Part 2: What Are the Funding Options for My Venture? — Equity

Funding is crucial to the venture’s success. When you’re just getting started on your business, all the funding types listed on the internet can be daunting. The optimal funding option or mix differs by type of business and your personal financial situation. I wanted to help founders get started by looking at ways to fund their ventures. This is useful for more experienced founders too — perhaps some avenues of funding were missed in the brainstorming process. Thus, I’ve compiled a list of funding options available, examples, and some resources (with a focus on Canada).

This is part 2 of the article and focuses on equity funding options. This is part 1 of the article and focuses on savings, loans, and grants.

Startup Programs

Startup incubators and accelerators are communities for founders, investors, and mentors to meet. They offer a large network for founders while providing investors with more reassurance of the startups’ success, as admission into the programs is highly competitive. Startups in those programs are more likely to receive equity funding for those reasons. Equity funding is usually provided by the incubator, investors, venture capital firms, or angel syndicates that are partnered with the incubator. These terms will be further explained in the next section. In addition, some startup programs provide grants upon acceptance into the program to help the founders get started.

These programs are highly competitive, and founders need to show commitment and a relatively well-rounded business plan and pitch to gain admission. Each incubator is different in its focus — some focus more on deep-tech ventures while others focus on mom-and-pop ventures. Some focus more on new grads and young entrepreneurs while others favour those with experience in the industry. Some focus on extremely early-stage firms with just an idea and a rough business plan, but others take in firms with a set business plan and minimum viable product. Each program provides a different set of opportunities but all programs provide mentorship and warm introductions to other founders and investors. The main difference is the funding — some incubators provide convertible notes, others seek equity in return or just provide a grant.

Some top startup programs in Canada I’d like to highlight:

• Next Canada (Toronto): https://www.nextcanada.com/
• MaRS Discovery District (Toronto): https://www.marsdd.com/
• Creative Destruction Lab (Toronto): https://www.creativedestructionlab.com/
• Accelerator Centre (Waterloo): https://www.acceleratorcentre.com/
• Techstars (Montreal & Toronto): https://www.techstars.com/startups
• Manitoba Technology Accelerator (Winnipeg): https://mbtechaccelerator.com/
• Launchpad PEI (Charlottetown): https://launchpadpei.com/

Investors — Individuals

This is the funding option that is popularized the most by the media. After all, Dragon’s Den and Shark Tank are both pretty fun shows to watch! Independent investors, (also called angel investors or private investors) are individuals who provide funding in return for equity in the firm. Popular media depict angel investors to be high-net-worth individuals with extensive industry experience. However, in reality, the most likely angel investors are your friends or family (also known as FFF — friends, family, and fools). If you connected really well with a mentor or manager from an incubator, they can also be your angel investors. Angel investors usually focus on very early-stage companies. Thus, they really care about the idea validity, market opportunity, and the team’s commitment as opposed to expecting any concrete numbers or finalized products just yet.

Examples of angels:

• Your family and friends!
• Your mentors from an incubator program
• Investors that represent themselves (rather than organizations) from an incubator program
• Every judge on Shark Tank and Dragon’s Den

Investors — Organizations

Incubators

As mentioned above, some selected startup incubators provide funding in return for equity in the firm they host. In this case, the incubators would be considered an equity investor. Incubators are relatively early-stage investors and can focus on startups that are currently seeking angel investment or have raised one round of angel investment — depending on the incubator.

Venture Capitals

Venture capital firms are private equity firms that have a strong focus on early-stage startups or emerging companies. They invest in startups with funds from the firm (which can be composed of funds from high-net-worth individuals, pension funds, wealth funds, insurance firms, etc.), rather than from an individual’s own pockets like angel investors. Unlike angel investors who may have other businesses to work on, they are an organization that is solely focused on sourcing new firms to invest in while providing mentorship and industry connections. It is extremely competitive to receive funding from a venture capital firm. As the startup failure rate is very high (90%), venture capital firms are very cautious as to who they invest in. They are (rationally) risk-loving and know that a large percentage of their investments will not provide a positive return. This is why they spend a lot of time sourcing new, promising firms in their portfolio — to spread out the risk of failure by investing and finding the handful of firms that will grow to billion-dollar companies. Like incubators, venture capital firms tend to have an industry and stage focus based on their Partners’ experience.

Examples of venture capital firms in Canada (this space is much hotter in the U.S., so I suggest looking at U.S. firms as well):

• Real Ventures: https://www.crunchbase.com/organization/real-ventures
• iNovia Capital: https://www.crunchbase.com/organization/inovia-capital
• Georgian Partners: https://georgian.io/

Angel Syndicates

Angel syndicates — as the name suggests, have something to do with angel investors. They are a group of experienced angel investors that decided to invest together. Unlike venture capital firms that have an organizational hierarchy with Partners or Principals who lead the direction and conduct due diligence with top startups, and Analysts and Associates sourcing startups from zero — angel syndicates have experienced angel investors who lead the search and source process. With angel syndicates, investors have more freedom in how much they want to invest in a deal compared to venture capital firms. Experienced investors also take matters into their own hands. This provides entrepreneurs with higher exposure and face time with top investors compared to contacting VC firms. On the other hand, rather than managing relationships and dealing with various angel investors, entrepreneurs have the benefit of only having to manage the relationship with one syndicate — this also becomes easier to manage on their cap table. Like incubators and venture capital firms, angel syndicates tend to have an industry and stage focus based on their group leads’ experience.

Examples of angel syndicates:

• AngelList: https://angel.co/syndicates
• Green Angel Syndicate: https://greenangelsyndicate.com/

Private Firm Subsidiary

Private firm subsidiaries are no different from venture capital firms in nature, except they are owned by a parent company with a broader focus. They may have started as a traditional financial institution but wanted to have a subsidiary that focuses on the startup space. For example, the Royal Bank of Canada (RBC) is a traditional financial institution that focuses on personal and commercial banking and lending. They have a subsidiary called RBC Ventures that focuses on acquiring and investing. After all — startup investing is such an exciting and fun space, no wonder why those firms with existing presence and experience in finance want to take part!

Examples of private firms:

• OMERS Ventures: https://www.omersventures.com/
• RBC Ventures: https://www.rbcventures.ca/en

Crowdfunding Platforms

It seems that the startup investing space is dominated by high-net-worth individuals or private firms, right? Does that mean the rich will get richer? This question was asked, and this is why crowdfunding platforms were created. They are firms that democratize investing and provide everyone an opportunity to be an investor. An individual can invest in a crowdfunding firm, and the experienced individuals that work at the firm will source and conduct due diligence on startups. The crowdfunding firm then provides the return on investment to the individuals who invested. Unlike angel syndicates and venture capital firms, where the capital comes from private funds or a small group of high-net-worth individuals, crowdfunding platform funding comes from many individuals who contributed smaller amounts. This is beneficial for entrepreneurs as they only have to deal with the firm rather than manage relationships with many individuals who invested smaller amounts. Like every other equity funding opportunity, it is extremely competitive to receive investment from a crowdfunding platform. Crowdfunding platforms — unlike venture capital firms with very specific specializations — tend to focus on ventures that are more easily understood by the general public.

Examples of crowdfunding platforms:

• Indiegogo: https://www.indiegogo.com/
• Frontfundr: https://www.frontfundr.com/

What are your thoughts and experiences with these funding options? Feel free to share with me :)

As mentioned, receiving funding is extremely competitive and difficult in most cases — if you require help with developing a well-rounded business plan and pitch, don’t be shy to shoot me a message.

Sources:

1. BDC: https://www.bdc.ca/en/articles-tools/start-buy-business/start-business/start-up-financing-sources
2. Small Business: https://www.thebalancesmb.com/the-truth-about-small-business-grants-in-canada-2948493
3. All the other sources have been linked in-text