If you’re looking to fundraise for a high-potential startup idea in Canada, headlines from Silicon Valley about a new idea getting $1 million in funding from angels can feel encouraging. Don’t fall for it.
Unfortunately, Canada is markedly different from the United States when it comes to the early-stage fundraising landscape. If you want to avoid this ‘early stage trap,’ here’s how you need to approach fundraising before you have traction that will excite bigger VCs.
Recognize the early stage trap
In the US, a ‘friends, family, and angel’ round can easily top over $1 million for a high-potential idea with angels committing hundreds of thousands each. This is a function of the maturity of the investment ecosystem in the US combined with the simple fact that there are more wealthy people in the US. Angels simply don’t write checks that big in Canada.
What’s worse, though, is the terms. Despite smaller checks, Canadian angels tend to be more risk averse. This means the deal process takes more time and often requires stricter terms and oversight than investment from US angels.
So if an angel round only comes up with $50,000 to $150,000 (and on strict terms), you may feel you need to raise what we call “in between amounts” – additional rounds between $250,000 and $600,000 at a time.
The problem with in-between rounds is not the amount, but Canadian investor behavior. Typically, investors look at two things: if the average check size they write fits in your round and who else is investing. Too many investors on the cap table gets messy, but very few investors like to be the only one investing in a round.
The average check size from a Canadian angel is in the tens of thousands, meaning you’d need a dozen to fill a $500,000 round. While some write bigger checks in the $50,000 - $150,000 range, such as Alexander Norman’s N49P Syndicate, this size is not yet common enough in Canada to be a reliable strategy. Seed stage VCs, on the other hand, prefer to be writing multi-hundred thousand dollar checks or even a million dollars per check, meaning an ‘in-between amount’ is too small for them and you’re more likely to get turned down.
The Canadian raising process
Instead of trying to mimic American fundraising strategies in Canada, I recommend a process that acknowledges the limitations of the Canadian market but still focuses on your business.
The first step is to focus hard on your friends, family, and angel round, but adjust your expectations. Aim for about $200,000 - $250,000 from this round on founder-friendly terms such as SAFEs.
It may require a bit more time up front, but you can hit this number without much dilution by combining:
From there, focus exclusively on building traction with accelerating growth to hit what I’ve seen as a good base to raise a proper seed round of $1 million or more:
- $25,000 monthly recurring revenue (MRR)
- 10 percent month-over-month growth rate
If you’re growing slower, you may need a higher MRR base to raise successfully. If you’re growing faster, you may want to consider raising earlier. It’s important to note these are rules of thumb and each business will be different.
Getting to these traction numbers can be done in one of two ways:
- Operate as lean as possible for as long as you need to generate growth.
- Join an accelerator to fill some knowledge gaps and speed up customer acquisition.
If you’re looking at accelerators, identify if they can provide you with relevant connections to new customers from their network, specific education for your industry and business type, and quality funding avenues for emergency capital and later rounds.
Ask for advice, get money twice?
During this process, networking with investors is a key part of being the founder of a venture-scale tech startup. However, there’s one last element to the early stage trap you must avoid: talking to the right people at the wrong time.
Don’t ask for advice from stage-appropriate VCs until you’re good enough. Every interaction with them is a pitch.
Instead, run your pitch by founders who have successfully raised a seed round or later-stage VCs that you can get warm intros to. The former will have unique insight about what specific investors like or don’t, while the latter can give you honest advice since you both know that you won’t get a check out of that meeting.
While it’s not an ideal scenario, it’s the current reality that Canadian founders live in. As more money flows, this may change. Regardless, don’t fall into the trap of spending your time and social capital to raise a small amount. There are ways around it, and there’s no point in diluting 25 percent or more of your company before you’ve done any real fundraising.
Raise from US Investors
Another way around this Canadian reality is simply raising from US investors. Since they have deeper pockets and can benefit from the exchange rate, these investors could be your best bet. Have a look at your network and see which VCs you’re connected to in the States and ask for warm intros to them. Joining a program like Forum Ventures that operates in both countries will also give you access to hundreds of US investors you wouldn’t otherwise have.
If you want to go this route, you need to make sure you’re aware of all of the nuances and differences between the US and Canada before you meet with any VCs down there – like currency, language, and approach. This could have a big impact on your changes of securing funding. In our latest Fundraising Playbook: Raising Your Seed Round for First Time Founders, I bring a Canadian perspective to each section that helps Canadian founders talk to US investors. Check it out.
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