One of the biggest challenges tech entrepreneurs face is finding funding to fuel their innovations. Dozens of organizations fund tech startups in Canada, along with thousands of angel investors and VC firms. However, less than 1% of startups successfully raise venture capital. So what do founders need to know before they set out to raise money?
We sat with Canadian angel investor Jaime Wong, one of Innovation Cluster’s Experts in Residence, to get practical guidance on how MVP+ stage tech startups should approach fundraising.
Jaime advises high-growth software companies and oversees investments in technology startups at Maddison Wong Investments. Before becoming an investor, he scaled a bootstrapped medical billing software company, MDBilling.ca, to capture 60% of the market share before a successful exit.
Jaime attributes his success to bootstrapping.
He cautions entrepreneurs against asking for too much money too early. Jaime encourages them to create cultures of careful and intentional decision-making. Understanding what investors look for and how to position your company so you can secure your first or next investment round is key.
I typically look at five things.
Scaling requires a lot of process. Internal process, and people as well. It's not like when you're trying to create an MVP. Scaling requires a very different attitude and view of the company.
It depends on the company. Some markets, technologies, and customers require a very long runway. Like selling to healthcare feels like it takes forever. Life sciences consume a lot of capital. So, you can't have a short road map.
Usually, a pure software company requires a lot less capital. And if it's in a market with big adoption, then you would expect the breakeven road map to be shorter. There's a balance to it.
It's always nice to see people with experience who have ‘been there and done that’, or who come with industry expertise. In the case of an entrepreneur going into an industry where they or the team doesn’t have direct expertise, investors must be cautious. That’s not to say the team can't be successful. Investors will look hard at who the founders’ mentors, advisors, and board of directors are.
I also look at their capitalization table to see how it matches with their key people—the management team, board members, advisors, consultants, etc. If they’ve said that X, Y, and Z are critical people, and yet they're not showing the cap table, that is a flag I need to understand.
I like to see traction. And when I say traction, it’s customer adoption. And ideally, customers who are paying.
Nothing beats a paying customer. That's the ultimate litmus test. Are people willing to take their wallet out and give you money for what you're offering? And will they keep doing that?
Everybody can say, “Oh, my market is this size. I can do this. I can do that.” But at the end of the day, are people taking their wallets out and buying from you?
It’s all about adoption. MVP+ companies could have some free trials or pilots in place. Those consume a lot of time and a lot of resources, by the way.
At the same time, there have to be some paying customers or customers committed to signing contracts. Or they're negotiating a contract of X dollars, etc. There must be something to give me a taste that there's going to be money in the near to midterm.
First, I would say accelerators and incubators—centres of innovation. Those are ideal because there's a vetting process already in place. Referrals and networking are also great. Any channel that can get you a warm introduction as opposed to a cold email or a cold call is the best way.
One of the best ways is to ask for a warm introduction. That’s the beauty of LinkedIn. If you know somebody who knows somebody, you can see it through your 2nd and 3rd degree connections, and ask that first connection for help in making a warm intro.
For example, I can ask my friend Johnny, “Hey Johnny, you know Bobby at Adventure Capital. Can you make an introduction?” It’s super easy to do.
Warm introductions aside, when you introduce yourself, whether through LinkedIn or by email, do a bit of research about this person—where are they investing, what are they posting about, are the companies in their portfolio in a similar business stage like yours? Then, write a short email that communicates what you're looking for, how you can potentially grow, and ask for a meeting.
It's a balance of both, but I would lead with the market opportunity. Talk about the opportunity first, then present the solution and how your work is unique compared to anything else. What's your unique value proposition, and how do you differentiate?
Then, talk about what other alternatives are out there. When I look at companies seeking funding, I typically look at the alternative solutions available to evaluate if what you're creating is differentiated enough from the status quo or from other solutions. And then I ask if people will be paying more for something that you have and whether it is or isn’t substantially different.
Maintaining differentiation can be a challenge. The minute you're successful, let's say you come up with an idea and you get some adoption—you're going to have copycats.
Protecting intellectual property is very expensive. It's very tedious. It’s also very critical. This is why you need to have a unique differentiator, and you need to defend it.
Always send a thank you email after the pitch meeting. Then, every so often—once a quarter—send a short update email on the success and progress you are making.
Since entrepreneurs are talking to more than one investor, send the same email to your whole list of investors, other stakeholders, board members, mentors, the head of the incubator or accelerator. The email should, in essence, say, “We're doing this. We're talking to these people. We're getting traction in this. We hired for this role, etc.”
That's a nonintrusive way to keep in touch and do a soft sell.
It depends on the Angel investor or the venture capital and what kind of investments they typically make in terms of the sector or industry. Take MedTech, for example. Some MedTech investors focus purely on digital health. Others in that sector lean more toward life sciences, or practice management for physicians. So, it depends on the preference of the investor. That’s one thing to watch out for.
Entrepreneurs also need to consider how much they're asking for in investment. For angel investors, the cheque sizes are smaller, but they also take higher risks. I would research where an investor typically invests—seed, Series A, bridge between seed and Series A—before pitching them. If you're a MedTech early-stage company, there's no point in trying to pitch to somebody who funds digital health at later stages.
First, highlight the traction you’re getting. For me, traction is customer adoption and, ideally, paying customers.
The second thing is financial clarity. Show how your expenses look in comparison to your growth trajectory. Visualize the slope of the expenses versus your revenue or projected revenue. A lot of people project revenue very generously. Almost every investor tapers it down.
Lastly, show the use of funds. I like to see the use of funds. A lot of times, I see people putting it in sales and marketing, which can be the right thing. But typically, sales usually take a longer time to show up on the revenue line than expected.
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Real-world advice from people who have been in your shoes and can make a huge difference in scaling your startup. The Innovation Cluster connects MVP+ stage tech entrepreneurs with dozens of business experts who cover everything from business development and strategic planning to fundraising and intellectual property.
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