Every entrepreneur who wants to expand their business abroad is confronted with the same, tough, question: How do you amass enough financing to underwrite all the expenses and capital investment associated with a serious export push?
As most small- and mid-size business owners know, banks rarely give loans to SMEs that need start-up capital for export operations, which means they have to turn to specialized export-financing firms, as well as Export Development Canada (EDC).
But don't overlook the possibility of approaching angel investors, some of whom will invest in companies that need the cash infusion to set up operations in the international arena.
Read: Pitching to an Angel
Gerard Buckley, chairman of Toronto-based Maple Leaf Angels (MLA), says his group tends to partner with companies that are either already exporting or have clear plans to enter markets overseas. Founded in 2007 by several high net-worth investors, MLA has invested $9 million in 22 firms. The group has helped attract an additional $21.5 million in other sources of external financing—credit lines, export insurance, and the like—for these companies, and negotiated four successful exits. Three-quarters of MLA's holdings have significant U.S. exports.
A former member of the Ontario Securities Commissions' SME committee, Buckley says MLA looks for companies that have a clear growth strategy that includes an export component. He recalls a pitch from one business that only wanted to sell its product in the Canadian market; MLA said no. "The big thing is that export sales shouldn't be frowned upon."
Here are four key questions that MLA's angels ask when they're considering an investment:
Is your company using an export-oriented growth plan to position itself for an acquisition? Buckley points out that his investors, as part of their due diligence, will look to see whether there are large active acquirers in specific SME-driven sectors such as cloud-based software services. Companies looking for equity partners, in short, have to show their investors how they'll get their money back down the road.
If you run a business-to-consumer (B2C) firm, how will you roll out your product or service? Many B2C firms, says Buckley, will market test their products in Canada, but fail to do likewise in non-Canadian markets. MLA investors will want to know how what you're offering was received in the places you intend to set up operations.
Have you lined up other sources of export financing? Buckley notes that EDC will provide trade insurance that covers up to 85% of foreign receivables. There are also companies that offer foreign factoring (i.e., firms that will buy an exporter's receivables for a fee and take on the risk of collecting payments from off-shore customers) and letters of credit. If MLA wants to invest in a firm, Buckley says they'll introduce the company to strategic partners that can provide additional funding. (He points out that Canadian angels will offer $500,000 to $1 million; firms that want larger and more structured tranches of venture capital—in the $2 to $10 million range—have to look outside Canada.)
Do the principals of the company understand the legal lay of the land when it comes to exporting? Buckley cites the recently bulked up legislation that makes it illegal for Canadian firms doing business abroad to pay bribes. "They need to be careful not to step in that minefield," he says. "There's no shortage of people who will ask for money to expedite sales processes."