Unlike venture capital firms (VCs), which typically invest the money of limited partners (such as pension funds, corporations or endowments), angel investors are often former entrepreneurs using their own money to get early-stage startups to that first milestone.
Generally speaking, angel investors provide less funding than VCs, but at a reduced cost. Angel investors often only seek a return on investment, rather than an equity stake, and tend to act more as advisers than influencers. But angel investors are not easy to find or convince.
Joseph Paradi is a Toronto-based entrepreneur, investor and educator who has been an angel investor for more than 45 years. He has founded several companies during his career, including Parcorp Ltd., an investment management and venture assistance company. Although he could have retired years ago, Paradi still works as executive director of the Centre for Management of Technology and Entrepreneurship at the University of Toronto.
Q: How did you become an angel investor?
A: Well, I always liked the idea of starting businesses; I always liked the challenge of a new thing. Once I sold my company, I then decided I really didn’t want to run any more companies but I would be seriously involved in them. That is when I began to look for things I wanted to do.
Q: How do people find angel investors?
A: There are many ways, but mainly networking. You earn some people’s respect so that you have the networks; when you want something, you ask them and they will typically direct you to people. But there are also events where people present, like the Toronto Region Board of Trade, and every so often they invite two or three entrepreneurs and have them talk to a bunch of people who are VCs and angels.
Q: What is the difference between angels and VCs?
A: Angel investing is a very personal matter as opposed to VCs which have rules and so on.
Angels are kind of private and VCs are more public. To find angels, you have to be introduced to them and it really is a relationship. Most angels bring more than just money to the table and also the investee can have a very good opportunity to learn from these guys.
Q: As an angel, do you want a say in the business or to just act as an advisor?
A: I’m not hands-on in terms of going in every day and looking over their shoulder. It is more my experience, background, connections and so forth which can be quite useful for someone who is starting up.
Q: Your background is in technology and you are an engineer, so do you stick with technology in terms of investments?
A: Yes. To go off in other areas where I don’t have the expertise doesn’t make sense. For one thing, I don’t understand what they are doing and for another, they can’t utilize me [as a resource] as much as they might.
Q: Are there things an entrepreneur could do to increase their chances with angels?
A: I go back to the personal things. We went public in 1969 and raised about $12-million in today’s money. The [investor] who made that happen has become a very powerful figure in finance today. I asked him a few years ago at dinner, ‘Why did you do that?’ He said, ‘I liked you.’ That tells the story. You meet somebody for the first time and you have a second or less to make an impression. So an entrepreneur walking in and meeting a 65-year-old guy and he looks like a mess, well, my generation does not take that as a good sign.
There can be a substantial mismatch between the people who need the money and the people who have the money. If the potential investor doesn’t like you, whatever that means, you are done. Would you put money into an enterprise with someone you don’t like? Not a chance.
Q: Do angels, like anyone else, like to see a presentation that is coherent and organized?
A: Of course, an investor wants to know that you have your stuff together. If you are not prepared properly, if you can’t answer the questions he might have… When I teach this, I tell [students] to put themselves into the investor’s shoes. Ask yourself, would I invest in this thing?
Q: What else is important?
A: Never lie. Because the moment even a small lie is caught, you are done. Some entrepreneurs tend to embellish and enlarge and put all the negatives aside and just tell [potential investors] how much good there is. An investor will say: ‘Life isn’t like that, tell me about the problems.’ If the entrepreneur says: ‘It is not much and I can solve it.’ Well, that is very good, but by then, you have probably blown the deal.
This article originally appeared in the Globe & Mail in October 2016.
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