Growth 500

How to find the best angel investor for your startup

Angel investors can elevate an entrepreneurial idea to an empire. As Startup 50 leaders share, you just have to know how to look.

Growth 500: Canada’s Fastest-Growing Companies

In early 2015, Tyler Handley had an idea he was sure would be a money-maker: temporary tattoos that look indistinguishable from permanent ink and fade within a few weeks. He had neither a business degree nor entrepreneurial experience, so he wasn’t exactly the typical startup whiz, but he knew this much: he would need money to get his idea off the ground. 

Convinced of the market demand for his product—especially among Instagram-addicted Millennials—Handley began where many young entrepreneurs now do: Kickstarter. In a few weeks, he’d raised almost $300,000, enough to validate consumer interest, but not enough to scale. He needed money, smart money, to get the business—which he called Inkbox—to a place where it could sustain itself and grow. Instead of going to a bank, Handley turned to a source of capital he felt was better suited to his risky, yet potentially lucrative, venture: angel investors. It wasn’t easy— as he explains, “A consumer brand focused on tattoos is very outside the market that most angel investors are comfortable with”—but he eventually won over a group of 15 angels for a financing round that raised US$1 million in exchange for 28% equity. That’s a steep price, but, Handley says, “For me, it was capital to do what we needed to do.”

The money gave the company runway to grow—which it has done, emphatically. Last year, Inkbox’s sales were more than $5 million, up 928% from 2015, earning it the No. 17 spot on this year’s Startup 50.  

Angel investors—or angels, to those in the biz—are generally individual investors looking to place their own money into promising startups, usually in exchange for a share of equity in the business. For early-stage startups unable to bootstrap, secure a bank loan or attract venture capital, angels can seem like the perfect choice. Angels are often successful entrepreneurs in their own right, and can offer valuable advice; furthermore, as Canada’s startup scene matures, there are more and more of them looking to invest.  

It is perhaps unsurprising, then, that fully one-quarter of the companies on this year’s Startup 50 ranking used angel investment to grow their businesses in the past few years. We asked their leaders to share the pros (cash! advice!), the cons (meddling! equity!) and hard-earned advice on how to use angels to elevate a brand-new business.

Start with proof

There are lots of ways to attract an angel’s attention—a buzzy product, an airtight elevator pitch, a slick deck—but if a decade-plus of Dragons’ Den and Shark Tank have taught entrepreneurs anything, it’s that angels generally won’t pony up cash unless there is measurable proof that people want to pay for something.

In 2013, Hamilton-based Matthew Sheridan got the idea behind Nix Sensor (No. 33), which scans the surface of any physical object and provides the perfect colour measurement. He liked the idea of angel investment, but knew he’d have to back up his pitch with cold hard facts. “Everyone has an idea, right? That’s not the problem. There’s an infinite number of ideas,” he says. “Angels want to know what the demand is for your product, and whether you will actually make any money. If you can’t answer those questions, you’re not worth their time.” 

So, before calling a single angel, Sheridan, like Handley, turned to Kickstarter. A succesful trial campaign enabled him to open conversations with potential financiers with a bang. “We could say, ‘Look, we just sold $70,000 worth of this product to strangers on the Internet out of my apartment,’” he says. “That’s a lot different than, ‘Hey, look at my PowerPoint presentation.’” This approach has resulted in Sheridan attracting 10 angels to invest in Nix Sensor.

This kind of proof is much more valuable to angels than a detailed, multi-year forecast, says Yuri Navarro, CEO of the National Angel Capital Organization, Canada’s angel investor industry association. “I think most angels work on the premise that founders are wrong in their financial predictions,” Navarro says. “What’s more important is for them to see where the numbers are derived from. You want to show progress over time.”

Seek smart money

One of the most lauded aspects of angel investment is that benefactors will give access to their brilliant entrepreneurial smarts in addition to cash. 

For Sheridan, not every angel has offered a well of advice, but several have helped him make decisions that fundamentally changed how he runs the company. For instance, a few investors who had worked with hardware companies before advised him to prototype and build Nix Sensor’s technology in-house, instead of outsourcing—a decision Sheridan says has allowed the company to iterate its designs more nimbly: “It’s helping us stay ahead of the curve.” 

It’s not strictly necessary to partner with an investor who knows your line of business inside and out, but it certainly doesn’t hurt, says Navarro: “Where many investors can add a lot of value is with a kind of business acumen, an understanding of an industry, and their relationships in the industry.”

Focus on personality

Angel investors tend to be in it for the long haul, and if you’re giving someone an ownership share in your company, it’s important to know that you’re going to be able to work with them in the long term.

When Dan Holowack, CEO of CrowdRiff (No. 39), an AI-powered, content-marketing platform based in Toronto, was seeking angel investment, his ideal funders were people with a deep understanding of how the business worked. But he also knew that, as the party asking for money, he wasn’t always able to be choosy.  

“Sometimes you work with an angel just for the money,” Holowack says. “If you’re going to do that, just make sure that you like them as people.” Key personality traits he looks for: patient (building a business like CrowdRiff is not a get-rich-quick scheme), not too overbearing, and not prone to micromanagement. Using these criteria, he was able to find “good, kind and patient people that believed in us.”

If you’re not sure about an angel’s style, both Holowack and Sheridan recommend asking other entrepreneurs in whom the angel has successfully invested for an unfiltered assessment of the experience. 

Mind the terms

Finally, companies who have never worked with angels before should be wary of agreeing to just any terms and conditions—even if they’re super-desperate for cash.

Marie Chevrier—founder and CEO of Sampler (No. 34), a digital product sampling company based in Toronto—says that negotiating fair terms has been one of the best lessons she’s learned working with angels. “Your term sheet with an angel is one document you want to really invest in,” she shares. “Make sure you’ve got a good lawyer.”

Many angels will come to the table with prepared contracts detailing every element of the arrangement. While it’s normal to be intimidated by this, Chevrier advises against signing anything until you are crystal-clear about every clause. If you’re unsure, she says your lawyer should be your first line of defense, but other entrepreneurs can also help familiarize you with the process.

For Chevrier, this diligence has been invaluable in creating harmonious angel arrangements: “If you get someone you’re excited to work with, on terms you can both agree on, well, that’s ideal.”