News

Sutha Kamal's 90 Day blog at globeandmail.com follows the trials and tribulations of starting a tech start-up in Canada. His company, AmbientVector is in the midst of the product launch for its Nakama platform.

He hasn't been shy about talking about his dealings with investors. Here's what he has had to say about it working with Angel investors and venture capitalists:

Let me be clear: there are great angels, and great VCs here in town and elsewhere in Canada. We're even lucky enough to have one of the best VC's behind us. That said, there's still a lot of stupidity when it comes to financing a Canadian software startup, and I think it actually starts with angels...

Read the complete post on this topic, called, Pref-share stupidity... angel money in Canada

Mr. Kamal was joined by accountant and consultant Hassan Altaf at noon, Tuesday to discuss how start-up companies should set about dealing with Angels, Venture Capitalists and other funding agents.

Mr. Altaf, CA, CFA, is Managing Director of Altrius Capital Inc., a Toronto based boutique investment advisory firm providing venture capital & private equity transaction support services to both entrepreneurs and investors.

Editor's Note: globeandmail.com editors will read and allow or reject each question/comment. Comments/questions may be edited for length, clarity or relevance. HTML is not allowed. We will not publish questions/comments that include personal attacks on Globe journalists, other participants in these discussions, questions/comments that make false or unsubstantiated allegations, that purport to quote people or reports where the purported quote or fact cannot be easily verified, or questions/comments that include vulgar language or libellous statements. Preference will be given to readers who submit questions/comments using their full name and home town, rather than a pseudonym.

Sasha Nagy, Business Features Editor writes: Welcome to both Sutha and Hassan, thanks for taking questions today. I think a lot of people may not understand how small start ups acquire financing. I was hoping that both of you can discuss the relative importance of Angel Investors and Venture Capitalists. I guess in an ideal world you would bring your own money to the table and then you could build your business with no regard for other people's interests.

Sutha, are there days when you wish that was the case? And Hassan, as someone who advises small businesses on dealing with venture capitalists, what is the most important advice you give clients when it comes to accepting VC money?

Sutha Kamal writes: Sure, there's even a term for it ... **** you money. That said, Ambient got lucky. We got angel money from people who knew and trusted us, including my former boss. These were people that took a bet on me, wrote us a few cheques, and even told us they wanted to write more when they figured we needed it. There weren't onerous terms: they knew that we'd do our best to take care of them as we grew the company, and if we failed, then we failed. I think a lot of the angel money that's around in Canada these days often comes with much more onerous terms, and so sure, it'd be great to start a company without needing outside capital, but it's not often an option. Also, our investors acted as advisors, and the value of their money aside, the value of their advice is enormous. That on it's own often makes taking outside money worthwhile.

Hassan Altaf writes: First off, thank you for asking me to contribute to today's online discussion forum.

As someone who has sat on both sides of the table in terms of representing entrepreneurial companies seeking financing as well as a venture capitalist investing in emerging companies (primarily in Europe/Middle East but also in N. America), I have the following opening tip for those seeking funding:

BE PREPARED! Far too often, entrepreneurs make a premature approach to VCs without having covered all their bases like developing a solid business plan etc.

Sutha — that's a fine point you've made…it's not just the "money" that entrepreneurs should be vying for as their sole criteria but also the industry knowledge/contacts that potential investors bring to the table.

Sutha Kamal: Absolutely. Both with our VC and our angels, we've been lucky to have super smart, super supportive people both in terms of experience and connections... the money's obviously been key, but we wouldn't have gotten nearly as much done without the assistance we've been given.

Shirley Jackson, from Oliver, B.C. writes:

Q#1. How do you find 'free' money for your new business (e.g. grants) in Canada? Problem: most business books and magazines tell you how to raise capital in the United States, not here.

Q#2. How do you keep control of your business if you accept investors? I like filmmaking as a business because you don't issue voting shares to investors.

Sutha Kamal:

1) No idea. We didn't really look for grants. However, the SR&ED credits the Canadian government are pretty attractive for technology companies. They effectively let you get a significant chunk of research and development costs (headcount, etc.) back after the fact. It's not as good as a grant up front, but it's still cash.

2) You're in a partnership. You need to be aligned with your investors, and have a common goal in mind. If you don't, it's a bad sign from the start. We're not as worried about control, and perhaps that's my failing, but it's not something that often crosses my mind. There are basic things like drag-along rights, etc. that you should ensure you have in any shareholders agreement that allow you to drag other investors along in a decision if you have a majority of shares, but aside from that, I don't know that it's worth a lot of consideration.

Hassan Altaf: Shirley: Now that is the million dollar question!!! Various levels of Government encourage innovation and scientific research by way of limited grants and soft loans but it's almost a full-time job trying to pin these sources down. I don't recall the website off hand but try searching iterations for "Canadian innovation/research funding" and some useful hits should turn up.

Q#2: As an entrepreneur it is important to ensure that you have a sustainable percentage of equity ownership (at least 40%) to keep you driven and motivated to build the business — other than this, the best way to keep "control" is to show the investor that you are on top of things and communicate frequently with them on new developments/challenges.

Saeed Bagheri, from Waterloo writes: You've said there's a lot of stupidity when it comes to financing a Canadian software startup, and it actually starts with angels inverstors. Can you expand on that?

Sutha Kamal: So my point was actually just that angels in Canada are often acting like VCs are... asking for pref shares, lots of control, and other things that generally make it *harder* for companies to raise VC money at later stages. As I said, we got lucky... we had angels that believed in us, gave us the money we needed to get going, and didn't complicate matters when we needed to raise venture capital money afterwards. There're a whole lot of startups in Canada that aren't as lucky... often selling half the company for a few hundred thousand dollars, doing early rounds at ridiculously high or ridiculously low valuations, or have such complicated corporate structures just to deal with taking the angel money, that most VCs run away from doing the deal.

Hassan Altaf: Yes I've experienced this first hand in some of the earlier deals I invested in on behalf of the institutional & high net-worth investors in Europe/GCC region — typically we invested in "private equity" deals as opposed to "seed" funding as angels but one of our deals involved a sole shareholder looking to expand geographical markets for his business and we forgot to take off our "private equity" hats which inevitably calls for more "tough" investing criteria/approach.

Sutha Kamal: Right, and so the point is that angel money, VC money, PE money, and investment banking money are all at different stages: angel and VC money is really there to GROW a company, not acquire shares in a company... there's a subtle difference, but I think it makes all the difference in the world in terms of how the company is built, grows, etc.

Sasha Nagy writes: Time to pit you both against each other.

Sutha, if you were approaching Hassan for funding. What's the very first thing you tell him? How great your team and product is, or how much money he is going to reap by investing in your company?

And Hassan, what do you ask him first? Who is behind the product, or what are his sales projections?

Sutha Kamal writes:Our pitch is pretty simple:

Here's what we do: Make a mobile photo and video sharing site called Nakama.
Talk about the market: Our target demographic, and how large it is.
How we make money: our revenue model
Why we're going to win: how we're different
Why we think we're already winning: early traction is helpful
Who's on the team: who we are, why we think we're the right people
Who we think we need to hire
Money: what we need the money for, what we'll do with it, what milestones it'll get us to.

Hassan Altaf: My initial meeting(s) would definitely be centred around the people or team that is driving the business — individual bio's — personal/professional credentials, how long the key partners have worked together, how they gel — in the end, it's the team that one is investing in to execute on the business idea not just the numbers behind the idea!

Following preliminary/exploratory meetings and having established a comfort level with the management, we would ask to review the documents substantiating their "pitch" as Sutha as outlined below except that I would also like to assess discussion "risk/competition" areas as well.

Sutha Kamal: Doh! I knew I was forgetting something. We actually have 3 slides about competitors in our deck :)

Sasha Nagy: So I asked for first impressions, and I got pretty detailed answers. Is that the reflection of the nature of making the deal? Given the amounts of money you are talking about, it's no wonder every step possible to remove risk is addressed.

Can you tell right away of you will be getting/giving the funding? Is it possible to know right from the start that a deal is going to get done?

Sutha Kamal: I think you have a feel as to whether there's chemistry and whether people buy in to the big vision in an initial meeting, but is it possible to know if a deal's going to get done? My Spidey-sense isn't nearly that good :)

Hassan Altaf: During the internet boom/bust not too long ago, entrepreneurs were very much in the driving seat and gave us investors very limited time (basically 24 to 48 hrs) to commit to the deal or they would initiate discussions with the next investor in line ready to jump on board so it was certainly possible to know almost right away whether funding would be forthcoming or not!!!

But today, investors will in most cases carry out some, if not detailed, due diligence prior to cutting a cheque and this could be an unnerving process for the entrepreneur which can take several weeks or even months depending on the deal specifics.

Sasha Nagy: That about wraps up our time. Thanks to both Sutha and Hassan for you thoughts. Any closing words of wisdom for entrepreneurs out there looking for that elusive Angel investor?

Sutha Kamal: Find good, smart people who believe in you... give them a reason to believe in you, and get them to help you with the things you don't know or just haven't done yet.

Hassan Altaf: Cover your bases before approaching investors in terms of internal housekeeping and presentation materials!