Read this post because
It will provide Start-Up founders/investors an overview of different ways of funding/financing a start-up in Canada.
This is the practice of raising money by selling shares of the venture’s company to potential investors. Most of financing in the world of start-ups are in fact equity financing where Angel Investors, Venture Capitals, Accelerators or Incubators take shares of your start-up in consideration for their investment.
The big question for equity financing is always valuation: how much is the venture worth? Or could be worth in the near future? For early stage start-ups this is the most difficult hurdle. After all how can a start-up be objectively quantified if it has not produced anything yet? These difficulties often make friends and families the best resource for early start-up funding. But extra caution is necessary to protect the venture’s future interests.
The best strategy to overcome these difficulties at early stages is for the founders to plan and document their goals and strategies. The founders further need to practice their storytelling skills to deliver effective pitches and presentations to family, friends and sophisticated VCs alike. Founders need to remember that at early stages, they themselves are among the most important selling factors of the venture.
Angel investors are typically high net worth individuals or groups of these individuals who are Accredited Investors* that invest in start-ups in exchange for equity or convertible debt*. Angels can have any background but those roaming the start-up world are typically current or former entrepreneurs interested in innovation.
*Accredited Investors: In Canada, an “Accredited Investor” is defined by the provincial securities commission in each province. In Ontario for example, an Accredited Investor is defined in OSC Rule 45-501. This definition includes, but is not limited to: an individual who beneficially owns, or who together with a spouse beneficially own, financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $1,000,000; or an individual whose net income before taxes exceeded $200,000 in each of the two most recent years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of those years and who, in either case, has a reasonable expectation of exceeding the same net income level in the current year; or an individual who, either alone or with a spouse, has net assets of at least $5,000,000;
*Convertible Debt: investor and venture enter into an agreement with the intent (from the outset) that the investment amount be re-payed (all or in part) to investor by converting it into a certain number of common shares at some specified time in the future.
Angels are most often sophisticated investors that will want to properly research and conduct comprehensive due diligence on the ventures they eye for investment. Angels often invest their own money, in contrast to Venture Capitals who are professionals that invest money entrusted to them. As such, Angels are more flexible in practice and are more prone to creative deal structures. Angels typically invest at very early stages, and expect high returns on their investments (i.e. 5x-10x). this is understandable because risk is very high at early stages and it will need to be properly rewarded to attract investors. In short, Angles are not cheap! Therefore, founders shall carefully consider whether approaching Angel investment is right for them: is the investment necessary such that it would warrant giving up considerable equity in a venture that has not yet realized its potentials?
Investments by Angels can range from a few thousands to even a few millions and mainly in the pre-seed, seed and Series A funding (see Start-up Funding Rounds).
As mentioned, Angels can also come in groups or networks. Once Angles adopt structure they tend to become more procedure-oriented and more risk-averse. They are less flexible that individual Angels yet more than Venture Capitals. Similar to VCs, Angel networks also specialise in certain sectors and have developed a certain appetite for investment.
If you are considering to approach an Angel Investor for the Start Up Visa (SUV) Program, you need to know that:
– Not all Angel Investors in Canada are qualified to participate in the SUV program. Currently there are 9 Angel Investors designated by IRCC and therefore qualified for the SUV program;
– As a legal requirement, designated Angel Investors must commit to an investment of at least $75,000 in the start-up company they choose to support for the SUV program;
Venture Capital Funds
VCs are often professionally managed pools of funds with an exclusive interest in start-ups (i.e. high growth potential). As VCs are more sophisticated and more structured that Angels, they often tend to invest at later stages of a start-up (there are specialized VCs that fund start-ups at early stages). VC investments just like any other investment in the world of start-ups have high rates of failure and are duly categorized as high risk. Risk that needs to be properly rewarded by giving up shares and/or control in the start-up venture as consideration for VC’s investment. Founders therefore shall expect lengthy, complicated and burdensome negotiations when dealing with VCs.
VCs are often specialized and have an established investment appetite. Some invest globally while others are geographically focused (i.e. Canada, US, …). VCs often specify the stages at which they would want to interview companies (see Start-up Funding Rounds) and they have a preference for sector (i.e. AI, VR, IOT, etc.). Therefore, founders are advised to duly research VCs to see whether their ventures are a suitable match to potential VCs’ portfolios. Just like any other important meeting in life, the best way to approach VCs are through a warm introduction from an influential individual in your network (i.e. a lawyer, accountant or etc.).
If you are considering to approach a VC for the Start Up Visa (SUV) Program, you need to know that:
Not all VCs in Canada are qualified to participate in the SUV program. Currently there are 23 VCs designated by IRCC and therefore qualified for the SUV program;
As a legal requirement, designated Venture Capitals must commit to an investment of at least $200,000 in the start-up company they choose to support for the SUV program;
Canadian VC Investment Statistics in 2019
2019 was an incredibly impressive year for venture capital investment in Canada as a record CAD $6.2B was invested over 539 deals. This represents a 69% increase than the CAD $3.7B invested in 2018 and three times more than when CVCA began market analysis in 2013. The last quarter of 2019 alone contributed CAD $1.6B to the staggering new record. For more information see Canadian VC Investment Conquers New Peaks in 2019.
Accelerators & Incubators
Just like “start-up” itself, anything associated with the start-up world, like accelerators and incubators, do not have universal definitions. Best way to differentiate between an accelerator and an incubator is perhaps by resorting to the plain meaning of the words:
– Incubator: enclosed apparatus providing a controlled environment for the care and protection of premature;
– Accelerator: a thing that causes something to develop more quickly;
The plain meaning is also in line with the practice in the start-up world where incubators often serve ventures that are at very early stages and accelerators often cater to ventures that are more developed and in later stages.
Accelerators and Incubators are not prima facie seen as sources of financing but they often provide ventures with valuable resources that will pave their way to financing. Although there are incubators and accelerators that invest in start-ups in exchange for equity or convertible debt just like angles or VCs, this is not prevalent among their peers. Most common services offered by these organizations are: advice, mentoring, operational technologies, and often a co-working space. They often engage with start-ups at the earliest stages, sometimes at a point where the company is still refining its proposition and doesn’t require capital yet.
Incubators and Accelerators, like colleges and universities come in different reputations and prestige. Just like the reputation of a university that will determine the kind of job a graduate will land, the influence of the incubator/accelerator will determine which investors will show interest in the venture. Incubators/accelerators are very different in their admission standards, and their fees. Some like the Creative Destruction Lab are free but have a very rigorous application procedure with a very low acceptance rate. On the other hand, some incubators just accept about any venture regardless of merit and in exchange for very high and rather unreasonable fees.
Founders are advised to be careful when considering incubation or acceleration for their ventures. They have to do their due diligence and properly weight the costs and opportunities before making any commitments. It is very important to ask questions and research the organization’s network (i.e. consultants, mentors, executives, board members and etc.). This research will help making an assessment on whether the organization is a match for the venture. It is best if founders make a list of their expectations before approaching incubators to ensure they will address all of their concerns before they commit to rigorous application processes or very high incubation costs.
If you are considering to approach an Incubator for the Start Up Visa (SUV) Program, you need to know that:
– Not all Business Incubators in Canada are qualified to participate in the SUV program. Currently there are 29 Incubators designated by IRCC and therefore qualified for the SUV program;
– There is no legal requirement for designated Incubators to invest in the start-up company they choose to support for the SUV program;
In simple terms, crowdfunding is the practice of funding a start-up venture by raising small amounts from a large number of people (i.e. crowd + funding) typically through the internet. One of the advantages of this approach is gaining exposure by attracting a large of number of investors who will play an important role in advocating for the venture. On the other hand, a big challenge for crowdfunding is creating an appeal for the company that would attract a large number of investors. There are different types of crowdfunding. The primary ones are:
– Donation-based Crowdfunding: this type of crowdfunding is strictly charitable and allows people to give money with no expectation of receiving anything in return. It is obvious that not all ventures can create the necessary appeal to attract charitable donations;
– Equity Crowdfunding: just like equity financing, equity crowdfunding allows people to invest in a venture in exchange for a small stake in the company;
– Reward-based Crowdfunding: in this type of crowdfunding, investors will get rewards, usually in from of exclusive product or service in exchange for their contributions;