ASSESSING POTENTIAL INVESTEE BUSINESSES
The focus of our activities will be trying to source businesses that are established outside of Canada and try to move those businesses to Canada. In order to qualify, the businesses must meet the following criteria:
a) The business owns a technology.
b) The technology enables a new or unique solution to a particular problem.
c) The technology will provide value to potential customers well beyond the cost of the technology.
d) The market for purchasing the technology is significant.
e) There is a viable strategy for protecting the IP associated with the technology.
Once a suitable company is identified, Canadian International Angel Investors will arrange the following:
f) Carry out due diligence on the company to minimize risk and fully understand the opportunity – see sections 2 and 3 below.
g) Negotiate an appropriate structure for the investment – amount, price, shareholders agreement, etc.
h) An equity investment of at least $75,000 CAD in the business by one or more members of Canadian International Angel Investors;
i) Establishment of the business in Canada. It is possible that it will make good business sense for a particular business to maintain a portion of its operations in the foreign country as well as having its head office in Canada. For example if the company manufactures a product, it may be cost effective for the manufacturing to remain in the foreign country while R&D, sales and marketing, and finance are run from Canada.
j) Immigration under the Startup Visa Program for the key people involved in the business. Key people will vary based on the particular business but can include:
The inventor of the technology;
Key management of the business;
Major owners or shareholders of the business.
Key people will be assessed based on their ongoing contribution to the business once it has moved to Canada. The situation will vary based on each company – there could be between one and five key people for any particular business.
k) Once the business is established in Canada, Canadian International Angel Investors will continue to provide support to the business by assisting the company in becoming established in Canada, working to provide additional sources of investment for the Company, providing management advice and introducing the company to appropriate potential partners (in the broad sense of the word) or collaborators.
2. Factors to consider in assessing potential investee businesses.
The following describes the areas we will look at in assessing the suitability of a potential business for investment:
1. Assessment of the technology. The technology should provide a new and unique solution to a problem experienced by potential customers and should provide value to those customers that greatly exceeds the cost of providing the technology to them. The potential market for the customers should be significant – there needs to be a substantial upside potential to the investment. There must be an avenue for protection of the IP associated with the investment. As well there should be no conflict with existing third party IP. The best way to accomplish this is patents or an assessment of patentability. However, there will be circumstances where this is not possible – e.g. software - and IP protection is accomplished through non-disclosure agreements and continuous improvements to the software that maintain an advantage over competitors.
2. Assessment of the business model associated with the technology. There should be a large delta between the cost to produce the technology and the value it provides to the customer or user of the technology. This allows one to price the technology to the customer on a basis that there is a compelling reason for the customer to pay for the technology (as the value exceeds the cost to the customer) while at the same time allowing the business to realize a healthy margin on the sale of the technology.
3. Access to markets and potential barriers. It will be necessary for the business to have a credible plan to market and sell the technology and understand the nuances of the market and what problems may arise in selling the technology. To provide an example we are familiar with for health software, there is a very long sales cycle when selling health related software. This is mostly because most customers are directly or indirectly funded by Government so there is a lengthy procurement and budget cycle associated with the sale of the software. As well, one of the barriers is privacy legislation that makes it mandatory to have features and processes in place to protect individual health care information. If this problem is not addressed by the software, there can be no sales. Similar industry analysis and understanding will be essential to understanding the viability of any potential business and its underlying technology.
4. Appropriate business plan to commercialize the technology. Technology businesses are subject to many of the same constraints that apply to any business. If one does not pay attention to customers and provide good service to the customer, it will hamper the growth of the company. If the business is not properly financed, the business can run out of cash and fail, regardless of how attractive the technology is. If the business fails to hire good people as it grows and have good HR practices, the business can be severely harmed. Accordingly, we will be looking to assess the overall business plan to try to ensure that all the necessary elements are in place for success – good technology, and good management, and a good plan to put in place the necessary elements for success.
5. Assessment of management of the business. Our experience with growing technology companies is that the skills needed to create a viable technology are often not the same skills needed to actually run and grow a company. Accordingly when assessing a potential company, we will look hard at existing management which hopefully is appropriate for the task of building the business. If the necessary management team is not is place, there will need to be a viable plan to put the necessary management in place.
6. Financial – we will need to look at historical finances. (It is often the case that historical finances are not well documented by early stage companies so there may be some work here to make sure the existing situation is properly understood.) As well, it will be necessary to look at credible projections. Our experience is that the revenue usually takes longer than anticipated. It is also very difficult to predict. The cost side however is very important and should be capable of being assessed reasonably accurately. In many cases, there will be more work required to fully commercialize the technology – a realistic assessment of what needs to be done, how long that will take, and how much it will cost is an essential part of understanding an opportunity. The output of that will be the financing necessary to achieve those objectives as well as an assessment of any gaps that need to be raised in the future. A key necessary attribute will be potential sources of funding available to the business until it can operate profitably.
7. Competition. Hopefully the technology has enough unique features that there are no viable competitors. This will not always be the case – in fact it would be unusual. Accordingly it will be necessary to assess who the competitors are and why the particular business believes it can compete effectively against the competition. Ideally this would relate to one or more unique features of the technology owned by the business that are not available to competitors.
8. Deal structure and valuation. It will be necessary to agree up an appropriate deal structure for investment by our members based on a fair valuation. It will be necessary to ensure the investment is structured to comply with the requirements of the regulations governing the SUV. It is likely that a $75,000 investment will not result in our members controlling the company. Accordingly it will be necessary for there to be certain protections common for minority shareholders. These include:
Restrictions on compensation for other owners working in the business;
Tag-along rights on a takeover
Right to participate in management decisions at the board level, either through a board seat or through a formal advisory role at the board level.
Veto rights may be appropriate over certain major transactions depending on the size of the business and the percentage ownership of our members.
These provisions will be in a shareholders agreement that must be negotiated for each transaction. The sample term sheet published on NACO’s website provides a useful guide to common provisions to be considered for each investment depending on the individual circumstances.
One of the structures for investment that we like in order to minimize downside risk is to use either convertible debt or convertible preferred equity.
3. Due diligence checklist.
The standard NACO due diligence checklist will be used in assessing each potential investment. Given the fact that many potential investee companies will be very early stage and will have been established in foreign countries, it is possible (likely?) that there will be some gaps. However the checklist is important in identifying potential areas of risk and then working on mechanisms to address the risk.
4. How we intend to find appropriate businesses
Canadian International Capital Inc. has been involved in sourcing business immigrants under various Canadian programs for over 25 years. We work primarily through immigration lawyers and consultants who are in the business of assisting people who wish to emigrate from their home country. We have done business with over 100 such consultants and lawyers who operate in over 20 countries. Our relationships with many of these agents are very deep having done extensive work with them for many years. We recognize that there is a paradigm shift for them with respect to the SUV program. We are looking for businesses and technologies that are owned by people who are interested in moving that business to Canada – we are not simply looking for people who wish to immigrate to Canada. This is a much harder task – as evidenced by the relatively limited number of successful applications to date.
We do believe our network of overseas consultants can assist us in sourcing suitable investment opportunities overseas. They are well connected in the countries they work in. One source will be to try to develop relationships with foreign universities and technology institutions. Our expectation is there will be a number of very smart people working in those environments that could have good business ideas that will fit the program and our requirements. We also expect there are communities of technology companies in these foreign countries that would welcome the opportunity to move their business to Canada and develop it further. Our network of agents should be able to assist us in identifying good potential businesses in their local communities.
The businesses we find will likely be at varying stages of development. Some may be at the concept phase of a bright innovator – in which case that would be the only person to apply under the SUV. Some may have a bit more of a team involved as owners and managers of the business. It will be important to identify the key members of the team that should come to Canada for each individual business. The SUV seems to contemplate this by allowing up to five individuals per company.
5. Due Diligence on Individual Applicants.
We understand that each applicant also will have to meet all the technical requirements of the SUV program – eg Language - as specified in the Regulations. This is normal business for us and our overseas agents. We would seek independent documentation proving the key elements of the individuals’ background that are necessary for the SUV program. These documents will be notarized by authorized person in the home country. As well, police clearance certificates and medical clearance from an approved doctor will be obtained as part of vetting the applicant. We have a lot of experience looking at immigration files and often there are discrepancies that require further documentation or clarification as part of the process.