There are many funding options for technology startups. We will discuss two often talked about options, angel financing and venture capital financing.
Angel financing is generally investments by high net worth individuals, referred to as angel investors, in promising startup companies. Most of the individuals are people who had made their fortune from selling of their own startup companies and now want to help budding startup companies with funding and their knowhow to help them grow, in the end hoping to reap rewards from their investments and efforts.
There are no accurate figures on how much was invested by angel investors in Canada. It is estimated that between $500 million to $1 billion invested each year by angel investors. The National Angel Capital Organization (NACO) has been attempting to capture and report angel investment activities. Due to its methodology of capturing investments only from its member angel groups, NACO results are substantially underestimating the true nature of angel investing in Canada.
When startup companies look for funding, one thing that they should and must be aware of the kind of returns their potential investors would demand from investing in their companies.
Risk and reward – the higher the risk and most expensive the funding option will be.
How expensive is angel financing? Most of the angel investors are flexible and willing taking slightly lower return than otherwise would demanded by venture capital firms, simply because they can actively assist and ensure the success of their funded companies.
The average size of angel investment generally ranges between $500,000 to $1 million. Unless the startup companies need a large amount of seed or startup capital, angel investment may be the best option for these companies.
With government support, numerous angel groups have popped up across the country.
An angel group generally is a member-based not-for-profit organization that made up of active angel investors, pooling resources in screening, conducting due diligence and funding for startup companies.
Funding will be coming from group members who choose to participate in investment opportunities. Some of the group have gone one step further, emulating venture capital firms by setting up their own funds. Those group include Anges Québec, Maple Leaf Angels.
Venture capital financing
Venture capital is generally perceived to be speculative, risk capital invested in seed and early stage startup companies. They are usually unsecured, a form of equity or convertible debentures, made by professionally managed investment firms, family offices or other entities. Venture capital investment are not necessarily just for seed or early stage companies, they are also for hyper-growth growth or late stage companies.
The salient feature of venture capital is unsecured and risky.
In Canada we have the association representing the very industry expanding the definition of risky capital by including secured debt as venture capital in their industry statistics. This should never have been the case and such information are totally misleading. Secured debt and sub-debt are not venture capital.
Venture capital is the most expensive financing option, and for most of high growth startups, the only option.
Venture capital firms are generally professional investment managers, similar to mutual fund managers, managing other people’s money, either through a limited life span limited partnership fund or an evergreen investment vehicle funded by governments, corporations or family offices.
Because of their sizes, venture capitalists are willing to take on higher risk through investment diversification. Differing from angel investments, venture capital investments generally are larger in size and demand higher returns from their investments even though majority of the venture capital investments are further “diversified” through syndication among several co-investors.
Companies seeking venture capital funding should prepare to give up some or substantial control of the company.
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Ted Liu, M.Sc. (Mining), MBA (Finance), is the Editor of Private Capital Journal, TechnologyMetals.ca, GoldSilverMetals.ca, and former Editor of Canadian Private Equity. Ted has been passionately tracking Canadian private capital industry since 1992, most recently served as Research Director for The Canadian Venture Capital and Private Equity Association (CVCA). Ted is President of CPE Media Inc., an independent, trusted and unbiased data provider tracking Canadian VC/PE, private capital industry.