Beyond the Bank

If you’re looking for funding for your business,
the answer may lie with an angel

Photo: Paul Hogendoorn of FreePoint Technologies Inc.

WHILE IT REMAINS one of the most difficult—and critical—aspects associated with any type of enterprise, there have never been more funding avenues available to help seed, launch and grow a business. With options ranging from love money (a loan from grandma, say) and government programs to bootstrapping and crowdfunding, there are countless choices for entrepreneurs looking to find the right funding fit.

But for certain types of businesses, particularly those with high potential but limited funding options, angel investors can provide the right fuel for growth. Often willing to step in where other investors fear to tread, angel investors seek to “get in on the ground floor” with the successful businesses of tomorrow, and are comfortable taking risks other investors might shy away from.

“Angel investors are accredited, high-net-worth investors who typically have acquired wealth from decades of business success,” explains Dennis Ensing, CEO of the Southwestern Ontario Angel Group. “They use a portion of their investment portfolios to provide emerging companies with seed and startup capital through direct, private investments.”

Founded in early 2008, SWO Angels is a not-for-profit corporation that aims to source quality early-stage investment opportunities and present them to a like-minded community of angel investors. Angel investment generally occurs in a company’s early stages of growth, and is usually done in exchange for a share of equity in the company.

“The angel investor’s goal is to achieve higher returns than the public markets typically provide, and they are prepared to accept the higher risk involved” — Dennis Ensing

But cash isn’t the only thing being provided, says Ensing. “Most angels are active investors. They mentor the companies in which they invest by contributing time and experience, as well as offering introductions to valuable contacts, because they enjoy helping entrepreneurs grow their businesses.”

So what separates angel investors from other forms of equity investment? Generally speaking, it’s the educated pursuit of higher-risk opportunities. “The angel investor’s goal is to achieve higher returns than the public markets typically provide,” Ensing says, “and they are prepared to accept the higher risk involved.”

Either operating solo or alongside peers through an organized group like SWO Angels, angel investors are very good at managing risk—they’re not rolling dice. “Most angels specialize in industries or technologies they understand, and invest only in companies within close geographic proximity,” explains Ensing.

Not surprisingly, choosing the right company to invest in is a critical step for angel investors. And for SWO Angels, Ensing says it’s all about growth potential.

“We invest in companies that offer exceptional opportunities for high returns on investment. This usually implies companies with the potential to achieve high growth, strong market position and sustainable advantages. We generally invest in companies that we believe have the potential to grow to more than $10 million in annual revenue within five years. This should be in either a developing market or in an existing market with national scope.”

One such company is FreePoint Technologies Inc., a London-based provider of productivity monitoring systems for a variety of manufacturers and industries. FreePoint president, Paul Hogendoom, says for companies looking to pursue angel investment, it’s important to keep a few key factors in mind.

“Before pursuing angel investment, you should, first, have proven out your value proposition, and second, know what you will be using the investment for,” he says.

In regards to value proposition, Hogendoorn says the only proof that really matters is if real customers are willing to pay for your products or services. “It is important that you know, for sure, that real customers will pay fair prices,” he says.

When it comes to application of funds, Hogendoorn says, “You should know how you are going to put that investment into play and what you expect to accomplish with it, identifying tangible outcomes for that investment.”

According to Hogendoorn, the perks associated with angel investment are almost as desirable as the investment itself. “The connections that the angel brings to the company are of equal importance to the money, perhaps more” he stresses. “Connections can include customers, additional investors, industry alliances and professional services. Angel investors can bring added credibility as well, in effect lending their reputation and previous track record to the new company’s story.

“It’s allowed us to put more of our plans into action sooner, as well as positioned us better for follow-on rounds of investment,” sums up Hogendoorn. “We get to test our ideas on a knowledgeable group of seasoned entrepreneurs before putting those plans into action.”