Investment Angels

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COLIN MCCONNELL/TORONTO STAR

Robert Koturbash, managing director and Marnie Walker, founding director of Maple Leaf Angels, pose with (on right) Paul Pelton of fleet ad firm City Flitz. Maple Leaf gets about 400 applications for funding every year, with only six or eight chosen.

Where can you turn after friends have ponied up and before your startup is big enough to interest venture capital firms?

September 28, 2009

Susan Down

Angel investors may not have wings, but they can be the answer to an entrepreneur's prayers, providing early-stage funding to deliver them from pre-revenue purgatory.

After the friends and family have written their cheques of support for the new enterprise and before the new company is big enough to interest venture capital firms or profitable enough to secure bank financing, angel investors are there to back a great idea.

"The biggest difference between angels and the other institutional options is that it's their own money," said Bryan Watson, executive director of National Angel Capital Organization, a Canadian group that aims to provide education and support to close to 30 angel investing groups in the country.

NACO is holding its Angel Investing Summit Oct. 14-15 in Toronto.

"They can spend it by buying as boat or a cottage or investing in an early-stage, high-growth company. On the venture capital side, they are managing someone else's money."

Money isn't the only benefit that entrepreneurs receive.

Most investments come with a caveat that the investor will be actively involved in the operations.

That means coaching and advice are included. Similarly, the eventual financial payoff – the length of a typical investment is eight years – isn't the only attraction for the angels. Typically seasoned entrepreneurs, they love the thrill of seeing a new idea succeed.

"What I love about is being at the birth," said Blake Witkin, co-founder and board director of Maple Leaf Angels, one of Canada's largest angel investment groups.

"When companies become more mature, more bureaucratic, it's not as interesting as being at the formation stage."

Angels are people with a high net worth, people who have successfully created other start-up companies and understand what's needed to succeed.

Angels can be retired, having sold their enterprises and cashed out, or they can be investors who are still working in other companies.

For example, Witkin is a managing partner in IT company Atra Vision Inc. He has also invested in about six new ventures as an angel, and believes he has a good track record. "All of them are surviving and some are prospering," he said.

Witkin likes to use an ecological image to explain the investment crap shoot: "Ultimately, job creation comes from the creation of wealth and all businesses like all trees have to start as a small seed. Angel financing is the water and the sunshine for those little seeds. And many of them don't make it, hence the risk."

Based in Toronto, Maple Leaf Angels is a non-profit organization established in 2007. The group has 50 members who have invested a total of $5.7 million so far. Every month the group holds a breakfast where members listen to three presentations from prospective investee companies.

If some of the members have interest then Maple Leaf will do some further investigating. Maple Leaf gets about 400 applications for funding every year, with only six or eight chosen to receive investment funds.

While angel investing sounds freewheeling, decisions are not made as fast as the CBC business show Dragon's Den would have you believe.

"It used to be that a sketch on the back of a napkin would be enough to get a cheque from an investor," said Watson. "Those days are gone. There's not much sketch-and-a-dream investing. People are looking for companies with a little bit of traction, a bit of revenue and a great team of people that will lead."

Even after careful assessments of the business plans, the ventures don't always become profitable. For every 10 investments, two go bankrupt, six will allow the angels to recoup their investments and two will deliver the big returns.

Typical investments are in the form of either equity or convertible debt in amounts ranging from $150,000 to $1.25 million.

An investor's exit strategy consists of one of three ways to get money out: an IPO, a merger or acquisition by another company or a dividend once the company has matured.

Angel groups say an extra $5 billion in investments is needed to ease the commercialization bottleneck and help grow new companies. NACO is pushing the federal government to initiate a system of tax credits as incentives to invest.

According to Maple Leaf Angels managing director Rob Koturbash, "fostering entrepreneurship is really what's going to drive us out of the recession because it's not established manufacturing businesses."

Street scrambles to revise forecasts

Have stock prices gotten ahead of themselves? Some say yes

The summer stock-market rally has been more than just a pleasant surprise for beleaguered investors. It also caught some of the Street's top market watchers with their forecasts down.

When the S&P/TSX composite index surged past 11,000 this month for the first time in almost a year, it blew through the targets that many of Bay Street's most respected forecasters had predicted wouldn't arrive until the end of 2009. After many market strategists had updated their year-end targets in June and packed away their calculators for the summer, the Canadian market defied the traditionally listless investing season to stage its strongest summer rally in decades, rocketing 14 per cent from early July to the end of August – and then tacked on another 5 per cent in the first three weeks of September, usually the worst month of the year for the market.

Although several strategists scrambled to raise their year-end targets in the past week, an informal Globe and Mail survey found that the median forecast among top Bay Street prognosticators stood at 12,100 – a thin 5 per cent above the index's 2009 high of 11,585.73 reached last week. In the U.S. market, meanwhile, Bloomberg News reported that the S&P 500 was trading last week about 5 per cent above the average year-end target in its monthly survey of leading Wall Street forecasters, and had already surpassed all but one of the 10 targets in its poll.

With the biggest rally since the 1930s already in the books, but With the traditionally strongest quarter of the year for the market still to come, the strategists are now asking themselves: Are their expectations too conservative, or is the market too frothy?

“The truth is, nobody knows where all of this is going, short term,” said Kate Warne, Canadian market strategist for Edward Jones & Co. in St. Louis. She said the rapid moves of the market over the past year have made target-setting particularly difficult.

“It's difficult enough to get the direction right,” quipped David Rosenberg, chief strategist at Gluskin Sheff + Associates.

Even last week's trading caused forecasters to step back. After reaching their highest levels in almost a year, stocks spent the last half of the week in retreat (the S&P/TSX ended the week off more than 3 per cent from Tuesday's close), raising questions about whether investors were seeing a brief pause in the rally or the beginning of a long-anticipated correction.

Strategists said the rally, which has been built largely on expectations of an economic recovery that has yet to transpire, may need to see more concrete evidence of growth before it can go much further. “We've already bought and paid for a lot of the recovery we'll see in 2010,” said Myles Zyblock, chief equity strategist at RBC Dominion Securities Inc.

“We need to see the earnings [growth] come in,” Ms. Warne said.

She said the S&P/TSX could manage to claw its way to 11,800 before the end of the year, but predicted a “bouncy,” volatile ride to the end of the year – typical of a market searching for a new catalyst after a big move.

And, she predicted, the next few months could feature a rotation by investors out of the energy and financial sectors – which have led the gains during the rally and may have run their course – and into solid dividend-paying names that have lagged.

“It's a time of what I'd call ‘choppy consolidation,'” she said.

Chief strategist Stéfane Marion of National Bank Financial in Montreal, meanwhile, believes the Canadian stock market could be slowed by the U.S. dollar. The greenback's woes have been a major driver of this year's surge in the price of gold and, by extension, gold stocks, which make up 10 per cent of the S&P/TSX composite. But the currency has recently been showing signs of stabilizing, and could be about to turn upward.

“A U.S.-dollar appreciation will put some downward pressure on golds by the end of the year,” said Mr. Marion, who has decided to maintain his year-end target at 11,600.

But others argue that the growing global economic momentum, the Canadian market's resource-heavy tilt, and the country's relatively strong and stable economy leave the TSX well-positioned to extend its rally.

“My gut feeling is that we'll reach 12,000 closer to Christmas than next year,” said Vincent Delisle, strategist at Scotia Capital in Montreal. “I think it's going to be quick.”