Project Start-up: Ep. 02 Financing

The Panel

Peter C. Goode
Partner, McCarthy Tétrault LLP, Calgary

On The Idea: The company has had some success in sourcing funds from institutions and high net worth individuals. Another source they might want to look at is friends and family. Friends and family will likely invest smaller amounts, but when aggregated together, those amounts might help them along the way to their goal of $2.3 million. 

Red Flags: The company should be cautious about the loan from AVAC. While the $1.1 million from AVAC is a substantial portion of what they need, what are the terms of the loan? If there are relatively standard commercial terms, will the company have the cash to pay interest and principal back when due? Many start-ups don’t have any cash flow, so taking on a substantial amount of debt can be crippling.

Next Steps: Even before they finish this round of financing, the company should have a good understanding of when they will need another cash infusion, and where it will come from.

Greg Spicer
Director, Sumex Inc., Edmonton

On The Idea: Precarn and AVAC are good funds. If those programs didn’t exist, the chances of such an early stage company being able to put this much money together at this point would be slim. When you’re an early stage venture like this, you can’t get any bank financing, of course, because there’s no earning history.

Red Flags: Be wary of filling these institutions’ criteria on management and corporate governance just to get the funding. That pressure can lead you into making decisions for your company that may limit your options in the future. Don’t simply grab anyone to beef up the management team or the first available industry sponsor. Make sure everything you do is a good strategic fit.

Next Steps: Once they have the money, it’s up to them to execute. If the thing works, they have to prove to the market’s satisfaction that its players should significantly change their operations. 

Grant Kvemshagen
Manager, Business Development Bank of Canada, Lethbridge

On The Idea: They’re not going to get conventional financing for this type of venture, so the financing package they’ve put together is just about the only way they could go.

Red Flags: Ben Bertrand, the guy with the biggest stake in the company, doesn’t appear to have actual cash equity in the company. He has tons of sweat equity. Clearly, he’s critical in this thing: it’s his idea; he holds the patent. But nothing replaces actual cash commitment or “skin” in the game. That reassures investors that if something starts to go wrong, he won’t just walk.

Next Steps: Even before their financing is in place, the start-up should focus on building the right management team.

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