When do startup get capital from outside investors? (V2)

This is an update to my 2019 Feb 22 survey, with additional findings and insights.

I did a survey of founders and CEOs of  startup software companies.  I asked them the question: When did you get outside investors, excluding friends and family?  After you had some satisfied customers who provided some revenue?  Before?  At some later stage of your company?

The key learning is that there are many paths to growing a software company

There were a total of 17 responses.  11 raided money from outside investors once they had a MVP (Minimum Viable Product) with some satisfied customers and some revenue, 3 never raised capital from 3rd party investors to grow into significant sized companies.  3 raised money before they had any customers. Two of these conducted large numbers of interviews of potential customers (in one case, 300 individual documented interviews in one year).

Investors told me that they did invest in pre-revenue and pre-customer companies.  These were clean technology, medical technology, pharma, quantum computing, etc. i.e. not software companies.

Every investor told me that they don’t invest in the idea.  They invest in the people.  i.e. The world is filled with people with ideas, but there are few people that can actually create something.

How profitable is Angel investing?

How do you read this article?

  • This article is based on research of Angels investors.
  • The research comes from three sources, listed in the Further Reading section. The research was done at different points in time by different groups.  Thus, the findings should be viewed as illustrative.
  • All of the research is U.S.-based, with no Canadian facts.
  • If I uncover Canadian statistics, I will update this article.

What is Angel Investing?

  • Angel investors provide capital after friends and family and before venture capital.
  • A single Angel investment round (with multiple Angel investors) can range from $100,000 to $1,000,000.
  • There can be multiple rounds of Angel investments.

What are the financial results?

  • 10% of all exits generated 85% of the cash, 70% of exits lose some or all of the investor’s cash.
  • For an investor with a portfolio of 11-20 companies, 12% of the companies will be positive exits (i.e. receive more capital than invested), and 39% of all exits will be positive.
  • An exit can be: company sale; shares acquired by future investors; or company being wound-up.
  • There are many zombie startups. The companies continue to exist, but there is no exit.
  • To make money, you have to achieve that one exit that makes anywhere from 5 to 30 times your investment.
  • The average hold time is 4.5 years, but very successful exits often take much longer.
  • The IRR is 22% for the overall pool of Angel investments. This excludes out-of-pocket costs for due diligence and ongoing management of your portfolio, and assumes your time has no value.

What do you have to do to make money?

Spend more than 40 hours on your personal due diligence.

  • Spend more than 20 hour of due diligence time for each potential investment.
  • Angels who spend less than 20 hours have an average return of 1.1X capital.
  • Angels who spend more than 20 hours have an average return of 5.9 X capital.
  • Angels who spend more than 40 hours have an average return of 7.9 X capital.

Stay involved with the company: provide coaching and mentoring, be the lead investor, serve on the advisory board or board of directors.

  • Angels who interacted with the company twice a month achieved a 3.7X return in 4 years.
  • Angels who interacted twice a year received a 1.3X return
  • Interacting more than twice a month does not improve returns. Note that I’ve meet with accelerators and incubators which have weekly meetings with startups.  I suspect that few Angel investors have this detailed a process.

Have a portfolio of companies.

  • Your return depends upon the 10% of exits that generate 85% of returns.
  • The average successful Angel investor has 12% of all investments in Angel companies.
  • Angel investors will hold 23% of the equity, prior to Venture Capital funding.
  • The average cheque will be about $35,000.

Select founders who recognize they’ll become minority owners.

  • Angel investors will hold 23% of the equity prior to Venture Capital funding.
  • Investors will own 2/3 of the equity by the time a liquidity event occurs.

How many startups actually get Angel funding?

One large Ontario Angel investing group told me that 1% of the companies that apply for an investment, actually receive an investment.


You can make money as an Angel investor if you stay closely in touch with each of your portfolio companies after in-depth due diligence.

Further reading

The following are the sources of the statistical research into Angel investing returns:

“The American Angel November 2017”, The Wharton Entrepreneurship and Angel Capital Association


Robert E. Wiltbank, PhD and Professor Wade T. Brooks , “Tracking Angel Investor Returns Halo Report 2016,” Angel Resource Institute and Willamette University


Robert E. Wiltbank, PhD Willamette University, Warren Boeker, University of Washington, “Returns to Angel Investors in Groups, November 2007”



What are the different kinds of startup pitches?

This article outlines a range seed or pre-seed fundraising pitches, depending upon the time available.  Series A and subsequent funding pitches are not addressed

The purpose of the pitch is to convince investors when you first meet them that they must learn more about you, and your company.  Investors will not write a check based just on the pitch.  Venture capitalists often invest in only 1 in 100 companies they encounter. The bulk of the information to the investor is provided by what you say during the pitch.  The pitch deck is not intended to be read as a standalone document.  Other documents, such as your executive summary, are be intended to be read as standalone documents.

There is a difference between a pitch (which is what the founder says) and the pitch deck (which are the slides)

The objectives of the pitch are:

  • Convince investors why the company must exist.
  • Be memorable – the investor must remember you the next day. Otherwise you won’t be called back.
  • Be professional – look and speak as if you already are the CEO of a successful company. This includes your body language, how you stand, and how you speak.
  • Create a trust, confidence, and emotional connection between the investor(s) and presenters.
  • Create the excitement and interest in the investors to learn more, while demonstrating your oral presentation skills and ability to have a Q&A dialogue.
  • Be able to communicate with an audience that has no previous information about you. Assume that the investors are not experts regarding your customers, your industry, or your technology.

The objectives of the pitch deck are to:

  • Support your presentation. The pitch deck is not intended to be read as a standalone document.
  • Help you tell your story and vision in simple human terms.

You need to answer the key investor questions:

  • Who are you?
  • Who is the customer, what is their problem, and what is your solution?
  • How will you make money?
  • How much cash do you need and what will you do with it?
  • How will you manage the risks?
  • How does the investor feel about you? Do they like you?  Do they think they might be able to trust you with their money?

Your approach is:

  • Engage the investors emotionally with the story about the startup.
  • Make a great first impression. The first few seconds can make or break you.

The following illustrate a range of pitches, depending upon the time available.  Pitches using slides are similar in terms of the slides used.  What varies is the amount of time the CEO/founder talks and goes into detail.

15 Word Positioning Statement

When someone asks you “what do you do”, you need to be able to answer in 15 words or less:

  • Who you target customer is.
  • The #1 benefit your target customer perceives from doing business from you.
  • The result of doing business with you.

I learned the concept of the 15 word positioning statement from Michael Hughes, Networking Guru.

Further information is available at: https://networkingforresults.com/

The 2 sentence Email Test

The Email Test”. Write up a two-sentence explanation of what your startup does then email it to a smart friend. Ask them to explain it back to you in different words. If they ask any clarifying questions, you need to revise your pitch. It’s important to revise your two sentence pitch because you can’t add explanations as you would in conversation.

Further information is available at:   https://blog.ycombinator.com/how-to-pitch-your-company/

 Your one-minute pitch

When you have only 60 seconds to make your pitch, the critical elements are:

  • Who are you? < 5 seconds. One sentence.
  • What’s the customer problem? < 20 seconds. 3-5 sentences.
  • What’s your solution? < 25 seconds. 2-3 sentences
  • What’s your ask? < 5 seconds. One sentence.
  • What’s the one sentence everyone in the audience needs to remember? < 5 seconds/

Further information is available at: https://www.techstars.com/content/community/rock-1-minute-pitch/

 Your two-minute pitch

When you have only two minutes to make your pitch, the critical elements are:

  • Describe the problem, using simple and easy to understand words. What is the customers’ need?
  • Describe how your solution will meet the customers’ need.
  • Describe the target customer (age, gender, lifestyle, etc.). Estimate the market size and the number of customers you can reach at each stage of your growth.  How are your differentiated from competitors?
  • What is your business plan to get, keep and grow customers? What will be your approach to marketing, distribution channels and partnerships? What will be your revenue model, and related costs. What will be your pricing model?

Further information is available at: (https://www.techstars.com/content/community/pitch-startup-idea/

 Three-minute pitch

When you have only three minutes to make your pitch, the critical elements are:

  • The introduction. What does your company do? Ideally in one sentence.
  • What’s the customer problem?
  • Who is the target customer and what is the solution?
  • What is the total addressable market, illustrated bottom up. g. each customer will provide $x in sales and we will have Y customers in Z months time? What has the customer traction been?
  • What are the relevant skills and experience of your team?
  • The conclusion. End with WOW!  List the 4 critical points you’d like the audience to remember: What are we building and for whom? Why hasn’t this been done before?  Why is it hard to do what we are doing? Why is this an opportunity not to be missed?

Further information is available at: https://blog.ycombinator.com/guide-to-demo-day-pitches/

 20 minute pitch

Your 20 minute pitch has 10 slides:

  • Title page, with you name, title, and contact information.
  • What’s the problem?
  • What does the customer see as your solution and your value proposition?
  • What’s your business model? g. how you make money, who pays you through what distribution channels, with how much gross margin?
  • What’s your magic? What’s your secret sauce?
  • Marketing and sales – how will you reach you customers?
  • How do you compare to the competition? Where are you better or worse?
  • Who is on your team and what are their relevant skills?
  • What are your financial projections and assumptions?
  • What milestones have your achieved so far? What are you asking for and what milestones will that ask achieve?

Further information is available at:  https://www.marsdd.com/mars-library/how-to-create-a-pitch-deck-for-investors/



How does a start-up raise capital from investors? (V2)


The purpose of this document is to provide an overview of how a startup can raise capital from investors.  You must prepare a custom plan for your unique situation.

There are four major sections:

I Are you ready for your Round X investor ask?

II Raising capital is an ongoing process with investors, until the final exit occurs.

III Round X investor ask

IV Company Data Pool


I Are you ready for your Round X investor ask?

You’re ready when you have your:

  • Purpose and WOW1 statements;
  • Executive summary;
  • Pitch presentation;
  • Business plan; and
  • Due diligence material.

Meeting investors will be all consuming of your time.  Things may move very quickly.  If you don’t have all of the above ready, two things will happen: 1) it will take you time to answer investor questions 2) you will present an unorganized and unready impression.  Investors will worry that you’ll manage and protect your money in a similar fashion.

II Raising capital is an ongoing process with investors, until the final exit occurs.

First you have to get ready to ask investors, which includes identifying target investors as well as the steps in the “Round X investor ask” described below.  Then you spend a focused few weeks contacting investors.  Interested investors will conduct due diligence.  Then there will be a legal and financial closing process to actually get the cash from the investors.  Of course you’ll continue communicating and working with the investors which includes ongoing two-way communications.  Meanwhile, you’re communicating with those who did not invest, as well as the broader investor community as part of getting ready for the next round of funding

Layout a plan of the overall process, recognizing that many things happen in parallel and evolve over time.  This is not a case of complete step A before starting step B

Prepare to ask investors

The objective is to get ready to ask investors for capital, and be able to respond to their questions.

The key things to do are:

  • Have a plan, both for this ask and considering future asks e.g. at a seed stage you won’t want to sell control of the company.
  • Prepare all of the material noted above.
  • Be clear on what type of investor you are targeting and why e.g. venture capital, high net worth individuals/accredited investors, government loans and grants, etc.
  • Be clear on how much you want, what milestones will be achieved with the funding, and what type of funding e.g. Debt, promissory notes, convertible notes, SAFE (Simple Agreement For Future Equity), convertible preferred shares, common equity

Ask investors

The objective is to have engaging interactions with investors and building your long-term reputation.  Investors should become part of your network and may invest in future even if they don’t do so now.

  • This will be a focused, all consuming, few weeks of time.
  • Have your target list of investors.
  • Have your network do introductions to the investors.
  • Hopefully some of your target investors will do introductions to other investors.
  • Manage the investor engagement process, which including documenting key points from each investor phone call and meeting.
  • Use CRM (Customer Relationship Management) software as the foundation for your long term process of engaging investors.

Term Sheet

A Term Sheet outlines the key financial and other terms of a proposed investment. Investors use a Term Sheet

to achieve preliminary and conditional agreement to key terms and conditions.  Once negotiations regarding the term sheet are complete and signed, then the final legal documents will be drafted, which will involve additional negotiations.

The term sheet is not intended to be legally binding, with the exception of clauses dealing with confidentiality and exclusivity.  The Term Sheet will usually define certain conditions which need to be met before the investment is completed

Have your own point of view as to what you require in a term sheet. E.g. what is non-negotiable vs what negotiable, what you’d ideally like vs bare minimum you’d accept vs you walk away.

MaRS here in Toronto has a sample term sheet, which illustrates what investors may negotiate.


Due diligence

The objective is to enable an investor to conclude that they should invest.  In the case of a VC, this could be an investment letter going to the partner meeting for approval.  You also have to do a due diligence of the investors, if this was not done as part of preparing the target list of investors.  The investor questions will be answered by you sharing some of the information from the Company Data Pool, described below.

The most important thing is to manage the process.

  • Do not just send data room access to investors.
  • Always ask the investor for a 15 minute call to understand what the investor is looking for, what analysis would be most helpful, and what the best format would be. If the investor say to send over the data and they’ll call in future, decline the request, because there is insufficient investor interest to for them to invest 15 minutes of time.
  • What you are doing is trading information in return for investor-engagement and learning more about the investor.
  • The data room is critical for your team to have an organized location for all information, from which you can
  • It will usually be junior people at the investor analyzing the data.
  • Do not just give customer contact information to investors. Always offer to contact the customer and get her ready for a 20 minute call with the investor.

Negotiations will continue, based on the findings of the due diligence.

At this point, you must do your own due diligence of the investors, if you did not do so when you prepared your target list of investors.

Close financing

  • This will be a set of negotiations (based on the signed term sheet) regarding the final legal contracts.
  • The lawyers will have a closing agenda.

Work with investors

  • If you have investors that are providing more value than just cash, then you need to work with them to extract this value.
  • You have to update investors with the objective of ensuring no surprises to them. The updates can include: issues, talent changes, answering questions, press coverage, new sales and partnerships, milestones achieved in the past quarter, milestones for the next quarter, growth in customers and revenue, potential new challenges, any financial changes, include burn rate, working with the investor regarding their requests.
  • Communicate with investors who decided not to invest.

Prepare to ask investors for the next round of financing

At this point, you’re keeping the Company Data Pool up-to-date, than creating from scratch.

III Round X Investor Ask

Each round of asking investors for capital is similar in process and structure but the messages, material, and perhaps presenters, will be different.

Reaching out to investors with messages, is like a pyramid with every increasing amounts of information, as the investor spends more time engaging.

The top of the pyramid is your statement of your company’s purpose and your WOW statement.   The objective is to generate immediate intense investor interest within a few seconds by communicating the essence of your company.  You can use this when you “bump” into an investor, leave a voice mail message, beginning of your presentations, etc.

  • Your company’s statement is a memorable sentence or two that is positive and outwardly focused on how you benefit customers and society (e.g. Nike’s “authentic athletic performance” rather than “sell lots of shoes made in China.”)
  • Your WOW statement has four sentences. What do you do better than anyone else?  What is your unique advantage and who benefits?  How are you different from the competition?  A wrap up sentence concluding with a call to action with the investor.

Then comes the 1 (at most 2) page executive summary.  The objective of the executive summary is to generate sufficient interest to get a meeting with the investors. You only have at most 30 second of reading time to persuade an investor to take the next step with you. The executive summary will be sent to potential investors.

The purpose of the executive summary is to:

  • Provide a written quick reference guide to your business.
  • Generate investor interest by demonstrating the clarity of your thinking and written communications skills.
  • Enable the investor to talk to others about your business, using your executive summary.

The content of the executive summary should include:

  • Immediately grab the investors attention with 1-2 sentences that state your unique solution to a big problem. This could be you WOW statement.
  • Describe the problem or opportunity and how the customer will benefit.
  • Outline your solution, as the target customer perceives it.
  • Outline your solution from an internal company operating perspective.
  • Summarize the team (founders, critical staff) and what is their relevant experience. Include total number of employees.  Be clear on who is accountable for sales and who is accountable for building and operating the solution.
  • List your unique technology, intellectual property, and patents.
  • State your target market size.
  • Describe your pricing model e.g. yearly subscription per user.
  • Identify the competition and your unique competitive advantage?
  • List your current key customers and outline sales funnel.
  • State the investment ask. e. funding needed to reach the next milestone, and what will be done with the funds. Include short cap table. List current investors and total current investment.
  • Show the current monthly recurring revenue, and burn rate.
  • Show the website name and year/month of founding.

The format will be text and tables, not charts and illustrations.

The pitch process

The pitch is a face-to-face presentation and discussion by the founders with investors.

The objectives of the pitch are:

  • Convince investors why the company must exist.
  • Be memorable – the investor must remember you the next day. Otherwise you won’t be called back.
  • Be professional – look and speak as if you already are the CEO of a successful company. This includes your body language, how you stand, and how you speak.
  • Create a trust, confidence, and emotional connection between the investor(s) and presenters.
  • Create the excitement and interest in the investors to learn more, while demonstrating your oral presentation skills and ability to have a Q&A dialogue.
  • Be able to communicate with an audience that has no previous information about you. Assume that the investors are not experts regarding your customers, your industry, or your technology.

The objectives of the pitch deck are to:

  • Support your presentation. The pitch deck will have little value if its is read as a standalone document.
  • Help you tell your story and vision in simple human terms.

You need to answer the key investor questions:

  • What will you do?
  • Who are you?
  • How will you make money?
  • How much cash do you need and what will you do with it?
  • How will you manage the risks?
  • How does the investor feel about you? Do they like you?  Do they think they might be able to trust you with their money?

Your approach is:

  • Engage the investors emotionally with the story about the startup.
  • Make a great first impression. The first 2-3 minutes can make or break you.
  • Describe what’s been a great relevant experience for each member of your core team (10-15 seconds each)
  • Use charts and illustrations.
  • Maximum of 10 slides, which support what you are staying. What is critical is what you, and how you say it, during the presentation and during the Q&A.

 The following are the 10 slides.  The bulk of the investor impact will be due to what the presenters say, how they say it, and how they deal with Q&A.  The pitch deck supports the presentation and only contains a small part of what the presenters say.  This is why multiple dry runs of the presentation are required in front of a challenging audience to ensure that the presenters have a detailed understanding of their future business.

Slide #1 Cover slide

  • By the end of this slide, the investors have some idea of what the company does.
  • State your company purpose and WOW statement.
  • Show company name, location, presenters names and titles.

Slide #2 Company overview

  • By the end of this slide everyone knows what the company will do. The remaining slides show the details of how to do it.
  • State any brand names (customers, partners, investors, advisors) associated with the company.
  • What is the target customer need, problem, or opportunity?
  • State your value proposition: what types of customers will perceive what types of benefits to address which of the customer needs or opportunities.
  • What’s your target market, your unique solution (technology and intellectual property), your customer traction (launch date, current customers, revenue rate, pipeline).

Slide #3 Market opportunity

  • This draws upon your market analysis.
  • You are demonstrating that you understand the customers and the marketplace.
  • What is the size of the opportunity ($, # of customers)
  • What are current customer success stories and testimonials?
  • Are there trends which support your statement of market size?

Slide#4 The team

  • The objective is to have the investors feel that the existing core team can achieve the next set of milestones.
  • Who are the key members of the team and what their relevant experience and accomplishments?
  • Those milestones may include attracting additional talent.
  • If there are any existing major talent gaps, identify those as well as the actions to close those gaps.

Slide #5 The solution

  • What will the customer perceive? Hardware?  Software?  Services? A combination?
  • Do the customers need to change their processes, talent or technology or does your solution complement?
  • Don’t use acronyms and lingo.
  • How will you deliver the solution to the customer?

Slide #6  The business model

  • How do you make money?
  • What is your pricing model? Cost-of-acquisition? Gross margins?
  • How long does it take to make a sale?
  • What are your costs?
  • What are your assumptions?
  • What do you do if there are major variances from your assumptions?

Slide #7 Unique technology and intellectual property

  • You are demonstrating that it is not easy to copy your solution.
  • This can include unique team expertise and unique partnerships with others.
  • Illustrate how the technology will enable you to scale your business at low marginal costs.

Slide #8 Your competitive advantage

  • You need to demonstrate: why customers will change what they are doing today. There is a cost to change.  Often the status-quo is better than the costs and benefits of changing.
  • Why will customers buy from you rather than competitors? This is very different than pointing out all the problems that competitors will have.
  • Why do you have a sustainable and profitable advantage? Competitors will respond to you.  How will you deal with their response?  Competition and the market place are not static.
  • A check box matrix can show why customers will choose you over the competitors.

Slide #9  Go-to-market strategy

  • Who has already paid you?
  • Who is in your pilot program?
  • What your prospect pipeline? Letters-of-intent?
  • What’s unique or disruptive about your strategy?
  • What are your critical barriers and how will you overcome them?

Slide #10 Key Milestones and financing requirements

  • What have been the accomplishments to date, with the historical financing. This directly ties to the metrics in your financial projection.
  • What is your ask?
  • What milestones will the ask achieve?
  • Restate the purpose and WOW.
  • Restate the customer problem and your solution.
  • What are the key points you’d like investors to tell other investors?

The Business Plan

Let’s assume the investors are excited by your pitch and believe that your company must exist.  Then the investor asks for your business plan.  If you don’t have one at this point, the investor will not move forward and will believe that you weren’t prepared.

The plan must convince investors why they should make an investment.  The plan can be read by itself. It is not intended to be presented and looked at on a screen.  The document contains large amounts of information, which answer many of the investor’s questions.  This plan can be 30 to 50 pages long  This demonstrate that you understand in detail what you are going to do with the investors money.

BDC (Business Development Corporation of Canada) provides a business plan kit for startups, available for free download.  The following is a link to it:


IV Company Data Pool

The company data pool contains all of the key information to launch your company, operate it, and raise capital.  From this data pool you can extract the information needed for due diligence. Founders, management, staff, board directors, and advisors may have access to select pieces of the data pool.

The data pool does not contain “working copies” of material.  It may contain draft versions of material

The contents of the data pool include the following:

The plan to raise money.  This includes the definition of the target investor, list of target investors, who will do the introductions, status if each investor.  Set up a CRM (Customer Relationship Management) process to manage the ongoing communications.

  • The executive summary.
  • The pitch presentation and supporting material.
  • The business plan and supporting material.
  • Ongoing sales, operating, and financial plans and reporting
  • The CRM process for customers, suppliers, etc.
  • Shareholders Agreement
  • Term Sheet
  • Due diligence material

The due diligence material will include:

  • Corporate records and charter documents
  • Intellectual property documentation
  • Securities issuances and agreements
  • Information regarding disputes and potential litigation
  • Information regarding employees and employee benefits
  • Equity Grants

What is an ideal investor?

  • Do they have the same values and interest in growing your business as you do? How soon do they want to exit?  What is their reputation?
  • Are they easy to work with? What do other founders say about them?
  • Do they have a relevant network: of other investors? Of potential customers or partners? Of talent that can help or join your team?
  • Do they have relevant industry expertise?
  • Do they have relevant business model expertise?
  • Do they have relevant functional expertise?
  • Do they have the financial capability to keep investing in future rounds?

You can download a due diligence template for planning and managing the creation of due diligence documents from https://www.fintelligent.com/virtual-cfo-services/due-diligence-checklist-raising-venture-capital/

You can download a due diligence checklist from Y Combinator


Who will be carrying out your ongoing financial and operational reporting? What software solution are you using?  Do you need audited financial statements?

What is your term sheet?

  • Common terms include: Who is issuing stock or note. Type of collateral. Valuation. Amount being offered. Shares and use of proceeds. What happens on liquidation or IPO. Voting rights. Board seats. Conversion options. Anti-dilution provisions. Investor rights to information. Founders obligations. Who pays for legal expenses. Nondisclosure requirements. Rights to future investments. Who signs.
  • Capital options: Debt. Convertible notes. SAFE (Simple Agreement for Future Equity). Equity. Consent to sell, first right-of-approval, tag-along.

What is your investor and company governance structure?  What decisions require shareholder approval?  What is in your shareholders agreement?  What decisions require board approval?  How are directors appointed?  How are disputes resolved?  What documented policies do you have for regulatory and legal requirements?  What documented policies and procedures do you have?

 What do you do if you are a SME (Small Medium Enterprise)?Z

This article is applicable to SME’s raising capital from investors.


A lot of work must be done before the first investor ask.  Planning, organizing, and team communications are critical.

 Your next steps

To enable discussion with your team and advisors, download the following one-page slide:

How does a startup raise capital from investors 2018 12 20


1 Bill Reichert, “Getting to WOW.  How to create a value proposition that will dazzle investors”, Garage Technology Ventures, https://www.garage.com/resources/getting-to-wow/

2 SME Industry Canada definitions (2018 May 9): Small business: < $5 million in revenue, < 100 employees; Medium business: between $5 million and $20 million in revenue, 100 to 499 employees.

Further reading

There are many types of potential investors.  Tom Koor, “How can a private company sell securities in Ontario?”, Koor and Associates, https://koorandassociates.org/points-of-view/how-can-a-private-company-sell-securities-in-ontario/

Why should a Venture Capitalist invest in you?


  • Can you provide a Round A investor with a10 times return on their investment when they exit in 5 years time?
  • Do you have a talented and committed team of superstars?
  • Can you deliver the 30 second pitch, at a moments notice, to a VC (Venture Capitalist)? Can you deliver the 3 minutes pitch to a VC?  Does the 3-minute pitch answer most of the questions a VC would have?
  • Founders often have the misconception that VCs invest in ideas. VCs invest in: market opportunity, innovation and uniqueness, and the team that can make it happen.
  • VC investors evaluate requests for funds much differently than Private Equity Investors.

Can you provide a Round A investor with 10 times return on their investment when they exit in 5 years time?

At what stage of a company’s development  does Round A investing occur?

  • Seed stage: you have an idea and are developing a business plan.
  • Start-up stage: the management team is in place. Proof of concept has been developed.  First customer contacts have happened.  These customer contacts start to validate the assumptions in the business plan.
  • Round A: Sales are beginning and the product/service is being accepted by the market place.  Cash flow is likely negative. Investment goes to quickly grow sales.

Why are Round A investors seeking such a high return?1 Three quarters of VC backed firms do not even return all of the investors capital.  Over 95% do not meet initial projections.  Thus, a very high return is needed for the few companies that do succeed.

 Do you have a talented and committed team of superstars?

  • Have the founders and team done successful start-ups before?
  • What is the integrity and reputation of the founder and team? The VC’s network will provide this feedback.  The founder and team must have both an excellent network and excellent reputation.
  • Does the founder’s team have the necessary superstars? For example, if the company’s success depends upon AI (Artificial Intelligence), is the Chief Technology Officer a recognized AI guru?
  • Does the founder have an intelligent advisory board, with the networks, experience, and skills relevant to successfully growing the business?
  • Does the lead investor have the reputation and network to draw in other smart investors?

 Can you deliver the 30 second pitch, at a moments notice, to a VC?  Can you deliver the 3 minutes pitch to a VC?  Does the 3-minute pitch answer most of the questions a VC would have?2

  • Is the market opportunity large enough to sustain fast and long-term growth, ideally internationally? Can you scale with low or negligible marginal costs?
  • What is your distinct, sustainable, and competitive advantage?
  • Who are the superstars in your team, and is everyone committed to working with VCs as partners? Is the team passionate?
  • What is your clearly defined and realistic business plan?
  • Is there the potential to become a market leader?
  • What is the practically achievable exit strategy?
  • Who are the other VC investors?
  • Is your technology platform unique and proprietary?

Why do you need a three-minute pitch?  Your presentation in your first meeting with an investor should last 3 minutes.  Follow-on meetings will have a longer presentation. Harvard business School research of 200 start-ups who raised $360 million (mostly at the seed and start-up stage, prior to Round A) showed that the average investor spends 3 minutes and 44 seconds looking at your pitch deck. On average, founders needed to contact 58 investors to get 40 meetings in order to raised $1.3 million in 12.5 weeks.3

 Founders often have the misconception that VCs invest in ideas.  VCs invest in: market opportunity, innovation and uniqueness, and the team the can make it happen.

Founders often think that if they have and idea and business plan, all they need is money to start delivering the product or service.  VC are looking for: the market (who are the customers and why will they buy from you rather than the competition), you and your team (Do you have the necessary skills? Can you execute better than the competition? are your good enough?), and the technology (Is it mobile? Is it secure?  Is it scalable? Is it unique and hard to copy?)

Most VCs invest in: Technology based solutions, health sciences, or clean energy.

VC investors evaluate requests for funds much differently than PE (Private Equity) investors.

Round A VC investors, fund companies who have little history, little or no profit, little tangible assets, and may have no revenue.  Even at exit time, there may be no revenue (in the case of Biosciences ventures).

PE invests in companies with a history of revenue and profits, with some tangible assets.  PE seeks to grow that revenue and profits.  PE often looks at their investment in terms of a multiple of EBITDA, and seeks to increase that multiple by exit time.

I’ve observed that PE investors do extremely detailed analysis of the finances and processes of a potential investment.  VC investors do far more analysis of the talent, because the financial and other data does not exist, due to the early stage of the company.


A passionate and skilled founder needs a strong reputation and broad network. The network enables drawing in superstars to the management team and advisory board, as well as a lead investor.

Your next steps

You can download this one-page slide from my website to enable discussion with your investors, advisory board, and management team.

Why should a Venture Capitalist invest in you?

 You can do a self assessment based upon questions above.

  • Ask your angel investors and advisory board for feedback.
  • Ask the people in your network for feedback.
  • Ask a third party to review your talent, your plan, and talk with customers.


1 Deborah Gage, “The venture capital secret: 3 out of 4 start-ups fail”, Wall Street Journal,  https://www.wsj.com/articles/SB10000872396390443720204578004980476429190, September 19, 2012  discusses research by Shikhar Ghosh, Harvard Business School

2 BDC, “Partnering with us”, BDC Website, https://www.bdc.ca/en/bdc-capital/venture-capital/about-us/pages/partnering.aspx  this outlines BDC’s election criteria for VC  investments

3 Professor Tom Eisenmann (Harvard Business School), “What we learned from 200 startups who raised $360 million”, http://www.slideshare.net/tseitlin/doc-send-fundraising-research-2015


Further reading

Touko Kontro & Ari Seppänen, “How to get your startup funded?”, NewCo  Helsinki, City of Helsinki, https://newcohelsinki.fi/app/uploads/2018/01/Fundingworkshop-2.2-1

BDC, “Business Plan Template”, BDC Website, https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/pages/business-plan-template.aspx

BDC, “Marketing Plan Template”, BDC Website, https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/pages/marketing-plan-template.aspx

How can a private company sell securities in Ontario?


  • There are two ways for a private company to sell securities in Ontario: with or without a prospectus.
  • A prospectus is always required unless the company meets specific exemption conditions.
  • With these exemptions, the company has multiple potential sources of capital.
  • With a prospectus, the company can raise capital from any investor, either through a stock exchange or the over-the-counter market. This is the IPO (Initial Public Offering).

This article (supported by a one-page slide) is intended to enable discussion and action planning among owners/shareholders, boards of directors, CEOs, and advisory boards. The approach and action plan will be unique to the specific situation of each corporation.  There is no one-size-fits-all answer.

This article does not provide legal advice. If you decide to further explore selling securities, you must speak with a securities lawyer who understands the law, the regulations, and the process for selling securities.

There are two ways for a private company to sell securities in Ontario: with or without a prospectus.

A private company can raise capital via many sources, including:  the founders’ funds, bank financing, leasing, government loans, grants and tax credits, selling accounts receivable, selling securities.

All corporate securities sales in Ontario are regulated by the OSC (“Ontario Securities Commission”).

A private company going public via an IPO must have a prospectus and be compliant with securities laws and OSC regulations.  Typically, an investment bank is used to sell the securities to a broad range of individual and corporate investors.  There are no legal restrictions regarding who can buy, the amount that can be bought, and future sale of the securities.  The securities are liquid.

A prospectus is always required unless the company meets specific exemption conditions.

 The following provides a high-level overview of the 7 general exemption situations if a company is selling securities directly to investors.  You must consult a securities lawyer for advice, as the laws and regulations are far more detailed than this overview.

  • Private issuer: your corporation has fewer than 50 people holding securities. A company starting out with a handful of founding shareholders actually takes advantage of this exemption, often without being aware of it.
  • Employee, officer, or board director of the corporation, or consultant to the corporation.
  • Accredited investor: These are investors with assets and income which meet the OSC’s definition of a “accredited investor”. The OSC views these as sophisticated investors who do not require the detail contained in a prospectus in order to make an investment decision.
  • Minimum amount of $150,000: As long as the investor (who cannot be an individual) purchases at least $150,000 of securities.
  • Family, friends and business associates.
  • Offering memorandum: an offering memorandum is a simplified prospectus, which must follow OSC regulations and be filed with the OSC.
  • Crowdfunding: your corporation can sell simple securities (e.g. common shares and non-convertible debt) through a registered online funding portal.

If you are taking advantage of one of these exemptions, you must file a report with the OSC, unless you are utilizing the Private Issuer or Employee, Officer, Board Director, Consultant exemptions.

 By utilizing these exemptions, the corporation has multiple potential securities buyers.

Potential securities buyers may include:

  • Friends and family;
  • Angel investors;1
  • Individual investors;
  • Incubators2 or accelerators;3
  • Private equity;
  • Strategic investors;4 and
  • Institutions.

In addition to the above, the corporation may utilize an exempt market dealer, who is an intermediary between the corporation and accredited investors.

Any buyer of securities issued without a prospectus, must fall within the conditions of one or more exemptions.

The securities are not liquid, due to the many restrictions on an investor being able to sell the securities to another investor.

With a prospectus, the company can raise capital from any investor, either through a stock exchange or the over-the-counter market.  This is the IPO .

A registered IIROC5 dealer (e.g. investment bank) is needed to sell securities to the general public and corporations.  The dealer may sell stock directly to investors.  The stock may be listed for trading on one or more stock exchanges (each of which will have its own regulations) or be traded in the over-the-counter marketplace.

What do you do if you are a SME (Small Medium Enterprise)?6

Many small private companies raise small amounts of money.  In 2016, approximately 1,400 Canadian companies raised less than $1 million each, in Ontario, without a prospectus.  The median size of debt sold was $2.8 million and the median size of equity sold was $600,000. 7,8


  • The decision to sell securities must be done in the context of the strategy and strategic plan.
  • Your company needs a variety of legal and financial skills in order to analyze options for raising funds and make the decision as to whether or not selling securities is appropriate.

Your next steps

To enable discussion with your shareholders, board of directors, CEO, and advisory board download the following one-page slide:

How can a private company sell securities?

Your shareholders, board of directors, CEO, advisory board, and C-Suite need to assemble facts and talk through what is driving the need for capital, the various options, and the implications associated with selling securities (especially selling equity).

  • Assemble the facts regarding your current situation: your corporation’s strategy, strategic plan, and financial forecast. The financial forecast will detail the future capital requirements.
  • Founders and major shareholders must also consider their personal and family financial plans.
  • What is driving the need to raise capital at this point? (e.g. Funding growth?) What are the options for raising capital?
  • Why is the best option to sell securities? g. other financing options not available.  There are various costs associated with selling securities, depending upon the approach you take.
  • What stage is your corporation at? g. Seeking angel investors/seed capital or A,B,C series funding?  An established corporation that has been in business for many years? Founders seeking to sell their interest or sell the company?

Does your corporate leadership9 have the necessary legal and financial knowledge to layout a plan for raising capital, including selling of securities?

Does your advisory board or advisory network have the experience and skills to help your corporate leadership think through the decision and action plan?  (e.g. someone who has raised capital, someone who has successfully sold securities, someone who has sold their company, securities lawyer, potential securities buyers, etc.)

If you are a SME wishing to sell your company and have less than $3 million/year EBITDA, consider how to grow the company to the range of $3 million per year, at which point your sale will be easier and your multiple will be higher.

Your final decision and action plan may result in an update to your strategy and strategic plan.


1 Angel investor: an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity.

2 Incubator: an incubator helps take a start-up to the point where there is a MVP (Minimum Viable Product).

The characteristics of an incubator are: Co-located office space with other start-ups; Links to investors; Access to lawyers; Provides coaching and mentoring, via successful start-up executives and consultants.

3 Accelerator: an Accelerator is a company or organization that puts a start-up company (which already has a Minimum Viable Product) through a very structured 3-4 month process.  This process has the goal of quickly growing the size and value of the start-up to enable future funding. The accelerator puts company’s through a vetting process so that higher likelihood of success companies are made available to investors.  This reduces investors’ due diligence time and costs. The Accelerator may take a small financial interest in the company in return for its assistance. Mentorship is provided by experienced start-up executives and investors.

4 Strategic investor: an investor (typically a company) that invests primarily for strategic rather than financial (return) purposes. e.g. in order to gain future access to a key new technology or product. (By contrast, financial investors make investment decisions primarily based on the prospect of a strong financial return.)

5 IIROC: Investment Industry Regulatory Organization of Canada

6 SME: Industry Canada definitions: Small business: < $5 million in revenue, < 100 employees; Medium business: between $5 million and $20 million in revenue, 100 to 499 employees.

7 2017 Ontario Exempt Market Report, Ontario Securities Commission Notice 45-715

8 This understates the number of SMEs raising capital.  For example, if a company has fewer than 50 investors (excluding current and former employees), there is no requirement to file a report to the OSC regarding securities sales.

9 Corporate leadership: board of directors, CEO, advisory board, C-Suite.

Further reading

How do you invest in a private company?

You are considering investing in a private company or you’re already a private company investor.

The investor must think about their own personal situation and future before thinking about the business. e.g. When might they need to exit?  What happens if the investor suddenly dies or is incapacitated?  How much time and effort for how many years does the investor want to devote to their investment? Etc.

There are 7 sets of questions to consider, starting with questions regarding the future (and the potential for value growth), which are the foundation for the questions regarding short term actions.  It’s better to think through these questions BEFORE you invest your money.

#1 What will be the needs of the future customers?

  • Who are the target customers?
  • What problem or need do they have?
  • How will the company sell to them?
  • What will be the customer experience?
  • How will the customer perceive the competitively differentiated value proposition?
  • How will the company’s internal operations be competitively differentiated?
  • What are the potential sales and profits?

#2 How will you get value for your investment?

  • Eventual equity sale?
  • Management salaries?
  • Dividends?

Products or services provided by the company?

#3 Will you leave your equity in the company indefinitely, or do you plan to exit? Even if you have no intent to exit, there is one exit situation to think through – your death or incapacitation.

Let’s assume there is an eventual equity sale.

#4 Who will buy the company in the future (5-10 years time)?

  • Strategic buyer?
  • Financial buyer?
  • Owner/operator?
  • Employees?
  • IPO?

#5 Why will they buy the company?

  • Leading and defensible market position?
  • Non-concentrated distribution?
  • Proven management team with successors?
  • Sustainable margins?
  • Growth potential for the future buyer?

#6 What might they pay for the equity?

  • Multiple of free cash flow or EBITDA?
  • Terms and conditions?

#7 How will decisions be made by the shareholders?

  • What decisions will be reserved for the shareholders rather than management?
  • What veto power will individual shareholders have?
  • What % of equity and % of shareholders will be required for a decision?
  • What decisions, if any, will be made by the board of directors

To enable discussion with your colleagues, download the following slide:

How do you invest in a private company?