C HAPTER 6: T HE S YNERGY B ETWEEN A NGEL N ETWORKS A ND C ORPORATE V ENTURING
TOUGH TIMES FOR STARTUPS The growth of a seed or start-up company is heavily dependent on the availability of risk capital. In early-stage companies, traditional sources of financing come from personal savings, family and friends, and severance packages. This form of financing, sometimes called “love money,” is usually sufficient to finance market research and to explore a product concept, but is rarely enough to reach prototype development. At this stage, entrepreneurs must begin looking for new sources of financing. In most cases, venture financing is not appropriate, as venture capitalists are reluctant to examine opportunities where the total financing is less than $1 million. As a result, angel investors, who are typically successful entrepreneurs with seed capital and acumen, help to bridge this financing gap. When love money has been expended, many start-ups will pursue grants and government funding. In Canada, examples of these funding sources include the Scientific Research and Experimental Development Program (SR&ED) and the National Research Council’s Industrial Research Assistance Program (IRAP). Some may choose debt financing in the form of low-interest loans or credit card advances, while others pursue supplier or angel capital. Despite these multiple sources, raising early-stage capital to fill the gap between love money (e.g., $150,000) and professional venture capital financing (e.g., $1 million) is still difficult. ANGELS FILL THE FUNDING “GAP” Angel financing is one of the few early-stage “smart money” sources that can fill the early-stage financing gap. As Carleton University professor Allan Riding remarked at the University of Toronto’s “Financing Innovative Ventures in Canada” roundtable series: “I have spent considering why it is that angels are important, and the first item, of course is money. Angels fill the gap between “family” and “friends” financing and venture capital.” (Riding, Canadian Investment Review June 2000). In the past couple of years, however, this role has been a challenging and difficult one. TOUGH TIMES FOR PRIVATE EQUITY INVESTORS Both angels and VCs have been hard hit by the devaluation of technology and telecom companies in North America and a continuing slow economy. As a result, start-ups are facing much higher scrutiny for new financing. Doug Hewson, a partner at Axis Capital in Ottawa noted, “It’s an awfully cold environment for angels right now. A lot of them have seen their personal net worth drop considerably.” (Hewson, Financial Post, February 2001). In order for angels to continue the cycle of investing in early-stage companies, they need to generate investment returns. Achieving satisfactory returns in 2002, however, was almost impossible because of the prolonged economic downturn, a poor IPO market and crushing down-round valuations, a phenomenon of declining valuations that occurs when new investors come into subsequent financing rounds. During these periods, earlier investors – typically family, friends and angels – have their equity stake diminished, and sometimes, wiped out completely. Says local Ottawa venture capitalist Pat DiPietro: “I invested in five start-ups as an angel and every one of them has crashed (in terms of price)…angel investing is a tough business.” (DiPietro, Ottawa Citizen February 2003).
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