We are just starting our rounds of meeting banks for funding a project we got in Indonesia. AI never crossed our minds.

Let’s see how it goes

1. Love Money
2. Traditional bank
3. Angels
4. Mezz financing
5. VC

I spoke to the head of the Toronto Angel Club when I use to practice law. They have a very tech bent and their exit strategy is typically to have a VC take them out. VC’s want you to go public so they are looking for “scalable” businesses to take to market (to use their lingo).

Then there’s free money- government grants and NGO programs. If you live in Ontario, you are dead out of luck but for targeted groups and geographical locations, Industry Canada lists grants.

If you are under 35 in Canada , you could try http://www.cybf.ca. However, their maximum loan is $15K which, given burn rates of operating a business in a big city, gets you 2-3 months operating capital or one piece of modest capital equipment.

Careful about investing in franchises unless the franchisee has ambitions to own 3-5 of them, most franchises pay the owner-manager about $100K-$120K in salary and that’s about it. Operating costs are high for bricks and mortar franchises and the franchise takes 5-7% gross right off the top in addition to other fees. It is often commented upon that franchisees do nothing more than buy the owner a job (read the E-Myth in what it truly takes to build a great small business).

Finally, you have to have someone with significant skin in the game- where is their money? This is why in commercial real estate the lender needs to see 30%-40% down payment. Its the same principle with investing in a business- the owner-manager has to be discouraged not to walk away with little loss at the first sign of trouble.

Most successful businesses I use to represent grew organically unless you are in tech then you have to swing for the fences given no pricing power and your competitive advantage disappears quickly. Lenders only pop out of the wood work AFTER you have made it.

As in, like “omg you wouldn’t believe what happened to me!” daily blog post, drive-you-up-the-wall incompetence, “I-can’t-believe-they-made-that-law” type of nuts.

Most of these people aren’t actually “high-risk” investors, they’re “aggressive” investors that want significant shares or control of the company. Some VC firms actually maintain a body of high-end professionals just for managing their “assets”, they’ll sign on small guys and bring in their own team of accountants, lawyers, business managers, technical experts, etc. And then they’ll review 1000 business ideas and reject all but one, just b/c they can.

Of course, there’s a reason for all of this. 20 minutes of Dragon’s Den made it pretty obvious to me. Lots of people simply have limited business sense. One lady makes great x-mas tree stands but completely overvalues them. It’s a seasonal, limited-market item. The steps with something like this are simple: patent & license to a bigger fish. One of the Dragons even mentions Noma. But she’s just dead-set against the whole thing.

And fundamentally, that typefies the problem with this “Angel Investing”.

The people with the most profitable ideas and the best business generally don’t need you: they’ll fund it with a loan or with money from a day job or money from a previous venture. The people with the least profitable ideas are more than happy to take the money and then run the business into the ground anyways.

So you (somehow) have to find the people with great ideas and a great product and great business sense and a really desperate need for money that can’t be sated elsewhere.

Something like a B&B or a franchise would be bank financing kind of stuff.