Raising capitalTips on how to improve your pitch to potential investors

BY DAWN CHAFE AND CHET WESLEY

46 | MARCH/APRIL 2018

ATLANTICBUSINESSMAGAZINE.COM | 47

FOR MOST ENTREPRENEURS,

raising the necessary capital to get going

is their first and most difficult challenge.

Understanding how different capital providers make decisions and

knowing how you should customize your approach for

each is critical. Whether you’re

looking for several hundred thousand

dollars to make food and beer, or hope to raise multi-millions

for a technology company, take it from

those who’ve been there and done that:

know what you want, what different capital

providers can do, ask for it, adapt, and

most importantly, never give up.

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48 | MARCH/APRIL 2018

STARTUP: FINANCE

ANGEL INVESTORSAngel investors typically come into the picture at the pre-seed/pre-revenue/product development stage. Their decision-making is all about the novelty of the idea, the capability of the team, their potential return on investment, and ability to position the company for debt financing or eight-figure investments from venture capital firms.

“Before you think about approaching an angel investor, you should research the individual or group to determine the types of investments they like to make: ICT, life science, construction, etc. Look for ones who can provide financial help and add value to your team with the knowledge and expertise you’re lacking,” says Jeff White, chief operating officer at East Valley Ventures in Saint John, New Brunswick. With a focus on boosting the region’s ICT sector, East Valley Ventures is a “founder-friendly” Atlantic angel investment club with acceleration services such as mentorship and executive team assistance.

“Before meeting with an angel investor,” advises White, “have a short 5-to-9-slide pitch deck available to present or give to the angel as the agenda for the meeting.”

To improve your chances of being green-lighted, White strongly suggests that you “be prepared. If you don’t know the answer to a question, say so. Ask for knowledge, involvement and investment, and be prepared to answer the ‘who are you’ question? The angels will be assessing truthfulness and confidence.”

“Talk a lot about the market, validation points, and the problem you want to solve and make sure you explain how much money you need, and how and when you are going spend it,” advises White. He says it’s also important to do what’s needed to make your business eligible for any investment tax credits angels can obtain.

BANKSThough banks haven’t always been perceived as small business friendly, Ian Penny, national vice-president of business banking at CIBC, says they should be the finance go-to for prospective entrepreneurs. “Today, you don’t necessarily need to find an angel investor or venture capitalist.”

By way of example, he says that last year saw 13 banks and life insurance companies create the Canadian Business Growth Fund. Its goal is to bolster growth and innovation by investing up to $1 billion in small-and-medium-sized businesses over the next decade. Penny also referenced CIBC Innovation Banking, a new full-service business delivering strategic advice and funding to North American technology and innovation clients, from startup to IPO and beyond.

So, what should someone who wants to launch a business do before meeting with a bank business loan officer? Step one,

says Penny, is the creation of a “solid” business plan. Step two is to “determine just how much debt you can take on and assess how much of a risk it will be to both you and your lender. Keep your startup and expansion goals realistic. Never ask for financing from a bank to be more than you have equity in your business in the beginning.” The bottom line is that lenders want to know how you plan to pay them back.

Then, when you do meet with a banking representative, highlight your business experience and successes. You should also bring along copies of your T1 statements, notice of assessments, personal net worth statements, and copies of any contracts. “There has to be a track

WHAT TO AVOID“Focusing on valuation and dilution. The purpose of asking the angel for investment is to accelerate the growth in value of the company, so you should have determined that this investor’s involvement will offset any perceived ‘give up’ on behalf of existing investors.”

Jeff White, COO, East Valley Ventures

Nicole Leblanc, director of strategic investments (read: venture capital) at BDC Capital. “Once you get to the venture capital stage, it’s all about the growth plan, how you are going to use the proceeds of the investment to grow the company through marketing and further development.” LeBlanc cautions entrepreneurs never to ask venture capital investors for money to buy things like inventory or equipment because that’s where debt financing comes in.

NOTHING VENTURED, NOTHING GAINED

DO• Have an airtight business plan with clear

objectives and milestones that are backed up with a realistic analysis of the cash flow needed to properly support the business.

• Seek input from experts you know can help you navigate business challenges ahead–people such as lawyers, accountants or industry veterans seek out expertise in areas where you know you are weak.

DON’T• Neglect to prepare a well thought-out plan

that’s supported by careful analysis of the financial support your business will actually need.

Ian Penny, National VP, Business Banking, CIBC

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record, revenue generation, and things you can pledge as security,” says Penny.

“Be prepared to highlight the vision you have for your business and back up your concept with well-researched facts and examples,” says Penny. “Be polished, know exactly what you’re asking for and be candid about your weaknesses. Let the bank see the real you—that is the person they want to have a partnership with and help succeed.”

CREDIT UNIONSAsked to explain the difference between banks and credit unions when it comes to financing small business—they are both full-service financial institutions, after all—the president and CEO of Community Credit Union (Amherst & Truro) offers one word: local.

“As locally-owned and managed financial institutions, focused on the well-being of the communities we serve, we do a lot of character-based lending,” says DJ (Darrell) Kuhn. “We are connected to the community and the economy. We know the market. For that reason, we assess business ventures differently. We are not assessing from afar. This local approach to lending is a significant advantage to entrepreneurs in all industries and sectors.”

That apparently laid-back local style can be deceptive: a prospective entrepreneur will still need to do their homework before approaching a credit union loan officer. The credit union will want to see a completed business plan, including three-years’ cash flow statements (based on realistic and worse-case assessments); product and market description; brand and marketing proposals; staffing; and equipment-spacing needs. Typically, notes Kuhn, credit unions are looking for the ‘preparedness’ of ownership for the startup or expansion.

Experience has taught Kuhn that failing to plan is planning to fail. He says that underestimating cash flow expectations and under-capitalization, for example, can quickly sink a new business. “It is critical that a worst-case assessment be completed and that cash-flow and capitalization requirements correlate to this. If not, entrepreneurs are often distracted by these areas after the fact, which takes them away from the ability to work their business plan as intended.”

It can’t be over-stressed: prospective entrepreneurs looking to impress their local credit union need to do their due diligence. Other things that Kuhn and his colleagues will look for? “The character of the people involved. What is their passion? Their experience and ability? Their investment and commitment? Their financial situation? We are often willing to take a chance but we need to see a solid plan and ‘the fire in their belly’.”

When Rosemary Murphy and her business partner, Terry Piercey, sought a bank loan to purchase and renovate a building for the Townhouse Brewhouse & Eatery in Antigonish, Nova Scotia, they were denied. This was despite raising 40 per cent of what they needed, including $100,000 from friends and family and preselling food to future customers through their ‘Suds Club’.

“We went to all of the banks with an incredibly in-depth business plan and figured the money we raised on our own would help our chances getting a mortgage,” says Murphy. “But it was our lack of experience in the industry, and their basic dislike for the restaurant industry that got us the no.”

Considering the community support they had garnered, and understanding the community-based approach at Credit Union Atlantic, they made one final—and successful shot—at debt financing.

For Murphy and Piercey, that

WHEN AT FIRST YOU DON’T SUCCEED

included assistance getting them into the province’s business loan guarantee program (it helps businesses without the collateral needed to get bank loans). In Nova Scotia, the government will guarantee 90 per cent of a term loan or 70 per cent of a line of credit up to $500,000. Other Atlantic Canadian provinces have similar schemes.

DJ (Darrell) Kuhn, President & CEO, Community Credit Union (Amherst & Truro)

HOW MUCH CAN YOU EXPECT?“Credit unions are able to do small business financing loans as low as $500 (which is unique in the market place) to millions of dollars. Over the past decade Nova Scotia Credit Unions have invested more than $230 million in small business startup financing, many in rural communities. While both are typically seen as high risk, loan losses have been minimal.”

Creative Accounting

How did you finance your startup?Tweet your answers to @AtlanticBus

#StartupFinance