The rise of angels and crowdsourcing

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Backbone Magazine | By Ian Harvey |November 28, 2013

The rise of angels and crowdsourcingFor start-ups, it’s always about the money. With the exception of serially successful entrepreneurs, early-stage companies only get so far bootstrapping or begging funds from family and friends. Enter two of the fastest-growing sectors of start-up funding in Canada: crowdsourcing and angel investors. With some well-publicized success stories, government policy shifts and funding assistance from players like the National Research Council, the Business Development Bank of Canada and angels, the money is flowing.

“The trend line is improving,” said Mike Edwards, a Vancouver-based angel. “There are more entrepreneurs trying, and more people looking for ways to develop more disruptive technologies, creating more volume and more successes.”Consider Hootsuite. The four-year-old Vancouver-based social media company raised $165 million in ‘B’ round financing last summer, after getting $20 million from OMERS Ventures a little over a year ago. These types of stories will boost angel investments, Edwards said, because it all “started with angel capital.”

Strength in numbers

More recently, crowdsourcing has become a popular platform to raise money, whether you’re Spike Lee making a movie or a Web site looking to expose a video of an alleged crack-smoking mayor. But there are risks, said Craig Asano, executive director of the fledgling National Crowdfunding Association of Canada (NCFA), which wants to facilitate the flow of cash and create a series of standards and protocols to protect investors.

“Looking at Industry Canada numbers for SMEs, VCs funded only about one per cent,” he said. “We think crowdsourcing could fund 17 per cent of those SMEs, and that’s $4.6 billion in funding.”

There are already more than 60 crowdfunding portals, but because of securities regulations, they’re restricted to a donate-reward model in which people pony up simply because it’s cool to invest in something they believe in. Instead, some portals want to issue shares and equity, a development Asano said is the next logical step.

That, in turn, is attracting attention from bodies like the Ontario Securities Commission, which fears fraudsters will rip off innocent investors. As B.C., Saskatchewan and Ontario circulate proposal papers, the bigger risk, Asano said, it that this could smother the opportunity, paperwork, compliance issues and capping investor and funding amounts at unreasonably low levels.

Angels’ landing

Angel financing, meanwhile, is getting a massive boost from the increased participation of the Business Development Bank of Canada (BDC).

“About five years ago we realized the system was broken,” said interim vice-president of strategic investments Dominique Bélanger, referencing the 2008 global fiscal crisis that dried up funding.

It was a major shift, Bélanger said: “The idea is to be a catalyst, not replace funding sources. We made the mistake in the 1990s of copying the successful model in Silicon Valley, but it was just a dumb cut and paste without thinking about how it can work here.”

Related:  Join the National Crowdfunding Association of Canada today

With $1 billion to invest, BDC is emerging as the go-to partner, galvanizing angel groups and working with accelerators like GrowLab, Extreme and Communitech. “Our mandate is to help high-growth-potential people build their business better and faster,” he said.

For example, a 90-day program at Communitech exposes entrepreneurs to hundreds of other successful entrepreneurs who mentor them, and the best of them go forward to a pitch day in front of angels and VCs. Those selected get $150,000 in the form of a convertible note from BDC, which sets terms and conditions for investments from angels, and some go on to raise more based on that initial kick start.

“We had one start-up that raised $600,000 from angels on top of the $150,000,” he said.

In the case of the Real Ventures Fund, BDC put up $3 million, which then prompted angel groups to invest another $15 million. Today, Real Ventures has 44 companies in its portfolio with an average $185,000 investment in each.

Against all this BDC interest, however, the glue holding the ecosystem together is the angels, who are there investing long before the venture capital funds or the banks.

Angel investors aren’t just people with money to burn, said Yuri Navarro, national director of the National Angel Capital Organization (NACO). Under federal tax regulations, qualified angel investors must have $5 million in assets and $1 million in liquid assets with a $200,000 yearly income. While 500,000 Canadians meet that standard, not everyone is an angel investor; Navarro said there are 200 to 500 serious angels in Canada, but no one knows for sure.

NACO has a membership list of more than 2,000, including angel groups and their members. “This number is what we consider the ‘visible’ Canadian angel community,” Navarro said. “It’s only a fraction of the total community.”

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada crowdfunding hub providing education, advocacy and networking opportunities in the rapidly evolving crowdfunding industry. NCFA Canada is a community-based, membership-driven entity that was formed at the grass roots level to fill a national need in the market place. Join our growing network of industry stakeholders, fundraisers and investors. Increase your organization’s profile and gain access to a dynamic group of industry front runners. Learn more eBrochure | Prezi or contact us at casano@ncfacanada.org.

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