When Startups Are Touched by an Angel

As an entrepreneur, how does my relationship with an angel investor differ from my relationship with a venture capitalist? 

Jess Joss: One of the first things is that, quite often, an angel investor gets engaged even before the entrepreneur is ready to raise capital. Many angels are actively involved in the ecosystem from an early stage; mentoring through incubator and accelerator programs, attending early-stage pitch nights, providing feedback for entrepreneurs and coaching them.

Because of this, the relationship is different than between an entrepreneur and a venture capitalist. While an angel may not ultimately invest in the business until six months or two years later, they have the context behind how the entrepreneur is growing and how they deliver. 

Also, angels often look for companies that are post-concept and post-revenue — in other words, companies that already have paying customers. This helps to prove that there’s a market fit for the entrepreneur’s idea.

Angels are also likely to adopt the philosophy of “patient capital,” meaning they take a longer-term focus. While they do want a return on their investment, many see their role as being beyond financial. Many angels offer additional resources like connections, mentorship and experience to provide extra leverage. This has the potential to help entrepreneurs grow their ventures more quickly.

How do entrepreneurs seek out angel financing?

Angel investor groups all have slightly different flavours in terms of what they look for, how often they meet, and how they structure the screening process. In Ontario, there are 13 groups across the province that run very similarly: they are not-for-profits that collaborate and share deal flow.

For an entrepreneur, the first step is identifying whether there is a group close to where they are located since there’s a better chance they may share connections.

It can also be beneficial to start getting involved in local entrepreneurship events like pitch competitions, for a few reasons. First, to get more comfortable pitching and to get feedback on the pitch. Second, to learn and start seeing the benchmark within the community. And third, to start networking and engaging with angels before seeking funding.

If entrepreneurs aren’t able to attend events and instead need to approach angel investors cold, they should be thoughtful in their approach. Starting by asking a question or commenting on an article that they posted, for example, is a nice opening. Focusing on building the relationship versus immediately asking for capital can make a big difference.

Once entrepreneurs get to the pitch stage, they can benefit from looking at it from the point of view of the investor. It shouldn’t be a simple product demonstration. Instead, they should explain why [the investor] would want to invest in the company overall and why [the investor] would want to invest in the business and the team. This helps give angels greater confidence in cases where the business may need to pivot.

What surprises you most about angel investing? 

Angel investing has changed a lot in the past decade. When the angel investing economy grew in Canada, we were expecting three- to five-year exits, based off Silicon Valley data. In reality, Canadian metrics are showing more seven- to 10-year exits. So there seems to be more longevity within angels’ portfolios.

But what surprises me most about the angel investing ecosystem, especially in Ontario, is the willingness to give. Whether it be providing mentoring, judging a pitch competition, or making introductions, there is a real pay-it-forward aspect. 

There is also a real belief in our local and national economies, and the belief that this is a transformative time for Canada’s leadership in different areas. There is a lot of idealism and optimism within the angel world, which I wouldn’t have expected before becoming an angel investor.

And last, the thing that would probably surprise someone who hasn’t been through the process is the amount of fun that angel investors have. We’re doing this, by and large, as volunteers with our own capital. So you have to have a little bit of fun along the way and you have to enjoy the process. In my group, we have a tremendous amount of fun. We’ve formed some deep friendships, have great opportunities to meet some amazing entrepreneurs and really enjoy the process. It’s certainly not stuffy or dry.

What surprises entrepreneurs the most about the process? 

Entrepreneurs sometimes expect angels to operate like venture capitalists. They assume the process involves a pitch meeting followed by a quick decision. But often, angels make their own individual decisions and do their own due diligence, which can make the process take a bit longer.

Also, because angel investors are often involved from an earlier stage, they can provide more guidance and support throughout the process, like handholding throughout the due diligence process. Even in cases where angels aren’t looking for a return, they may still be willing to offer their mentorship, expertise or connections. This is why it’s called “smart money”: There are many different ways to fund your business. And these benefits often far outweigh the actual dollar value of what’s invested.

—Alan Morantz