A group of Maritime investors has decided to keep their cash at home to assist young businesses trying to get off the ground. Already, eight firms have benefited.
By CLARE MELLOR Business Reporter
Sun. Apr 6 - 12:41 PM
Jim Mullen. president and CEO of Adventus Interactive, says his company recently benefited from angel capital investment. He says the money allowed the Halifax-based company, which operates MusIQ Club, to expand and implement a new business model. MusIQ Club is an enriched after-school music program that allows young students to use computer software and keyboards in unison. (Blake MacEwan)
Holly Bond, owner of Bulldog Interactive Fitness in this 2006 file photo, was a beneficiary of angel investment. Bulldog was sold to DHX Media.(Eric Wynne / Staff)
MARITIME ANGELS are starting to believe that there is strength in numbers. Just a few years ago, Halifax business groups were lamenting the lack of an angel business organization in this area.
But it seems one has taken flight, and since September 2005 it has attracted 76 members, who have funnelled $2.7 million into Maritime businesses ranging from biotechnology to educational software companies.
“We know for a fact that our money going into those (eight) companies has leveraged at least $10 million more for them,” says Ross Finlay, a business consultant and one of the founders of the First Angel Network Association, based in Halifax.
“So much money goes to Bay Street every year. Why not keep it at home to support our businesses and support the growth of the region?”
Finlay and Halifax entrepreneur Brian Lowe came up with the idea of the non-profit network one day in the spring of 2005.
The two had just finished raising $1 million in private equity for ImmunoVaccine Technologies, a Halifax biotechnology company of which Lowe is vice-president. That endeavour involved pounding the pavement and cold-calling potential individual investors.
“(We thought) it would have been a lot easier if there had been a network that we could have gone to,” Finlay says during an interview over coffee at the association’s sparsely furnished headquarters in downtown Halifax.
“So we decided, well, why don’t we do it? Nobody’s done it. Why don’t we give it a shot?”
The term “angels” was coined in the 1920s, when it referred to wealthy people who sponsored Broadway plays. It is now used to describe people who invest in mostly early-stage businesses that need a cash infusion to start up, expand or get their product to market.
Most major cities have organized networks of angel investors. The networks began to emerge after the burst of the high-tech bubble, which resulted in many investors losing their shirts.
“A lot of people lost a lot of money because they ignored the fundamentals of why you invest and doing the due diligence that is required on any investment. It scared a lot of people,” says Finlay, a friendly, enthusiastic man whose crisp purple shirt and matching tie are a contrast to the drab office.
“Business angels decided to come together and invest as a group and look at opportunities as a group. (It was) a little more disciplined approach to analyzing investment opportunities. and it proved to be successful.”
Finlay and Lowe spent that spring studying different angel models from around the world and came up with one they thought suitable. They then set out to ask some local business types what they thought about the idea.
“They said it was a no-brainer — a great idea. So we said, ‘Great, here is your invoice for membership.’ We weren’t going to do anything until we had 10 cheques because we needed office space and we needed equipment. There is no better commitment than a cheque,” Finlay says.
In just three months, the network, which charges a membership fee of $850 annually, had 50 angels signed up.
“When we started out, we said, well, if we get 30 people in this network, we will have some fun. That’s all we wanted, just a comfortable little fun thing that we could do in our spare time and have a little bit of an impact, but it just took off. Unbelievable.”
Finlay now spends much of his time away from his paper-laden desk, travelling in the region, meeting with investors and entrepreneurs.
There is no shortage of Maritime entrepreneurs. The network scrutinizes about 80 businesses a year, but introduces just one new business each quarter to its members at business dinner meetings held all over the region.
So far the First Angel Network has invested in eight businesses. They include Origin Biomed, BullDog Interactive Fitness (recently sold to DHX Media); Adventus Interactive, Intelivote Systems Inc., Green Imaging Technology, Safeharbour Security, Open Ocean Systems and Insightfoods.
Iraj Fooladi, a professor of finance at Dalhousie University, says it shows a real thirst for credit among small- and medium-sized businesses.
“(Angels) definitely fill a gap. Every time you see something like that growing that means there is a market for it. Financial institutions basically almost don’t loan to small business for a project. Commercial banks don’t loan for projects; even when they think they are, they are not really loaning for projects, they are loaning for collateral and so forth.
“Here is where the angel investors would come in.”
The First Angel Network sizes up the business, but it’s up to the individual investors to decide if they wish to invest. It is considered high risk investing. Some angels take a portfolio approach, reducing risk by investing a little in all the businesses.
“We don’t have an (investment) ceiling. The floor is typically $10.000,” Finlay says.
Unlike some other angel networks, the First Angel Network will work with and mentor a promising Maritime company, advising it how to become investment-ready. Once the network invests, it forms a strong relationship with the business and often positions an angel on the company’s board of directors. It owns a piece of the business, ranging from five per cent to 40 per cent.
Jim Mullen of Halifax Adventus Interactive says the angel investment in his company last fall came at a crucial time.
The company operates MusIQ Club, a music education program that uses interactive software. In business since 1996, Adventus required an infusion of capital to launch a new business model, says Mullen, president and CEO of the company. “It was very helpful and it helped the business turn a positive cash flow.”
He declined to reveal the amount of the investment but said it was about 10 per cent of the business.
“There is a limited time span to see the fruits of your new model and there is also a much higher risk when you don’t have reasonable amount of capital to work with,” Mullen says.
“If we were left to our own devices with an investment here and there it would take considerably longer to expand and that is a big risk.
Adventus will still require working capital in the future, but is seeing new markets open up around the world as a result of the capital, Mullen says.
So just who are the angels? It is difficult to find out unless you are a member.
Finlay believes the network’s quick growth is at least partly due to its policy of keeping its members’ names confidential. (They must waive that privilege to sit on the network’s board.)
Finlay estimates just over half the angels in the network are from Nova Scotia, 30 to 40 per cent from New Brunswick and the remainder from Prince Edward Island. Newfoundland and Labrador has its own angel network.
Finlay says there is a good mix of investors from rural and urban areas. Some are downright wealthy and others just well-off.
“They are from all walks of life. They are lawyers, doctors, very successful business people. People that have had businesses and sold the businesses. People who have inherited money.”
Maritime angels are “patient investors,” expecting a return on their investment in three to five years, he says.
“One of the benefits of membership is that if you are known to have money, you are hit on a lot, so they are able to say, ‘Look, I am a member of the First Angel Network; submit your business (plan) there.’
“It gets (people) out of their office.”
The overwhelming majority of members are men, says Finlay, who seems somewhat embarrassed at that fact.
“It was never meant to be gender-specific. We would love to have more women. Put that in,” he says.
The network has received support from several companies, such as PricewaterhouseCoopers and the Progress Media Group. It also receives funding from the Atlantic Canada Opportunities Agency and the National Research Council.
Last year the group received $180,000 over 18 months from ACOA to provide seminars on how businesses can improve their readiness for Angel investment. Recently, it received $450,000 over three years to support operating costs and to host the National Angel Summit in Halifax in October.
“The reason behind our getting involved in the First Angel Network Association is, it is a very interesting — I guess we call it a micro-lending, mentoring, coaching initiative,” said Richard Gauthier, an ACOA spokesman based in Moncton.
“It makes a whole lot of sense to ACOA to get involved in this, basically to have another option of venture capital but on a very small scale, backed by existing entrepreneurs who have a very keen interest helping to grow small and medium-sized businesses.”
Fooladi says that since ACOA’s mandate is regional economic development, the support makes sense.
“If another organization belonging to government does that, you could question why would they spend taxpayers’ money for this, but isn’t ACOA established for this sort of thing?”
The First Angel Network was recently asked to join a group of 22 angel networks in the New England states, known as the North East Angels. It will bring one of its companies, Green Imaging of Fredericton — ready for another round of financing — to that group’s upcoming meeting.
“It gives us more access to capital because all of a sudden the door is open. . . . There is a clear path to angel money that is in the New England states,” Finlay says. “That’s a lot more money than we’ve got.”
How successful the network becomes depends on membership growth, he says.
“It has grown to something way more than Brian and I thought it was going to be. I think we are starting to have considerable positive influence with what is going on economically.”
( cmellor@herald.ca)
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