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[Editor's Note: This is a guest post by Chris Maeda LinkedIn Follow @xmaeda. Full disclosure, Chris as he mentions in the article, was an investor in Influitive, a company I co-founded. Chris is the CEO of Brick Street Software and an active angel investor. He's looking for deal flow and we will be hosting a series of Founders & Funders in Toronto, Halifax, Vancouver and a few other cities to connect those that start high tech, high potential growth companies with those that fund them. Subscribe to Founders & Funder$ notification list for updates. If you're looking to connect with Chris, my advice, is to reach out to him on AngelList, but hey, it worked for me and I'm a sucker for patterns.]

I’ve been an angel investor in Toronto since 2011.  Towards the end of the dot.com days, I traded my SOMA loft for a New Hampshire cottage, partly as a by-product of some public company M&A transactions.  I began investing with a New Hampshire angel group in the mid-aughts.  I like living in NH, but the deal flow you see there is quirky.  There weren’t very many software deals, and New Hampshire has a lot of trees and cows, so the angel group ended up looking at non-software deals, like online wood pellet distributors and dog yogurt manufacturers.  When I was hearing the dog yogurt pitch, I had a what-the-hell-am-I-doing-here moment of clarity and quit the angel group.

Then two things happened.  First, my company, Brick Street Software, decided to set up a customer support center in Toronto so I started coming to Toronto for business on a regular basis.  Second, Influitive was advertising a round on AngelList.  I met the Influitive founders (Mark Organ and David Crow) and, after verifying that they were not planning to enter the dairy products business [Ed. Note: I have a dairy allergy so I'm kind of anti-dairy], I invested in their pre-venture rounds and joined their board.  I recently invested in a second Toronto company and am working on a third.  I’m starting to see patterns for why Toronto is great place to invest.

1. Activity, talent pool, and competition:
   As I tell my American friends, Toronto is the New York and Los Angeles of Canada.  So almost everything that happens, happens in Toronto.  I’m sure I just ticked off a bunch of people outside of the GTA, but this is reality when viewed from the US.  The software talent pool is pretty good; there are lots of startups but everyone complains about a shortage of capital.  So this forces Canadian entrepreneurs to have a bootstrap mentality and means that valuations are not outrageous.  The seed funding bubble has come to Canada but its not as gassy as the US.
2. Lots of public money and assistance:
   the US does not have SR&ED credits, IRAP grants, refundable HST, or the network of publicly-funded innovation centers that you find in Ontario.  A Toronto company that I’ve invested in has probably raised as much money in grants as it has from investors.  This means the Canadian government is reducing my dilution and (hopefully) goosing my investment returns.  Thanks, guys.
3. Corporate customers are nearby:
   Many of the large corporate buyers are headquartered in Toronto.  I rode along on a sales call to a large Canadian company.  I usually have to get on an airplane for something like this; in Toronto I can take a cab.   I can even take transit if I’m not in a hurry.
4. Better for international business:
   There are a number of little things that make Canada a good place for an international business hub.  For a variety of reasons, Canadian employees are less expensive than Americans, and the NAFTA treaty makes it easy for Canadian companies to expand into the US with minimal US headcount.  You can have bank accounts in foreign currencies (e.g. US Dollars and Euros). Finally, and perhaps most importantly, the Canadian market is so small that startups have to plan for international expansion from day 1.

Chris Maeda

Chris Maeda is an Entrepreneur / Angel Investor / Computer Scientist. He is the founder of Brick Street Software.

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We have seen a pretty amazing wealth of information about financing models and structures come to light in the last 10 years. It wasn’t that long ago that VC and Angel financing were dark arts which few entrepreneurs understood. We have always worked hard to demystify startup financing on StartupNorth and have done a long series of articles which was focused on shedding light on angel investing as an option for entrepreneurs which began in 2006.

But the question we hear a lot is “Should I have to pay an angel group to pitch them?“ 

I’ll keep it simple: Generally the answer is No. By definition angel groups are made up of wealthy individuals who are happy to foot the bill to organize the group.

For example a group might have 100 members all paying $1000 a year. That would mean that the angels themselves are fronting $100,000, which is generally enough to hire a part time (or even fulltime) director or organizer as well as to host the necessary meetings (sometimes members will donate space for the meetings as well or offer other services in-kind).

But if you do have to pay, how much should you expect to pay?

The Angel Capital Association provides direct guidance on this here.

• 31 out of 81 angel groups surveyed charge fees.
• Of the groups that charge, the range of fees is $175 – $750
• with two outliers at $1,500 and $3,000, average = $580
• average without outliers = $338

We have surveyed all Canadian groups and with the exception of one of the outliers mentioned by the Angel Capital Association above, fees in Canada are at similar levels but are charged less often (closer to 25% of the time).

We have only found two groups in North America which currently also charge a percentage fee (Both in Atlantic Canada, one charging 8% and the other charging approx a 1/2 percent to 2 percent) of the transaction, so generally speaking you will never have to give another fee or piece of the transaction over to the group. We have not completed our research on this and if we uncover any more we will share that data here.

Our advice? Tell the angel group that you prefer to forego the fee completely. If they believe you have a great deal then a shrewd angel group will still want to get an opportunity to fund you. If they say “no way”? Then you have to decide just how serious you think THEY are.

Jevon MacDonald

co-founder of Startupnorth.ca

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David posted a pretty in-depth piece on the First Angel Network this week. This followed an awesome discussion on TechVibes about angel groups over the weekend. The structure and funding model for First Angel Network were a pretty big surprise to me when I moved to Halifax 3 years ago.

Frankly it is pretty easy for us to write a post like David’s because the facts really speak for themselves: Millions of dollars from government sources are flowing in to finance what appears to be the exclusive personal gain of two individuals.

$3000 + 8% is just not acceptable and what makes it even worse is that the 8% does not contribute to the growth or sustainability of the angel group in any way. ACOA and other agencies are the ones paying to maintain the group while the cream is skimmed off the top.

My guess is that the First Angel Network will tell you that their model is normal and that it is on par with what is happening elsewhere. Simply put: it isn’t. It is artificially sustained, it is egregious and the model needs to be wiped out.

Shortly after David’s post went live I had a call with one of the most active angel investors in Atlantic Canada. He’s someone I admire and who always seems to be a step or two ahead of my own thinking. When he speaks I try to listen (which means I have to stop talking. . .).

He doesn’t have much love for a model which skims off the top either, but he’s pragmatic too.

His question to me was: If not First Angel Network, then how do we keep money moving?

Angel groups are not an easy thing: There are large groups of willing but relatively unsophisticated investors out there. They have to be marketed to, rounded up, fed a decent meal (usually) and encouraged to focus while a startup pitches to them for an hour or so total. Not easy and it certainly doesn’t have obvious economics for the organizer. It is a tough model no matter which way you slice it. The question is valid and it is something we need to think about a lot.

The world of tech startups is, or should be at least, different in many ways however. I believe it HAS to be different.

Sophisticated tech angel investors are accessible and they are ready to do deals almost anywhere. Value-add investors will, by definition, be accessible to the network and available to look at deals. We have a significant opportunity here in Atlantic Canada as well because we have some of the best angels in the country living and working here.

The landscape is changing for seed investing in tech and I think we need to find new models which make more sense for a typical startup today.

1. There are many individuals investing regularly in extremely early stage opportunities in New Brunswick and Nova Scotia
2. There is far more information available to entrepreneurs about financing structures and models than there ever has been before
3. 10s of Thousands of investors are accesible via AngelList and other sources
4. The ecosystem is larger than just these few provinces– we are easily connected in to what is happening in other communities.
5. Legal and other fees should be minimal. Startups should be able to get a round closed for $5k with a max of $10 for a complicated and priced round.
6. Early stage capital IS flowing in this part of the country from more formal funds such as OMERS, Rho, Real, Version One Ventures and others.
7. There is a new fund coming online here which will be leading deals and syndicating with outside investors.

Alternatives will emerge once there is a void to fill and I believe that capital will still flow to great opportunities, while we may have to watch some less awesome ones whither.

There is a loose syndicate of angels emerging in this part of the country and from what I have seen they are all extremely high quality. It is a group made up of exited founders, successful investors and quality operators. THAT is who should be seeing deals and they do far more than 4 deals a year– dozens are getting done.

In the end the challenge we have is not simply to tear down the old. The challenge is to take responsibility for building something that matters in the future and that will create more startups through a better model. I believe that First Angel Network’s model needs to change to become less predatory and more focused on creating value in the ecosystem, otherwise we need a new alternative to replace it.

That is our job here and that is what will really make a difference.

Right now we have the beginnings of an alternative:

• AngelList is an amazing network which can be used to access outside investors and which already lists over 1000 investors who have interest in the region
• Democamps
• Founder’s meetups (which there are at least 3 of in Halifax and I suspect more elsewhere)
• Launch36
• Gateway investors like Dan Martell and Gerry Pond (they access big syndicates)
• Well connected and clued-in service providers like Robert Cowan (please share any others you can vouch for in the comments)

These are all founder-friendly and accessible routes to getting access to early stage capital. None of them take 8%.

It’s not perfect, but we will get there.

Jevon MacDonald

co-founder of Startupnorth.ca

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