If you’re looking for equity capital for your Canadian startup or small business, several options are available. It’s important for you to do the preparation work to convince potential investors that your business is worth the investment.
Locating Equity Capital for Your Canadian Startup
Among the primary sources for equity capital are venture capitalists, angel investors, and business incubators or accelerators. Different types of businesses are attractive to different funding sources. If your startup is in the tech field, for example, it likely has more options for funding than businesses in some other fields. In addition, you may be able to take advantage of startup financing from banks or government organizations.
Venture capitalists are most often interested in tech companies in areas such as biotechnology, communications, and IT, since they have a high potential for growth. When you make a deal with a venture capitalist, you trade away some of your equity in your own company in exchange for funds. Venture capitalists often have an end game of taking a company public, planning to make back their investment at the initial public offering. If you’re not a tech company or aren’t interested in going public, venture capital may not be your funding source of choice.
Angel investors are typically leaders in an industry, often retired executives, who invest their own funds in smaller startups. If you only require $100,000 or less to get off the ground, an angel investor may be the right funding source for you; if you require closer to $1 million, a venture capitalist may be a better fit. Look for wealthy individuals who have experience in your field and who are willing to leverage their knowledge and network to help you. Expect to offer a seat on your Board of Directors to any angel investor.
Business incubators are most prevalent in the high-tech field, though some other industries are beginning to copy this model. Often local development incubators focus on urban revitalization and job creation, for example. When you work with an incubator, you typically get to share the incubator’s office space, laboratories, tech resources, and administrative support, saving you money so you can focus on the core of your business. There’s a time clock ticking whenever you work with an incubator or accelerator. Typically you have a two-year window in which you must finish development of your product so it’s ready to begin production and bring to market. Business incubators have been especially successful in the biotech, IT and industrial tech fields.
While bank loans are a common source of funding for established companies, they may not be as readily available to startup companies. Banks like to make loans to companies with strong business plans, good credit records, and proven track records.
Funding Source Options
Business Development Bank of Canada provides venture capital financing to select companies. In general, this funding source provides large amounts of startup funding to help promising companies with the potential for high growth. With some startup funding from BDC, can hold off on making payments on the principal for a year.
If you’re seeking an angel investor, check out the Canadian Angel Investment Network. You can also learn more about approaching and dealing with angel investors by contacting the nonprofit organization Angel Investors Canada.
For established business incubators or accelerators in Canada, check out the comprehensive list provided by the Canadian Association of Business Incubation.
What Investors Want to See Before They Invest
Whether they’re venture capitalists or angel investors, potential investors want to see some evidence that they’ll make money on their investment. Your business plan must be firmly in place and cover crucial areas including your results so far, customer satisfaction metrics, market share, and potential for scaling. Investors want to see that your strategy makes sense in your marketplace. Show your investors all the numbers you can, starting with your financial statements.
Investors also want to know how you plan to invest their funds, should they choose to help you out. Do you need funding to add to inventory? Are you in need of a new marketing strategy and want to boost your advertising budget? If you’re a seasonal business, you may have cash flow needs during certain months of the year. As your business grows, you may need funding to open new markets.
Watching Out for Potential Pitfalls
It’s tempting as an entrepreneur to look on the bright side and focus on the positives and possibilities for your company’s future. However, if you ignore potential pitfalls, you may run into problems when you don’t expect them and give your investors cause to question whether an investment in your company is really a good idea. Analyze the challenges you face honestly, whether they consist of a daunting array of competitors, a distinct lack of resources to pursue your business plan, an inappropriate location, inventory problems, or issues with your customer base.
By being honest about your company’s weaknesses, you reassure your investors that you’re prepared to deal with reality and make any needed changes. Prepare your business plan to answer all investor questions as you seek out venture capital or angel investors, and investigate incubator options to grow your company.