Financing Startups - Panel Discussion with Entrepreneurs at Accelerator Guelph
It’s not easy being an entrepreneur: Big vision, high stress, no time, and little money. And it’s up to you to get it all done. If you’re past the earliest stages you have a viable product and some customers, and you have formed a small core team of like minded individuals with different skills and expertise to bring to the table.
And still you have to balance two conflicting ideas: You can solve a big problem that people need (or will need) you to solve and, the odds are stacked heavily against you. There are incumbents and other startups potentially working on the same idea. Intellectual property can be stolen. Key staff can be lost. You can run out of money and have to close your doors. But if you persevere, a big payoff. You’ve built a viable business.
The Panel
It is against this backdrop that I was able to meet with a group of bright, young agri-food entrepreneurs last week at the University of Guelph as part of Accelerator Guelph (AG) and the University of Guelph Research Innovation Office. These entrepreneurs are leaders in their fields of study, some working on bringing product designs to market and others with products already in a commercial stage. All of them had a project within the AG workshop to develop a financial plan for the next phase in their startup growth. The question that was on everyone’s mind was “how do I raise the funds to grow my business?”
To help answer that question, and others, we had three finance professionals provide their insights and tips within their respective financial fields. We had Johanna Franz from Export Development Canada (EDC) representing debt financing, Garry Chan from Maple Leaf Angels representing angel investing and equity financing, and myself providing an insider perspective on corporate financing and financial management.
The panel was structured as a conversation and question and answer format and the entrepreneurs were encouraged to gather as much information as possible for the next stage in their startups. The entrepreneurs represented a wide variety of projects ranging from food production, DNA sequencing, process engineering, 3D printing, ingredient development, and plant tissue and culture vessels for agriculture. All attendees were developing or had developed their own intellectual property.
Questions and Insights Shared
There were a variety of questions asked during the session, mostly to do with finding and securing financing. Some, for example, wanted to know what requirements must be met to raise debt financing, while others wanted more specific advice on how to approach early stage equity investors.
One of a few notable insights that the group was able to take away was the requirements one must meet to raise debt. Debt is often desirable in that it is cheaper than equity and does not dilute the existing equity in the firm. This is very important, especially in growth stages. However, low cost debt is typically only raised by those firms that can demonstrate a low enough risk for the underwriter. In the case of a traditional bank, a company must show at least two or three years of financial history and ability to make and meet forecasts. This is a high bar to meet, but if it’s met, it can allow firms access to capital at costs between prime plus 1%-3%. If the firm has a track record but is slightly more risky than what a traditional bank can absorb, companies like the EDC, a crown corporation, can provide slightly more expensive debt financing, especially if there is a significant export component to the business. The ECD tackles insurance and foreign capital issues that traditional banks and insurers might not.
The attendees also learned about different kinds of debt financing, such as short term debt against receivables or recurring Saas (software as a service) revenue, versus long term debt, secured against hard capital assets such as property, plants, and equipment. We were also able to provide some information about how debt contracts are structured, including covenants that the lender might impose on the borrower that can limit the borrower’s ability to pay bonuses and dividends, for example. Covenants are important in that they give the lender the ability to demand full and immediate repayment of their loan if the covenants are not met.
On the equity front, attendees were very interested in learning what angel investing was (as opposed to VC investing) and the process that they could follow to raise equity capital in very early stages. Here Garry provided a very concise and simple explanation of what angel investing in this context actually is:
Very early equity financing
Typically less than $150,000 per investment
Expected exits of roughly 10x of what was invested
Everyone agreed that angel investors are not necessarily angels!
Garry also provided some useful advise as to what entrepreneurs would have to demonstrate when asking for equity financing. In particular, he stressed that the entrepreneur should know three things very well:
How much money they need to raise
What problem they’re trying to solve
Why should the investor invest in them
Most importantly however, was the fact that the entrepreneur, either on their own or as part of a team must make a compelling pitch and close a deal. And while expertise in a product or market go a long way to answer the second question, sound financial planning and business analysis is needed to answer the first. A balanced pitch that shows a solid grasp of strategy, product, market, and finance also tell the investor the answer to the third.
This leads us to the last insight for the group: The need of a team. We tend to think of an entrepreneur as “one”, but in fact it can and should be a closely knit multi-disciplinary team. In preparation of a business strategy, a well formed team provides much needed perspectives, and during a pitch for financing it can show your own ability to work as part of a team, the kind of chemistry your team has, and most importantly, if you can sell.
I hope we were able to provide useful insights to these early stage companies and look forward to hearing about the next stages in their journeys.
About Accelerator Guelph
Accelerator Guelph is a new program offered by the Research Innovation Office at the University of Guelph. It is an entrepreneurship training program offered to researcher-led teams who want to explore the commercial value of their research. As the University of Guelph pipeline of start-up companies matures, we anticipate partnerships will be formed with investors and small and medium-sized companies that need to innovate to scale their businesses. We licensed the Waterloo Accelerator Centre’s program because it was designed for university based entrepreneurs. The program is divided into workshops, pitch coaching, and business plan development exercises offered in an online platform called Pathfinder that guides teams through doing a business model forecast, primary research plan and forecast development exercise.
About the Entrepreneurs
Arrell Scholar Team: Led by Amberley Ruetz and Leah Blechschmidt. Developing a shelf stable local fruit product that matches the guidelines that school lunch and snack programs must follow. (premarket)
FloNergia Team: Led by Dr. Wael Ahmed, this team wants to create a company that delivers energy efficient agri-food technology to producers. Their first product is an airlift pump that is designed to make aquaculture and aquaponics more sustainable. http://www.flonergia.com/ (in market)
Lifescanner: led by Sujeevan Ratnasingham, this team is housed in our Biodiversity Institute and sells DNA kits for home and school use as well as more complex systems that can be used by border protection agencies, wildlife enforcement officers, etc… http://lifescanner.net/ (in market)
We Vitro: Born in the lab of researcher Max Jones, this team is led by grad student Kevin Piunno. Their product is a vessel that optimizes how plant tissue cultures are grown in laboratories. (Beta testing in process.) http://www.wevitro.com
Maple Sugar Team: Led by researcher Mannick Annamalai, this start up wants to specialize in manufacturing ingredients that are healthier and more local alternatives to commonly used items. Their first product is being developed and optimized for nutrition and flavour. It will be a crystalized maple sugar product that will replace imported cane sugar and deliver the mineral and micronutrient benefits of fresh maple sap. (premarket)
Additive Manufacturing Team: From the lab of researcher Dr. Ibrahim Deiab, this team is led by John Clouthier, a PhD student in the department of engineering. This team is hoping to create a metal fabrication solution that will make if much faster for manufacturers to test new tooling quickly and inexpensively. (prototype machinery in development. Industry partners secured for beta testing)
* Image credit: https://venitism.wordpress.com/2017/05/04/agribusiness-innovation/