Financing: Angels, Banks and Venture Capital
Looking for Capital?
If you are an entrepreneur and want to finance the growth of your company you can either borrow, or you can sell shares in your company to investors. In 2005 over $2,170M was provided for finance and investment by Venture Capital firms in Canada!
This article will tell you who to approach and what to do.
If you are starting – or recently started – a new company, you should look for an angel investor. This angel is commonly found within your circle of family or friends and who knows and believes in you. They provide cash in return for a share of your company’s shares.
There is another group of angels, who are individuals within your local community, town or city, who have retired, sold their business or farm, or received an inheritance, and have a sum of cash available to invest in a new business. They often focus on business areas in which they have experience and offer a valuable resource to a new company.
The downside of an angel investment is that they may expect a certain amount of control over the management of your company and they may ask for their money back if dissatisfied.
Investors or Partners Agreement
It is a good idea to use an investors or partnership agreement to establish the roles, responsibilities and expectations for each investor or partner. This agreement should also state when and how shares can be sold. With this agreement in place there can be no misunderstanding or unclear expectations among those involved. Any experienced legal or financial advisor should have an agreement available to suit your needs
How Much and What For?
Most new start up companies need separate financing for the purchase of “fixed assets” such as equipment – and for “current assets”, which are the stocks of goods and materials you intend to sell. There are separate forms of finance available for each class of assets.
Fixed Assets may be financed by a loan for up to $250,000 from a Charter Bank, made using the Canadian Government Small Business Loan Guarantee Scheme. The company directors must have a good personal credit history to support this application, even though they do not need to offer personal guarantees.
Current Assets include the stocks of materials and goods that you must buy to be able to sell to your customers. The assessment of financing required is complicated by the need to pay for supplies when ordered (common if they are imported) or on receipt of the goods. Then you must wait for your new customers to pay you. This can take 60 or even 90 days. The time between paying for your supplies and receiving cash after you have sold them will add significantly to your current asset financing requirements. Use a cash flow forecast to establish the amount of financing you require.
It is possible to obtain a loan to finance your current assets, but this will require a personal guarantee by the Directors. You may prefer to ask angels to provide that financing.
After at least 12 months trading your new company can demonstrate a solid growth in sales. You do not need to show an accounting profit, but you must be able to show that a rapid increase is sales can be achieved through additional investment.
You need a good business plan that describes your competition, your prospective and actual customers, your operations and how you will grow sales. You must be able to show that the management team has the capacity to match any of the challenges of growth.
Now you can grow a company using internal resources, provided that your company has generated a positive cash reserve. If your company is cash poor, then you must finance growth through attracting additional investment, typically from a Venture Capital firm.
Venture Capital Firms
There are over 1,300 Venture Capital (VC) firms world wide (see www.jobs4canada.com). Analysts from some VC firms regularly visit the Technology Parks and Business Incubators associated with major Universities in a search for new start up investments.
The VC task is to invest in growing companies which, after a few years, can be sold or floated on the stock exchange to generate huge profits. They typically offer between an investment between $2M and $5M for a significant proportion of the shares available. They may also require a Director on the Board and may offer specialist management expertise to the company executives.
You can find the right sources for money to grow your new company. You will need good, unbiased professional advice. These funds can enable your new company to grow and prosper
These web resources provide access to information about Venture Capital in Canada, including Government of Canada resources, company and financial information and statistics.
This web site is intended to serve immigrants to Canada who intend to self employ, or to create employment by starting their own business. It includes valuable information on Venture Capital and provides access to a list of 1,300 Venture Capital Firms in Canada, the USA and Europe.
Business Development Bank of Canada (BDC)
The BDC provides entrepreneurs with flexible financing and venture capital.
The Canada’s Venture Capital & Private Equity Association represents the majority of private equity companies in Canada, with over 1000 members. They have an annual statistical review which can be helpful.
Department of Finance Canada
This Government of Canada website is devoted to the financial sector.
Investment Dealers Association of Canada
The Capital Markets department of the IDA prepares reports on capital markets developments.
Ontario-Venture Capital Activity
www.2ontario.com/welcome/bcfs_504.asp A breakdown of the venture capital industry in Ontario.
Strategis-Sources of Financing
A directory of Canadian financial providers, a search engine to assist in locating financial providers, information on different types of financing and financial providers, and tips to help you secure financing.
This database on Canadian venture capital transactions has detailed information on daily investment headlines and snapshops of Canadian investment trends.
Toronto Venture Group
The Toronto Venture Group provides an overview of the venture capital environment in Canada, with news, forums, seminars and more. A membership is required for most information.
UBC – Venture Capital Resources
This University of British Columbia Library website includes sources, statistics, guides, articles and books.