer due diligence• 12 Angel Groups in Ontario• Keiretsu Forum & Golden Horseshoe Venture Forum are Private

For Profit Angel Groups

Canadian Angel Group Investment Activity 2013

• 199 Investments in 2013 totaling 89 m an increase from 2012 of 139 investments & an increase in investment from 40.5M

• Average investment is $945k up fr $314k• 78% - Ont & Que, 21% West, 1% Atlantic• ICT (45%), Life Sciences (33%), Clean Tech (13%)• Valuation – Median 6.1m, Mean 5.0m • 61% of transactions involved a co-investor• Of 3775 applications 5.2% get funded by networks in Canada• Angels in Canada appear increasingly able and willing to

provide follow-on funding to carry companies through to the next stages of growth.

Angel Resource Institute – Halo Report – 2013

• Median Angel Round Size trends up to $600K Q4 from $550K Q3. When invested with others 1.7m

• Early Stage Pre-Money Valuations remain stable at $2.5M; however, top valuations increased from $6.6M to $9.3M

• 72% of deals occur in angel groups’ home states• 73% of Angel Deals are Syndicated or Co-Invested• Share of Deals by Sector - Internet 38.5%(+), Healthcare 19.6%

(-), Mobile & Telecom 16.2%(+), Software (non-Internet/mobile) 4.0%(-)

• Interesting that the top US angel group in 2013 is Golden Seeds with 300+ members invests predominately in women led & controlled companies

Traditional Angel Network is Changing

• Currently Southern Ontario Angel Investment community is fragmented with 13 groups

• Government programs ( IAF, MaRS, OCE, IBI)• Online - Angel List, Syndicates, Funders Club, The Funded,

Gust• Y Combinator, Tech Stars, 500 Start-ups• Incubators & Accelerator funds• Crowd funding such as kickstarter.com and equity crowd

funding will follow • Super Angels & Micro-VC’s

Target Investee Companies

• Companies who are in seed and early stage, two for each meeting if the quality can be found

• In technology, provided they are backed by a member who is willing to sponsor

• Great management team, valuation, technology .......

Selection Criteria

• The stage, quality of the management team, valuation and technology of companies are more important than the sector criteria

• Quality is more important than quantity• The best of the best should only present and the number of

companies presenting should be limited to one or two, introduced by someone who is willing to sponsor or lead the investment and due diligence process

Superhero of the Modern World

Venture Capital Investment

• Cdn VC’s invested $378 mm in Q1‘14 is up 2% from Q1’13• Disbursements to 122 companies up 16% ‘14 vs. ‘13• Ave investment decreased to 1.4m Q1’14 from 3.4m in

Q1’13 which is only 36% of that seen in the US in Q1’14 for like firms

• 2013 seen 2b of new venture investment up 31% from 2012 while fundraising dropped 24%, which was at it’s highest level since 2007; however VC investment in Cda is DN fr 5.9b in 2000 it’s high water mark.

• 2013 seen 452 deals completed up 2% and VC investment is being skewed to early stage companies

Venture Capital Investment

• For entrepreneurs, choosing the best financing model for their start-up isn’t a luxury – it is a necessity

• The terms you will be offered will be commensurate with the value you have created. Sales = Higher Valuation

• VC’s money comes from LP’s which is mostly institutional

Venture Capital Pros

• Small piece of a big company is better than a large piece of a small company

• Their goal is to grow the company quickly and exit.• Deep pockets for follow on financing• Allows you to focus on the business rather than constantly

raising $• VC firm name helps & signaling positive• It is their FT Job to help you succeed• Industry expertise

Venture Capital Cons

• You have to qualify• Often looking for exit in short time frame• Negotiations tend to be one sided• Legal costs of documentation are high• Equity has a higher cost than debt +30%• Staff & time commitment for due-diligence• Reduced control or determination of business• VC’s ask for and get better terms than Angels

Venture Capital Cons

• Your business is exposed to the VC’s funding cycle and market uncertainties

• One author referred to VC’s as a last resort• May control board decisions• Follow on Financing requires higher valuations to support VC’s

valuation• Funding is down and VC’s are taking less risk.• Series A crunch

Pitfall’s

• Complex covenants based on performance metrics• Inordinately thick documents• May replace management• Liquidation preference• Anti-dilution clauses • Loose control of the direction of your company• May hold veto rights or rights to sell company• Signaling effect (VC in seed rnd & passes nxt rnd)

Canadian SME Financing Market Trends

• Nation of independent contractors• The state of employment is changing dramatically• Canada is an Immigrant Nation• Productivity in Canada has not improved• USA advantage is the development of their risk Capital Markets• Seed and Pre-seed level is where VC money is going• Consolidation of Accelerators and Incubators• Angel Tax Credit provincially and is being lobbied federally• Valuations for public companies are high and is effecting private

markets• Less exits

Do it Your Way - Parting Thoughts

• Over 90% of all businesses are started and grown with no equity financing

• VC is the OPM (Other Peoples Money) drug of Start-ups• Oct’13 Profit Hot 50 - Seed Financing – 98% Founders own

capital, Growth Capital – 62% Founders own Capital • Control your destiny until you create sales• Eyes Wide Open and be well researched

Gerard Buckley, BBA, FICB, ICD.DPresident and CEO Jaguar Capital Inc.(C) 416-884-9522(W) 416-646-6789g.buckley@jaguarcapital.ca

www.jaguarcapital.ca

@jaguarcapital @gerardbuckley