Finding Money

By Shannon Moneo

Sometime in October, you’ll be able to watch as Laurie Sutherland and her daughter Kaydee lay bare their business plans before Canada when they face fire-breathing angels. The duo will appear on Dragons’ Den, the popular CBC television show where businesspeople try to convince five successful Canadian entrepreneurs to invest in their dreams. 

The Sutherlands own Cheesecake 101, a Victoria franchise that makes 101 flavours of the rich dessert.

Business has been good selling cheesecakes in flavours such as monkey’s lunch or lemon raspberry. To move into a bigger market, they sold their flagship Campbell River shop and used the proceeds to start up in Victoria in July 2008. With the 2010 Olympics looming, they want to add retail outlets, ideally in Whistler and the North Shore. They’re looking for at least $125,000 but a half million would be better, Kaydee says. But Cheesecake 101’s niche — food services — is one of the riskier ones. “Banks aren’t giving out loans,” Laurie says. “We don’t want to ask relatives and mix family with business. We’d rather do it on our own,” adds Kaydee.

A big fan of Dragons’ Den, it was Laurie’s idea to go for the show. A four-page confidentiality agreement prohibits the Sutherlands from revealing how their sweet pitch played. “But they definitely loved our product,” Kaydee says, adding that Cheesecake 101 is still seeking investors.

Dragon Jim Treliving recalls meeting the Sutherlands in May, one of about 20 pitches each lasting 40 minutes that the Dragons would see in one day from 7 a.m. to 7 p.m. What Treliving — chairman and founder of the Boston Pizza International chain — looks for is whether the business works, does it make money, and if the owner has done due diligence. “Is it a business or just an idea?” asks Treliving, interviewed from Dallas, where he oversees the head office for his U.S. arm of the company. People have a tendency to lose focus, making the business less attractive to investors, he says.

Treliving started his eatery empire by feeding off family. A former RCMP officer, he was smitten when he ate at the first Boston Pizza in Edmonton. By 1968, he had turned in his badge and bought one of the franchises in Penticton with a $5,000 loan from his father and $5,000 of his RCMP pension money. As the business progressed, Treliving, now in his 60s, borrowed money from the Business Development Bank of Canada (BDC) to open more franchises. In an equal partnership with accountant George Melville, the business flourished. Today, 330 franchised restaurants operate in Canada and another 54 in the U.S. The company will soon open restaurants in China, targeting 350 million middle-class consumers.

Last year, Dragons’ Den saw roughly 260 pitches. About 20 per cent secured some form of investment, says Treliving. For the 2009-10 season, the show has doubled to 20 programs and is pulling in a huge audience heavy with young people and immigrants. “What’s amazing to me is kids talk about it at school. Immigrant families watch it to look at ways to get into business,” he says.

Closer to home, a local angel network operates, much like those in most cities. “There’s plenty of supply in the Victoria area,” says Paul Schure, a University of Victoria economics professor whose 2004 study examined the availability of private equity in the Victoria area. He unearthed more angels than he expected.

So when the house is mortgaged to the hilt, the line of credit is maxed out, the love money has withered away, and the bank’s loan officer won’t see you, few other options, beyond limited government programs, exist. “If you run out of money, you have to go to angels,” Schure says.

One of the oldest forms of financing, angels appeared during Roman times when banks didn’t exist, Schure says. If a Roman wanted to start a business and family and friends had no spare coin, he would visit a rich person and make a pitch. But the term “angel” wasn’t used until the early 1900s, originating in New York to refer to people who showered “pennies from heaven” to finance Broadway shows.

Today, angels operate under the radar. Like lottery winners, they don’t want everyone to know they’re loaded. Some object to the term “angel” and prefer industrialist, Schure says. Most often retired, wealthy entrepreneurs, these high-energy men (yes, it’s almost a 100-per-cent blue-winged contingent) miss the cut and thrust of business. Schure says many of them made their money in the tech sector and that’s where they tend to invest.

But before they part with their money (usually $50,000 to $1 million), angels do their due diligence and make darn sure the business will grow their investment. In the fiercely competitive U.S., some of the estimated 300,000 angel investors go to extreme lengths before laying down cash. Dennis Ray, who teaches international business at Royal Roads University, knows of one angel who hired a private investigator to check the prospect. “He told him, ‘I’m going to investigate you like a future son-in-law,’” said the U.S.-born Ray, who has worked and taught around the world.

Bill Cooke, a professional engineer and former CEO of VIATeC, has had close contact over the last decade with Victoria’s flock. When he was manager of VIATeC’s “Access to Capital” program, he helped more than 300 companies get off the ground, some of those launches aided by angel investors. To make the connections work, two things must happen. The business and investor must be well matched — a relationship built on trust and compatibility is necessary. “It is like a marriage, a real partnership,” Cooke says.

And, like some marriages, the business- person loses independence in return for money. “Do they understand what they’re giving up in return for equity investment?” Cooke asks. “With money comes control by investors.” Owning a piece of the pie is strong incentive to make the business succeed. But finding a match is tough, adds Schure. “The angels say there are not enough interesting projects available.”

If they’re out there, how do you find them? An angel group meets once a month in Vancouver, while an angel forum is held every six months. Bellingham, Washington also has a very active, cross-border angel group. Cooke can help companies connect with these angels.

Closer to home, VIATeC hosts angel networks about every four months where investors and VIATeC member businesses seeking financing are invited to a secret location, says executive director Dan Gunn. “It’s like a debutantes’ ball. You announce your situation. The odds of getting a date are not certain. It’s pretty arduous,” Gunn explains.

Russell Ovans had his coming out in May in a large conference room. “I’m not sure who was there as an angel or an organizer. It was a weird mix,” says Ovans, president and founder of Backstage Technologies, a Victoria company that creates games for social networks. In June, more than 400,000 people from 175 countries played Backstage’s games. Ovans, who has a PhD in computer science from Simon Fraser University and taught at UVic, wants to double the number of users and create more games by June 2010, but he needs money to finance his marketing plan. At the angel forum, he did a 12-minute presentation, followed by three minutes for questions and time for mingling and exchanging business cards. He didn’t ask for a specific amount of money, because he didn’t want to constrain any possible investors and his business plan wasn’t in final form.

Ovans has created 15 well-paying jobs in a profitable company where he earns more than a full-time professor. Yet nothing came out of his angel encounter.

Cooke admits that angel investing has dropped off this year, with the late spring/summer period always slower because angels tend to vacation. Angels are also finding that businesses are operating in a tougher environment, which can constrain success, he adds.

The restrained response is OK with Ovans. “I have a proven business model in a very sexy industry: social networking games.” He’s biding his time as well as seeking a loan with the BDC.

Ovans launched Backstage in 2005 solo. By 2006, he had six employees, growing to eight a year later. It was in 2007 that he started writing Facebook applications, work that he financed with earnings from consulting. While waiting for the Facebook project to make money, he used his credit card to cover about $30,000 in payroll costs. To get through the crunch, he visited HSBC, which offered a personally guaranteed line of credit.

Instead, Ovans opted for the BDC where he got a $50,000 loan and paid off the credit card. But before the first interest payment on the loan was due, the Facebook application took off. Ovans started making “serious money” and quickly repaid the loan. The traditional banks weren’t very helpful, he says. Four-page questionnaires and a tendency to dismiss good corporate credit ratings didn’t impress him. “And if we have a $100,000 line of credit with HSBC, we have to pay to have it sit there,” he says.

Christine MacNeil bought a small business in March in Sooke. To finance her purchase of the Curves women’s-only fitness centre, she was forced to get a personal loan of just over $40,000. The family’s line-of-credit is also being used to the tune of about $20,000. MacNeil never considered love money. “You don’t want to mess with family and friends’ money,” she says. And a business loan was never on the table. “You have to own a business for two years before you’re even eligible to get a business loan,” says MacNeil, a wife and mother of two children. Hampered by the rigid policy, she also understands the bank has no idea if the business will be viable. The CIBC’s local service was great but head office policy drives the decision against small business. MacNeil would have preferred to not have her family indebted. “We’re feeling the pinch more,” she says.

Banks will say little about their lending practices. Royal Bank of Canada spokesperson Christie Smith cites client confidentiality and competitive reasons for not discussing business loans. While the rules haven’t changed, the “challenging economic situation” has made RBC “more prudent,” says the Vancouver-based Smith.

The landscape isn’t much better than in 2000, when a Statistics Canada report found that 61 per cent of small and medium-sized businesses survive past two years, dropping to 20 per cent after 10 years.

At RBC’s Langford branch, Yvonne Stearns handles clients who have both business and personal loans, most of them over $30,000. The indebted include pharmacists, lawyers, accountants, contractors, electricians, and plumbers, considered low- to medium-risk professions or trades. Businesses such as restaurants or small retail operations, with their high failure rate, are usually told the cupboard is bare, forcing owners to go the love money route or reinvest capital, says Ray from RRU.

In the banking industry for seven years, Stearns sees her role as helping businesses succeed. “I think of myself as a builder,” she says. “I’m not a product-pusher.” But she peppers her clients with questions. “The first meeting can last from one hour to two hours. The more information I get the better. The last thing I’ll discuss is products,” says Stearns. “I always want to be aware of what the client is doing. If people don’t want to talk, I say ‘It’s just the bank being nosey.’”

She’s also a bit of a psychologist who prides herself on drawing people out to collect information. “It can be very exhausting.” Red flags fly when clients aren’t prepared, they don’t understand what they’re getting into, or they have no personal equity.

Some bemoan the difficulty getting loans but, compared to the bailouts of U.S. banks, Canadian institutions were held up as fiscally vigilant. As Stearns says, “I’m here to make the bank money. We’re a business. Would you want to deal with a bank that’s not successful?”

The federally run Business Development Bank has become a bit of a saviour in these tough times. Focussed on small and medium-sized enterprises, the BDC provides loans, venture capital, and consulting for 27,000 clients using its $3 billion of paid-in capital. BDC’s executive vice-president Edmee Metivier says that access to financing is one of the biggest challenges facing entrepreneurs and it’s only getting worse. While Canada’s commercial banks have not stopped lending to smaller businesses, they have adopted a more cautious approach, she says. At the same time, U.S. lenders in the Canadian market have slowed down their activities considerably, slashing the number of sources of financing available to Canadian businesses.

Venture capital, a forum where deals usually start over the $1-million mark, is where the risks are as big as the projects. Investors are looking for massive returns to make up for the ones that didn’t work out, Gunn says. Real estate developments or companies that require a lot of pricey equipment are typical VC users. Today, venture capital is hurting, Ray says, thanks to what happened in the U.S. with investment bankers. Cooke has found that established companies are attracting investment not new ventures.
What has brought some optimism to Victoria’s venture capital climate are the twice-daily direct flights from San Francisco. California venture capitalists are showing “significant interest” in some local tech companies, Gunn reports.

A little story told by Ray illustrates that while money is important, what’s more important is the person handling it. When working at the University of Auckland, Ray recalls a project where a business class had to write about New Zealand entrepreneurs. “There was an interesting pattern,” Ray says. “They all dropped out of school around the age of 15. They were all millionaires by 23.”

Sir Terry Matthews…  golf fan to some, IT billionaire to others.

It’s not every day that one of Canada’s richest men hands out free advice on how to inject capital into a business. In May, Sir Terence Matthews was in Victoria to claim UVic’s Distinguished Entrepreneur Award for 2009. The mechanical engineer and founder of more than 60 companies addressed UVic business students.
“I’m a born capitalist. I like going around the world and taking on the Japanese and the Germans,” says Matthews, who launches five to six new companies each year. “Either you win or you don’t win. If you can’t win, stay the hell out of it.”

His Canadian game began in the early 1970s when he landed in Ottawa and got a job with Microsystems International. It was the early days of high-tech, and it didn’t take long for the feisty Matthews to be frustrated by management’s constraints.

A self-described “enthusiast,” Matthews paid a visit to the Bank of Nova Scotia where he borrowed $4,000. Soon he and fellow British émigré Michael Cowpland formed a little company called Mitel, an acronym for “Mike and Terry Lawnmowers.”

In what’s become a legendary tale, the duo intended to import lawnmowers. But the first shipment got lost at sea and the belated mowers arrived six months late. “You can’t give away lawnmowers in November,” Matthews wryly says.

The two men then dialled into their comfort zone and developed touch-tone phones where gross profits were 80 per cent. Getting capital wasn’t a problem, as investors were eager to get a slice of the cutting-edge company. Matthews, now 66, never looked back. He was knighted by Queen Elizabeth in 2001.
Later in a one-on-one interview, Matthews, said getting that $4,000 loan wasn’t difficult. Granted, $4,000 in the early 1970s was akin to about $22,000 now, an amount today’s banks would likely bankroll via a personal loan.

But in a nod to Matthews’ extraordinary work ethic, it isn’t always about how much money is available. “If you don’t work hard, don’t get into it. Go work for the government,” says the man whose international empire is valued at about $1.1 billion.  A very small amount of money coupled with the right team and passion can get you far, he says.

China and India — countries where Matthews plans to expand — are full of hungry, innovative entrepreneurs who earn one-tenth of what a Canadian does. “They work very hard. They want to be someone,” he says. Closer to home, Matthews believes that now is the time to form new businesses. Many good people have lost their jobs and, coupled with his mantra that “timing in life is almost everything,” he predicts that we’re entering an era where there will be “a huge upswing of start-ups.”

To “catch the bump” before the flurry of competitors, a business must have a good idea and be the first to move. That attracts investors, says Matthews.


How to Bag Bucks for Business

Royal Roads professor Dr. Dennis Ray has immersed himself in the business environment of countries as disparate as Romania, Japan, Netherlands, and Singapore. In his native U.S., he created the first university-based global technology incubator at the University of Texas in Austin and started a national angel-investor network in New Zealand.

Ray also spent time outside of academe to handle marketing for a U.S.-Canadian manufacturing company. Now teaching international business and entrepreneurship, the former Hall-Fulbright distinguished professor of entrepreneurship has a few tips for those seeking capital, advice drawn from business-watching over three decades on four continents.

  1. Before any investor, be it bank or buddy, takes a risk on you, the business has to be a good opportunity. Beyond the splendid idea, it has to be viable and sustainable.
  2. Be saleable and presentable. Not only are you selling the business, you’re selling yourself. “Look the part,” Ray advises.
  3. Understand your business inside and out, including profits and margins. You have to be able to talk about more than the gizmo itself. “Never, ever say ‘talk to my accountant,’” Ray says. With some investors, that could be the “kiss of death.”
  4. Do your own financial projections, and not with fancy software but by hand the old-fashioned way. It may be tedious and painful but that’s how you’ll get a full understanding of your finances.
  5. Know what you’re looking for. Ask the investor strong questions. Show curiosity about where they invest.
  6. It’s possible it’s not a good fit for you and you may have to turn down the offer.
  7. Timing is critical. If you wait until you’ve run out of money to raise money, you’re dead. The cash flow has to be positive. The target is sales over investment.