Finding the Right VC or Angel Investor

Scotiabank Financial Literacy Campaign 2023

*The following content should not be considered financial advice. Before acting upon the following information, we recommend you seek the guidance of a qualified financial or business advisor who can take your unique needs into account.

Barriers surrounding financial management are consistently top pain points for small business owners in Canada. Throughout November, in alignment with Financial Literacy Month, Scotiabank and Startup Canada will be breaking down key aspects of this complex, often overwhelming hurdle many early stage founders face. Through the curation of tailored financial resources, the case studies of leading founders, and the expertise of applicable support organizations, we can work together to empower more entrepreneurs in Canada with the financial know-how and tools they need to succeed. 

This month-long series will break down four key topics critical to the financial literacy and wellness of early stage entrepreneurs: 

  1. Accessing Government Grants for Your Business
  2. Funding for Black Entrepreneurs in Canada 
  3. Finding The Right VC or Angel Investor
  4. The Importance of Business Advisors 

Finding The Right VC or Angel Investor. 

Equity capital investments are highly sought after by many Canadian entrepreneurs – VC and angel funders can move quickly, provide access to impactful networks, and deals can be tailored to your business’ exact contexts and needs. However, with Canada’s equity capital landscape being susceptible to shifts in the economy – with cross-country VC deals now dropping to the lowest levels since the early days of the pandemic – founders are faced with a glaring obstacle: there are too many hands, and the honey pot seems to be shrinking.

For the next segment of the 2023 Financial Literacy Campaign, Startup Canada had the pleasure of discussing the topic of finding the right venture capital or angel investor with Gabrielle Masone and Sarah Young. Gabrielle Masone is the CEO of Coloursmith – a company pushing the boundaries of sight via their innovative eyewear that addresses some of the world’s most challenging eye problems. Sarah Young is a Founding and Managing Partner of Sandpiper Ventures, a seed stage VC fund investing in women and women’s innovation, in addition to providing portfolio founders with valuable networks, toolkits based on extensive industry expertise, and new market opportunities.

SC: Sarah, what is Sandpiper Ventures? How are you disrupting Canada’s venture capital landscape?

SY: Sandpiper is a venture capital firm based in Atlantic Canada, but we are a national fund investing in founders right across the country. We invest in Canadian women entrepreneurs who bring diverse perspectives and unique insights. We’re really looking for those founders who bring creative solutions to some of the big, complex global and industry challenges that we’re facing right now and, obviously, those that bring the potential for superior financial returns for our LPs. 

SC: Gabrielle, tell us about your business – what do you do, and who do you serve?

GM: Coloursmith was created to take the contact lens industry to the next level. Although light filtering dyes are quite common in the eyeglass lens industry, they don’t work well in contact lens formulations. As a result, important light filtering features like light protection and colour enhancement have yet to be widely commoditized – that’s where Coloursmith comes in. We’ve developed an innovative platform encapsulation technology which has a way to make these optical filtering dyes compatible with contact lens formulations so that you can enjoy all the benefits of contact lenses without sacrificing safety or wearer experience. 

SC: What is your current VC investor breakdown? Why did you arrange your financing in this way?

GM: When it comes to private investment, we’re lucky to have partnered with five amazing VC organizations who have contributed about 90% of our funding. The remaining 10% has come from about five angel investors, who we are extremely grateful for. We’ve decided to keep things simple, and we haven’t taken any investment from friends or family. Our goal is to have fewer investors, which means that each investor has to contribute more. This strategy has its benefits – like leaving room on our current capitalization table for new investors to come in in subsequent rounds. 

Featured Resource: 

Plug into the Sandpiper Ventures network and explore the Atlantic Women’s Venture Foundation

Equity Capital – Knowing If & When You’re Raise Ready:

SC: Who should be exploring equity capital as a financing solution, Sarah?

SY: Companies who are really looking to scale significantly. We are often looking for companies, in particular and from a timing perspective, that want to grow exponentially and those that want to enter global markets. Equity financing is really for those companies that want to take on a growth strategy that is quite ambitious. Those looking to create a smaller business or those that have a smaller risk tolerance may not be as interested in equity. 

SC: How did you determine equity capital as a primary funding method for your venture, Gabrielle? What benefits or drawbacks has this format posed?

GM: Coloursmith made an intentional decision by going the route of equity financing. We wanted to tap into the expertise of some of the smartest business minds in Atlantic Canada to guide us in the right direction on our journey. Our team is great at science and technology, but we knew that having the right business expertise on board would help us cover all aspects of our company. Thanks to this decision, we can now focus on achieving our technical and business goals without getting sidelined by the continuous funding efforts. 

SC: How did you know when you were “raise ready”?

GM: Becoming “raise ready” looks different for each company. For us at Coloursmith, it meant reaching certain milestones that would increase the value of the company and make us an attractive option for investors. 

Identifying the Right Investor(s):

SC: Sarah, in your experience, what are some red flags entrepreneurs should look out for when vetting potential investors?

SY: One of the things people often forget is that, when fundraising, you’re often very focused on getting that cheque written in a short amount of time while failing to recognize that it really is a long-term relationship. Sometimes people will use the comparison of a marriage – so how do you make sure you’re finding the right match? Is this someone you want to work with? Are you aligned in terms of vision and values? Not only the investment of capital, but what do some of the gives and takes look like? What do the conversations around exit strategies look like? 

If you’re not aligned on these factors, it’s going to be really challenging. You don’t want an investor that is going to be a drain on you, personally, or a drain on your focus while growing the company.

SC: Gabrielle, when looking for investors, what criteria or qualities were you looking for?

GM: In my experience, the best investors possess qualities like patience, supportiveness, and great listening skills. They’re like an extended member of the team, so when I communicate with potential investors I pay attention specifically to what motivates them and specifically how their expertise can benefit the company. 

SC: Some investors are more hands-on in the process, while others are quite hands-off. Some solely supply capital, while others function more as partners – offering advice and connections. To you, Sarah, what does a good investor look and act like?

SY: It depends on what a founder is seeking. Speaking from my own experience, Sandpiper and our team are what’s known as “operators” – we’re executives and we bring our background as operators to our founders. So we not only bring capital, we bring that experience. When we are looking at investing in a company, we first like to find out what kind of value we can bring to the founders. How can we help them ensure they can grow and accelerate that growth? That doesn’t mean we are trying to get in the way or interrupt, it’s simply making sure that we can be useful. 

SC: What do you and Sandpiper Ventures look for in a portfolio company?

SY: We’re looking for women founders – that’s anyone identifying as a woman. We are, obviously, looking for women who hold equity in their company, that hold a C-Suite position, and are based in Canada. We’re looking for companies that tend to be in the spaces of Ed-Tech, Health Tech, Environment and Community, as well as Workforce of the Future – that’s where we are focused and those companies tend to be in the seed stage life cycle. 

We want to ensure that there is not only a strong purpose and problem being solved with our investment, but that the company can return the fund – they need to be very profit driven as well.  

Featured Resource: 

Learn about Roynat Capital’s Technology & Innovation Banking group, which offers specialized financing solutions to Canada’s high growth tech companies today!

 SC: Gabrielle, what was your process for finding the right investor(s)? What tools, channels and methods did you utilize?

GM: Pitch competitions and accelerators were a huge help in getting us connected with a wide variety of investors. We found that bringing on venture capital had a lot of benefits, especially since these organizations are often connected with others who share similar interests and values. This made it easier for us to find the right investors who could really add value to the company and provide the expertise we need to attack a whole variety of issues that might come up. 

SC: What were your biggest challenges in finding the right people and accessing them? Do you have any advice for others currently in this stage?

GM: It’s crucial to ensure that your investors have the same vision that you have for the company, otherwise you may find yourself on some shaky ground. For example, if you see your business as a B2B but your investors see it as B2C, there could be a mismatch in expectations.

Shifting the Odds in Your Favour – Approaching Investors & Nailing The Ask:

SC: What’s the ideal way for a company to reach out and set up a pitch meeting? Is there an avenue with the highest likelihood of success?

SY: We’re constantly seeking and looking for companies, we have companies regularly referred to us, and we also have companies coming to us directly. All companies go through an intake process which starts with an intake form on our website. We certainly encourage companies to come to us. We love to hear from exciting companies – you know, we think we have a good sense of what’s on the go, but then we’re delighted to hear from a new organization doing amazing things. That’s one of the things we love about what we do. 

While women founders have been achieving and actually outperforming their peers, they’ve been overlooked both historically and currently. Women are out there working just as hard, if not harder, and they haven’t been getting the capital investment. This is really important to us – it’s why we need to be seeking, it’s why we want women to put their hand up, and it’s why we want referrals. 

SC: Is there anything to avoid doing at all costs when approaching a venture capital or angel investor?

SY: I would certainly suggest quality over quantity. Sometimes there’s a focus on quantity and looking at a KPI as “I did X number of pitches, I made X many asks, I went to X number of conferences.” Instead, I would suggest really focusing on your thesis alignment and, if there is alignment, prioritizing those and getting them done really well. This approach makes a lot more sense and is more likely to generate successful outcomes versus doing a “long list” approach. 

SC: To you, what sets a pitch apart from the rest?

SY: A pitch that defines the problem that is being solved very clearly. The problem that’s being solved should address a complex challenge that’s linked to either a societal challenge or a big industry challenge. Then, convince us that this problem not only needs to be solved, but how it’s being solved by you – how is your company ultimately making the world better? 

Being able to articulate that in a way that immediately hooks us is important. In those first few minutes if a founder can tell us what they do with simple clarity, quite frankly, it can be magical. 

SC: How should founders approach their valuation?

SY: A couple of thoughts on that. One would be doing their homework – talking to other founders and advisors. Another, and this may be obvious, is accessing the correct formulas for accurate calculation. 

The only thing I would caution is that sometimes founders get really hung up on their valuation and often don’t recognize that this is simply a point in time. What we saw a short time ago is a lot of companies that were over valued, and that hasn’t served many of them well. Be very thoughtful and mindful of different scenarios, rather than focusing on short-term thinking. The other point would be that many founders have started to think that their valuation is the one key output, the one sign of success, when this is just one component of the whole puzzle they’re putting together. 

Owning the Deal & Negotiating Terms:

SC: What have your biggest lessons learned regarding owning your deal and negotiating terms? Any red or green flags for others to consider, Gabrielle?

GM: I think it’s really important to have a solid legal team supporting your fundraising efforts. If you’re planning to raise funds locally, then I would recommend working with a legal team who have closed rounds in your area around the same time that you are raising money. That way, you can ensure that you’re offering terms in line with other successful rounds that these investors may have seen. 

Another amazing resource are those offered by the CVCA which include model deal terms – I encourage everybody to check this out before starting a round. Using these guidelines can really help you make progress on detailing the exact specifics of the round, and do it in a way that’s super easy. 

SC: What does a typical due diligence process look like for VC investors?

SY: First we will start with an investment memo where we’ll do research – into the industry, into the company and its performance, we’ll go into their data room, we’ll do our own analysis and have our team really look at where we see opportunity within the industry and within the market. Next, we will meet the founder and as we go along in the process we will meet the team. 

There are different stage gates in the process, and as they pass certain stage gates we’ll meet with customers, often have consultations with technical experts, and gather feedback as well. We will then bring the founder or team back in for further consultation and test the business plan further. Then, ultimately, working with the Investment Committee, we will make a decision around the investment. From there we will work on an investment starting with the term sheet and, of course, the terms of an investment has many layers to it as well. 

Alternatives to Equity Capital:

SC: How do industry priorities and/or venture-stage elements impact an entrepreneur’s chances of securing equity capital? What advice do you have for founders navigating these barriers currently?

SY: Absolutely, those factors can be a barrier. Alternatively, angel investors and angel networks are really good options. Foundations or Family Offices are options too. If a company is early stage, they can look at friends and family as an option. We’ve certainly seen that founders find a lot of the events and pitch competitions to be really helpful because of the profile they get, the networks they can build, and the access it gives them to strategic audiences. 

Sandpiper actually launched a foundation and that foundation launched an angel network of approximately 40 women who created a fund. As an organization, we hope to not only see more women founders, but more women investors as well. It’s about getting more diversity on both sides of the table and improving access, together. 

SC: Have you accessed or tapped into any other organizations that have helped you in your funding journey?

GM: Private funding is really just one piece of a larger puzzle – the other piece is non-dilutive funding. This type of funding is provided typically by government organizations to support important activities like upskilling your team, developing an intellectual property strategy, or hiring the right consultants to get a particular job done. Non-dilutive funding has been a lifesaver for us when we’ve encountered unexpected challenges, like when we needed to hire a bunch of research scientists to explore additional applications for the technology while we focused on the development of what we were working on at the time. This allowed us to take advantage of the non-dilutive funding to fully capitalize on the opportunity that Coloursmith has here, without losing sight of our development goals.

Featured Resource: 

Explore Roynat Capital, a Scotiabank subsidiary offering long-term capital solutions for mid-sized companies.

 Other Expert Insights: 

SC: Do you have any other advice for your peers who are beginning their private funding journeys? 

GM: Be well prepared, do your homework, and have fun! Doing a private investment round or raising funds is really that first step you need to accomplish the goals that you set out for your company. It’s a really exciting opportunity to share those goals, learn from the investors, and really shape the organization that you want to see!  

SC: We’ve all heard the rumblings – Canada’s venture capital climate is often conservative, especially in periods of economic uncertainty. What are your insights on this? Do you have any advice for entrepreneurs navigating this space currently?

SY: One of the things that we have been noticing, certainly with the founders that we work with, is that women have the benefit of being accustomed to not having the same access to capital that a lot of their peers have had. Many are accustomed to having to work hard for capital so, in some ways, they haven’t necessarily experienced the highs in the same way so right now, the lows don’t seem as low. 

Women are really good at capital efficiency – and right now that’s a benefit. When we’re working with founders, we are suggesting that while it is challenging right now, that can also be an advantage. That being said because everything is a little bit slower right now, capital efficiency is crucial. Make sure that that is part of your operations and decision making. 

Another thing to recognize and remember is that you need a customer, and you need to be customer focused. The business fundamentals and basics, regardless of the investment market, are crucial. Revenue, profit, customer – right now that’s really where you want founders and companies focused because, at the end of the day, that’s what matters most and that’s who will be successful. 

  • Learn more about Gabrielle and Coloursmith here.
  • Explore Sandpiper Ventures, and kickstart your equity funding journey here.
  • Discover the Scotiabank Women Initiative here.

Additional Resources: 

Plug into specialized support organizations today! The Women’s Equity Lab, National Angel Capital Organization (NACO), and Canadian Venture Capital and Private Equity Association (CVCA) are a great place to start.