Starting a new business can be a humbling experience. Often startup founders have to begin at zero, relinquish control and admit that despite their title or industry experience, they are not the expert when it comes to scaling up. 

However, emerging markets are so attractive to investors due to their potential return on investment. A strong influx of talent is flocking to emerging tech sectors such as Alberta and Saskatchewan, creating what can be seen as ‘the perfect storm’ for tech-focused startups.

A recent technology report published by Startup Genome named Calgary among the world’s top 60 emerging startup ecosystems – largely credited to sub-sector strengths including cleantech, fintech and ag-tech – while last year 2022 YYC’s tech market comprised more than 50,000 tech jobs, 6.9 per cent of total employment across the city, according to GeekWire.

With this boom in a tech-focused workforce also comes a boom of innovation and VC capital. Combine all this together, and Alberta has created a powerful cocktail for outsized investment returns.

Alberta is a great example of why investing in entrepreneurs within emerging markets is so attractive, with factors such as a growing technology-focused workforce and robust funding from the government contributing to the growth the province is seeing in the VC space.

In August the federal government announced plans to funnell $6.1-million into Calgary’s tech sector – with plans to create an estimated 1,000 jobs across the city – and technology investors and VCs looking to the next unicorn understand it is much more likely to happen in an emerging market like that of the Canadian Prairies.

We’ve compiled a handy list of talking points for any potential investor to sink their teeth into:

Market size 

Total Addressable Market (also known as TAM) defines how much the market is worth that your business is targeting.

Investors are looking for investments with outsized returns, and businesses operating in large total addressable markets offer this opportunity. Potential investors will want to see what market you’re targeting and understand how this market will facilitate exponential growth of your company.

However if there’s a large market, how is your business going to pull the desired customers away from products and services they may already be using?

An innovative product with a growing moat

What makes your product different from what is currently offered by competitors? Who is your audience, and what pain points does your business address? These are some of the first questions you can expect to hear from venture capitalists assessing your business.

Innovation can, at times, be a loosely defined buzzword that is thrown around in business presentations to ‘wow’ the audience; but putting into words exactly how your product is a unique innovator is much harder.

Specifically, potential investors are looking for early-stage startups which clearly define what separates their business from others – how they are building a moat or competitive advantage that competitors won’t be able to easily replicate.

Quality leadership

Especially in the early stages (where you might not have a functioning prototype let alone actual revenue), investors are putting their money into your idea; namely, planning around execution and business strategy.  

They are investing in you, the founder. Your business savvy, your drive, your experience, your due diligence. Have you demonstrated that you are willing to put your time and heart as well as potentially your own money (bootstrapped) into your business?

This is why it’s important to show investors you have the vision to bring a business idea to the final product.

Being a founder of a company is definitely not easy, and you will be regularly required to make difficult decisions and lead your staff through challenging times. Being a strong leader is a necessity for building a company from the ground up and investors will want to see you have the passion, coachability, and commitment that is needed to build a company.

However, as you begin to initiate talks with a potential investor – whether it’s a VC firm or single early-stage seed round investor – they will want to see more detailed plans on how you plan to execute your vision.

Having the technical and STEM talent on board (regardless of whether it’s the founder or team) is important, we’re talking tech startups here! So a scientist, engineer, and a coder or two could be imperative in executing and running your business vision.

B2B or B2C?

Most companies can be separated into two different groups, with each group having their own nuances and things to consider when understanding what potential investors in Alberta are looking for when deciding where they will invest their money. Check out our blog post on the differences between these two different groups here.

Financials

Financial statements are one of the most important things you will bring when presenting your business to potential investors. Your numbers will be highly scrutinized, as they will provide a metaphorical looking glass into the future of your business. Find out more about pro-forma statements, financial essentials and what investors will expect from your financial statement here.

Market Analysis

As a founder of a company, you’re expected to have a high level of understanding surrounding the market your business will operate in.

Undoubtedly your company will have competition or alternatives to your new product, and investors will want to see you have performed in-depth market research to understand where your competitors fall short, why there is a need for your business, and how your company will stand apart from the rest.

Make sure to do your due diligence in analyzing the companies offering services similar to your own, and just as importantly, make sure you have researched your target customer. Investors will also want to see you understand what your ideal customer is looking for and how you intend on making them aware of the value of your product or technology.

Business Experience

When venture capitalists consider investing in a startup, they typically want a leader who has experience. This experience usually comes from one of three different places:

The first is industry experience. If your startup is focused on building logistics software for the trucking industry, investors will appreciate it if you’ve spent at least part of your career directly involved with the trucking industry. This shows you understand the problem your company is working to solve and have an inside view as to why your company’s solution is worth an investment.

The second type is entrepreneurial experience. Building a company from the ground-up is a skill most don’t possess. Investors will want to see your leadership style, as well as any direct experience you bring in taking a business idea and turning it into a fully functioning company.

Investors will also be judging you on your drive, work ethic, charisma, and personality. When presenting your business to potential investors be sure to not just say, but show, how much blood, sweat, and tears you have put into making the vision you have for your business come true.

Remember, as an early-stage startup with little to no success yet, investors are investing more in you as the founder, than the actual company itself.

Make sure to give them a reason to invest!

Putting Yourself Out There

Ask any entrepreneur who pitched their business to a round table of VC firms or angel investors and they will tell you it is a much different atmosphere compared to relying on friends and family. Professional investors don’t know you and don’t owe you anything. This is business, and sometimes, business can be harsh.

However, as long as you come prepared and can articulate the value your business offers and the potential it holds, the chances of you finding the capital you need greatly increases. For Metiquity Ventures this means emerging market technology based business.

A lot is expected of you as a founder, and that may seem overwhelming, but don’t worry. Behind all the financial statements and analysis lies the underlying truth: if you can clearly articulate to investors the potential your company has, and show you are the leader to execute on this potential, the right investors will believe in your vision as much as you do.

It’s not just about trying to impress investors, it’s also about finding the investors that impress you.

For an investor to take a startup seriously, it’s vital for a founder to have their financial statements at the ready. Many early-stage businesses don’t have an operating history or any source of revenue yet, which can make creating an income statement or statement of cash flows rather difficult.

Worry not: investors will still expect financial statements. However, they will be what’s called pro-forma.

These pro-forma statements are a fancy way of describing projections. As the business doesn’t have any real source of income, founders are expected to create projections for the next one, three and five years. These projections will explain to investors important elements such as how much revenue the company intends to bring in, how their expenses will grow and how their margins will change as they expand.

There are three important financial statements investors will expect to see from any bright-eyed business person: 

• The Income Statement: The income statement shows how much revenue a founder will accomplish in a certain time frame, as well as their expenses. This financial statement will be highly scrutinised by potential investors as it will usually be the first statement they look at. It will also tell them when a budding business is expected to turn a profit, which is (of course) never to be underestimated.
• The Balance Sheet: The balance sheet describes a company’s assets and liabilities. Things like any intellectual property or technology a company owns can be listed here, as well as any debt or short-term liabilities investors should be aware of.
• Statement of Cash Flows: This financial statement sheds light on the flow of cash in and out of a business, breaking down your cash flow into operations, financing, and investing activities. The statement of cash flows will show investors a high-level overview of the influx/outflow of money for various purposes.

Financial statements are one of the most important things a founder will bring when presenting their business to potential investors. As well as being assessed with a fine-toothed comb, they will provide a metaphorical looking glass into the future of the business.

For this reason, entrepreneurs should come prepared with realistic projections and an arsenal of information to defend their assumed growth rate, alongside other important financial metrics.

Creating an income statement may be difficult, but it’s sure to be worth the hours of sweat and tears when the right partner comes along.

Figuring out what potential investors are looking for from startups in emerging markets such as Alberta can be worlds apart from what they’re expecting in more established hotspots such as Silicon Valley, Stockholm or even Toronto.

For example, In July Silicon Valley-based software company Teknol announced plans to move its engineering headquarters to YYC, a $12.5-million investment which is predicted to create 125 jobs over the next three years, with the company’s CEO hailing Cowtown for the “positive buzz” of its tech sector.

This year’s annual Tech Talent report also found Calgary to be Canada’s second largest tech hub (trailing behind Vancouver) with job growth in the sector increasing by a massive 61 per-cent.

Most companies, however, can be separated into two different groups with unique factors driving their investability from a VC perspective: 

Business to Business (B2B)

B2B simply means the business will focus on selling its product, service, or technology to other businesses. A company dedicating itself to this strategy needs to make sure potential investors understand why they have chosen to target other businesses (as compared to individual consumers) and the benefits of doing so.

A B2B sales strategy allows for larger purchase orders or broad installations of technology, as other businesses usually have significant buying power (much more than the average consumer), as well as a willingness to sign long-term contracts.

When preparing to pitch a B2B business to potential investors, founders should make sure to highlight the advantages of targeting other businesses and clearly explain why this is the strategy that provides the largest avenue for further growth for their company.

Business to Consumer (B2C)

Where B2B’s target other businesses, B2C’s target the retail consumer. By going direct to consumer, companies are targeting an audience with much lower buying power when compared to other businesses. However, the size of the potential market is usually much larger.

Typically, B2C businesses benefit from higher gross margins, as well as a much wider reach in terms of who they can market their product/technology to.

As an entrepreneur begins to think about presenting their B2C business to venture capitalists they should remember to articulate the breadth of the market, high margins and (again) why specifically this is the best decision for their company.

As an entrepreneur sets off on their journey from humble beginnings to startup success, they will inevitably need financial support to fund their business. This funding may come from a variety of different sources, such as their own bank accounts, friends and family, business loans, grants, or private investment. 

So how does a promising new entrepreneur get a handle on how and when to seek out sector and investor help? Here’s a guide to some of the most common avenues founders will encounter when navigating the weird and wonderful world of startup investment.

Bootstrapping

A founder who can start their company with little outside investment is said to have ‘bootstrapped’ their startup. They may have little to no assets, but they get things up and running. Later in the evolution process the business and founder may need to scale up or go public to attract investment, but for now they’ve managed to get off the ground without any external investments.

Friends and Family

When a business is first starting out – and is perhaps better described as an ‘idea’ than a fully-functioning organization – capital is an essential asset in funding market research, developing prototypes and testing their business hypothesis. The journey for this capital among many entrepreneurs begins at home, with friends and family. 

At this point, the company would usually not have any sales or customers. The founders are simply looking for capital to explore their business idea to see if their concept has further potential. This stage of VC is also called pre-seed investment, as this capital raise is fairly unofficial with little (or no) paperwork completed. 

In short, this is usually an entrepreneur’s first try at raising capital for their business if they don’t have enough money to ‘bootstrap’ the business and lack the information and business proof-of-concept to look to larger investors. 

However not everyone is comfortable bringing their nearest and dearest into their business plans. 

Angel Investors

Angel investors are typically individuals or family offices who are looking to provide capital to startups they believe have potential. Angel investors can range from a single person to official angel groups who invest across multiple businesses. 

These business angels tend to be wealthy individuals who are entrepreneurial in nature and want to support other entrepreneurs while also seeking a high return on investment. Alongside capital, it’s important for founders to consider what expertise and history of success angel investors bring to the table before offering them a seat at the table.

While securing capital from friends and family is considered pre-seed funding, working with an angel investor (or anyone else who gains equity in the business) becomes the first round of fundraising – otherwise known as “seed funding”. Angel investors will look for a stake (or equity) in the company in exchange for their investment and may or may not be interested in actively assisting in growing the company. Exchanging shares of a company for capital is an official transaction and is considered to be seed funding. 

Lead investors or early stage investors are a form of angel investor; however, early seed rounds are less about one individual who might invest in a business. Instead, they are based on a fund and due-diligence process around private investment. 

Family Office

Family offices are private wealth management advisory firms dedicated to serving high net worth individuals or families. They generally fall under the label of LP (limited partners) who invest in larger VCs or funds. Traditionally, family offices are categorized into two separate types – single-family offices (SFOs) and multi-family offices (MFOs)

Single-family offices serve only one family and are responsible for managing their finances. This includes allocating capital into various investment opportunities such as venture capitalism, along with functions such as succession planning, lifestyle management, risk management, filing taxes, and more.  

Multi-family offices serve similar functions with one important distinction: where single family offices only serve one family, MFOs can be thought of as more traditional private wealth management firms who serve multiple different clients. This allows them to enjoy economies of scale by pooling their clients’ resources together when appropriate. 

The value behind family offices is their ability to manage the entire financial umbrella of a high-net-worth family. Functions like estate planning and taxes are typically done by separate institutions, and for families with extreme wealth these processes can become quite complex. Family offices enable wealthy families to have all financial tasks handled by a single entity, simplifying the process and ensuring their capital resources are managed efficiently.  

Venture Capital Firms (VC)

Venture capital firms can be similar in function to angel investors, yet differ in their expertise and access to resources. These VC firms are most often led by former entrepreneurs who exited their own businesses successfully. They are experts in evaluating and analyzing the potential of other startups, and typically have teams of investment analysts to help them sift through research reports. This makes it easier for them to determine where their investment capital is best allocated. 

VC firms draw their funding from pensions, family offices, and other institutions. For this reason, they have a substantial amount of capital to invest in prospective startups. Many VC firms will focus on companies who have moved past the prototype stage and are looking to expand operations and grow their customer base. However, some firms focus on the early-stage startups where founders are still testing their business hypothesis and researching their proposed market opportunity. 

Just like angel investors, VC firms will gain a portion of ownership in an entrepreneur’s business in exchange for capital, and take a hands-off or hands-on role in assisting the entrepreneur in building their company. 

A common question is how much equity is a VC firm likely to want in exchange for the capital a founder needs? This is a complex question that unfortunately does not have a simple answer. 

The important thing to remember is that VC firms operate with precision and intention. When determining how much equity they are looking to gain in exchange for providing a business with capital, they will usually resort to some sort of valuation model. One such model called a discounted cash flow (DCF) attempts to forecast how much revenue a company will achieve in the future and then work backwards to what a company is worth today. VC firms will then take into consideration other important factors such as risk tolerance and the total return they want to gain from this investment. 

Upon understanding what a company is worth, what sort of return they want to achieve, and what their risk tolerance is, a VC firm can begin to determine the equity required to align with their strategy.

As an example, let’s say a founder wants to raise $500,000. A VC firm, through using a DCF model, values their company at $23 million in five year’s time. Assuming they are looking for a return of 9-10 times their initial investment, that would put the startup’s worth at $2.5 million today. This means that for an investment of $500,000 the founder would give 20% of the company’s equity to the VC firm. Check out this handy startup valuation calculator to understand the relationship between the capital entrepreneurs are looking to raise, the value of a company, and the equity stake a founder would give to a potential investor.

The above is an example of one possible methodology a VC firm may use to begin to value a company and determine how much equity they wish to receive. In reality, several factors – including operating history and whether there is a developed prototype – will come into play when negotiating with a VC firm on the investment amount and equity stake.

The most important thing to remember when beginning conversations with a VC firm is to work with them and not against them. Founders should come prepared with a clear outline of the future potential of their business, as well as projected revenue/earnings. This will help to navigate preliminary negotiations and assist in determining what percentage of equity an entrepreneur is willing to give in exchange for capital.