Innovation, Investment, Impact: The Angel Investing Journey with Michael Badham

Innovation, Investment, Impact: The Angel Investing Journey with Michael Badham

Kelly Kennedy: Welcome to episode 116 of the business development podcast. And on today's expert guest interview, we are bringing you the managing director of the Georgian angel network, Michael Badham. Michael is going to teach us all about what angel investors are looking for and what ideal partnerships are made of.

Stick with us. You are not going to want to miss. This episode,

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Let's do it. Welcome to Capital Business Development. To the business development podcast, and now your expert host, Kelly Kennedy.

Kelly Kennedy: Hello, welcome to episode 116 of the business development podcast. And on today's expert guest interview, man, do we have a show for you today? We're chatting with Michael Badham.

Michael Badham is a distinguished senior executive with remarkable track records spanning over four decades, during which he has excelled in steering transactions across an extensive array of sectors within Canada. With a background in computer science, statistics, and financial analysis from the University of Waterloo, Badham's journey has been marked.

by key roles at prestigious firms, including partnerships at Deloitte, CCFL Advisory, Nesbitt Thompson, Power Financial Capital, and KPMG. His expertise encompasses a wide range of areas, including corporate finance, business and equity valuations, strategic planning, due diligence, and more. M and a restructuring, executive training and lecturing at Georgian College.

Currently, Michael wears multiple hats, reflecting his commitment to fostering innovation and education as the part time managing director of the Georgian Angel Network. He plays a pivotal role in guiding investments and facilitating the growth of businesses with transformative innovations.

Simultaneously, as the part time executive director at the International Institute of Business Valuers, he spearheads efforts to deliver high quality professional business valuation. Education globally. Additionally, as a partner with Strategy Tools, Badham contributes to empowering organizations globally through strategic facilitation workshops utilizing modern tools and techniques.

A founding shareholder of Hardwood Ski and Bike Inc., Michael Badham's journey exemplifies a fusion of academic brilliance, extensive corporate experience, and a profound commitment to shaping the future of business and education. As he continues to make meaningful contributions to various sectors, Michael Badham stands as a beacon of leadership and expertise, leaving an enduring impact on the Canadian business landscape.

Michael, it's an absolute honor to have you on the business development podcast.

Michael Badham: Thank you so much, Kelly. I'm not sure my mother could do as well as an introduction is that. Oh my gosh. Thank you so much.

Kelly Kennedy: Congratulations on an absolutely stunning career.

Michael Badham: Well, you know, I, I when I, you reflected back on the University of Waterloo and when I started in, in statistics and computers and, and mathematics and I, I, I kind of left high school thinking, God, it's either reading, writing, arithmetic, and I, and I chose arithmetic, you know but I, I think as most people know, writing becomes really important.

And of course reading is, is still one of those skills that we still need to, to be able to learn what we do. So yeah.

Kelly Kennedy: Absolutely. Absolutely. Yeah. And you know, obviously we had our first our first meeting ahead of this and we just totally hit it off. I absolutely love that conversation with you.

And when we kind of delved into investing, I was like, Michael, this is something that we have not touched on yet in over a hundred episodes of the business development podcast, we've, we've dealt with people that do startups. We've dealt with mentors, but we have not touched on the investment side. And who better than you to do that?

And then obviously there's some other things that we talked about as well with regards to simulation, which you guys are working on. That's super, super exciting. And I think will be the future for a lot of these startups in order to essentially test their ideas and learn ahead of the need. But what I would love to do before we get into that today is just if you could take us to the beginning and take us down your journey that led you on this path.

Michael Badham: Well, as you mentioned, I started my career with with KPMG in 1979, having graduated from the University of Waterloo and was immediately funneled into the restructuring group because 1980 was a recession for us. And it was at a time when it was Kind of all hands on deck. And I, I had some tremendous experience reorganizing and restructuring and liquidating and, and building various small businesses as a result of loan foreclosures and working for the banks.

And in, in one of my sort of more interesting stories, I, I, as a very young person, given. Kind of the reigns of a small jewelry company that had three divisions. And over the course of two years, I liquidated one. I built one up well enough to sell and continue to operate one until it had repaid the loans and, and at which time we sold it.

So that kind of early experience in dealing with. The small businesses really set me into a an interest of how do, how do we continue to build small businesses in Canada? I mean, there are the public markets, but the total revenues of public market companies only represent about half of the revenues of our North American economy.

And the other half are in small business. And we always say that small business is the backbone of the economy. And I just became really interested in how small businesses are financed. And, and that is really a struggle in Canada. And so that became kind of a focus throughout, throughout my career.

And I, I moved from there. I became a partner at KPMG from there. I moved to financial power capital corp, which was a small private equity group, where we looked at making equity investments. And from there I moved on to an investment banking ultimately becoming a senior partner at Deloitte and, and ran Their corporate finance and M& A practice for many years.

When we had the financial crisis in 2009, I left Deloitte and it was also the time in which the iPad was coming out. And I just decided to go on a journey of technology and iPads and Canada was really transitioning from a resource economy to a startup economy. And again, I began to think, well, capital, particularly for startups is the fuel that gets these businesses going, that helps entrepreneurs take their, their idea or their development from innovation to commercialization.

And so I started working with all kinds of small businesses in a whole range of sectors. And in 20. 17 took over the managing directorship of the Georgian Angel Network, which was one of 16 angel groups in Southern Ontario and a number of angel groups all across Canada. And these groups all, we all collectively work to connect.

And it's really, it's, it's interesting that it's my career has collided with this because this is about the most fun that I can have. And, you know, basically I look at 20 things a month, I have to screen them down to to the two that I think are of most interest to our investors. And they pitched to the investors in an investor meeting.

And from there we follow up as to who's interested. And, and, and we go, you know, eight investor meetings a year. Most of the groups in Southern Ontario are supported by the federal government for admin costs. We charge membership fees to our members, of course. And yeah, you know, so over the George and Angel Network was started in 2012.

And I took over in 2017, as I said, but our members are 30, on average, 30 active members over the last 10 years. Invested in over 75 companies and have put out just over 25 million. So that's money out of people's pockets directly into the economy. And you know, we've seen some successes, we've seen a lot of failures, but it's been, it's, it's absolutely fascinating as to what.

The young people are doing today in our economy in terms of transitioning to digital platforms and new inventions and new innovations across all industries, all spectrums. It's really fascinating.

Kelly Kennedy: Yeah, that is, that's amazing. First off and sounds, it does sound super fun actually from a job standpoint.

How how did you end up, you know, the managing director?

Michael Badham: Well, it's a small organization, right? So it was an interview process. It was actually the managing director before me was a colleague of mine, Sandy Robertson, and You know, he reached out to me and said he would be retiring and there was a search committee on and I, I had been teaching corporate finance at Georgian college.

I'm based in, in Barrie, Ontario. And so a few people knew me and I went through the interview process and and, and, and landed the, the, the position. And, and it's an interesting because, you know, it is a combination of education and, and investment. You know, we do a lot of, of workshops helping people who are interested in making angel investments, learn how to do it you know, to, to the best of their abilities.

And as you know we, when we spoke previously, you know, angel investing, you need a portfolio approach to it. You're going to make. You know, 10 to 20 investments over a, a five year, 10 year period. And, you know, on average, and it doesn't actually matter when you look at the statistics, the very best angel investors probably only have a track record of two or three out of 10 being successful.

And, and so there's some interesting strategies that people use. To, to find good opportunities, to screen them, to do the due diligence for them, and to actually then invest in them and then help them grow and, and also apply a portfolio strategy to their investments to be as diversified as possible to give them the best chance of success.

Kelly Kennedy: It sounds incredibly challenging to pick a winner.

Michael Badham: Well, you know, you can always just sit back and do the spray and pray model, right? And there's nothing wrong with that. You just say, you know what, these are the, the, the few that I like, I like the people, I like the, the idea, I, I, I get it and I'll just invest.

But it turns out that the, the, the most successful investments are those in which you, you add a bit of your knowledge, a bit of your connections, you can make good introductions, you can help the founders take their businesses to the, to the next level.

Kelly Kennedy: Yeah, no, for sure. For sure. And it does seem like something like that does take a lot of research.

I imagine that when you're vetting these companies, there's a lot of onus on you to to really do your diligence and make sure that it's done perfectly by the rest of the group, I would imagine. Can you explain to me what that process is like for you to go from, you know, Or first, maybe what are the criteria that you would start with?

Michael Badham: So I do have a selection committee that, that I work with and all the angel groups are different. Every, everybody does it slightly differently. In the case of George and Angel Network, the selection committee is, is, has an advisory role with me. They help me but they put the onus on me to actually make the picks.

In other organizations there's a more active involvement by the members and the, the managing director has more of an administrative role than a, than a decision making role. But I, I apply what I call the seven T's in order to clear the the, the first hurdle where I talk about team and who, and who, who will.

You know, who are these people? What are their backgrounds? Why are they passionate about this? I talk about traction in the marketplace. What are the level of sales that they have? And, and are their sales growing and, and how are they obtaining that traction? We talk about, I use the T called terrain for the overall size of the market.

You know, we're not good at small niche market businesses. We want to see businesses that have really large. Total addressable markets or TAMs with the very large, you know, specifically addressable markets that they can get after right away. And when we, we generally, there's a lot of research.

So we generally think about total addressable markets in excess of a billion dollars. And, and in fact, really the benchmark is, is. 10 billion so that if you even get just 1 percent of that market you know, you'll have a sizable business and therefore a good opportunity for investors you know, other teas, we call the terms of the deal.

So we want to make sure that the, the deal basically fits the angel investing seed or precede stage model. We've gone through a period the last couple of years where valuations have gone down. And for the first Part of 2023, it was if the founder community in Canada, hasn't got the memo that, that values were down.

And so I could, I could screen a company out just by saying, so what kind of a valuation are you offering investors for today? You know, and they would give me a number that was just way too large. I said, you know what? I don't really even need to know much about your business. You're, you're not, Fitting our mold right now, right?

Other parts of terms have to do with a focus that we have at Georgian Angel Network in climate tech and in B2B transformational opportunities. We don't do very well on the B2C consumer products, although we have seen a number of them, which have been sort of interesting from, from golf bags with magnetic.

Plates embedded in them so that your magnetic phones and other devices or range finders can just snap onto the bag very, very conveniently. To a Strava like the app that tracks you for your sailing. So if you think about, you know, Strava for running or Or cycling here's a device that will track for, for sailing.

And so we do from time to time, look at consumer price, but most of our products are B2B type innovations. And then thirdly, we look at the head health tech med tech space. And recently we've been collaborating with. The RVH, a large hospital in our region, which is building an innovation center to to help promote the head health tech med tech innovations that they're that they're looking at.

So again, screening within that, there are some, you know, oddly funny screening, like you have to be able to meet. Attending a meeting, right? I can't schedule our member. Our, our meeting date is fixed. So it's kind of funny. I can say, are you available on, you know, X date? And if they're not available, there's no really point in having the conversation, you know, it's kind of funny that way.

So, and then it's just a question of going down, you know, deeper into each of those areas and making sure that, that they have All of the, the documents in a way that I can send them to our members easily, that they've got a data room set up, that they've got a one pager, that they've got a presentation that, you know, will, will cover all of the key issues within 20 minutes.

Our format for our meetings is we do 20 minutes of presentation, 20 minutes of Q and a, and then we go in cameras, a membership group for 15 or so minutes. And then we invite the founder back for some followup questions. So they have to be able to fit that. That mold but yeah, and then we're, you know, again, I could go through some of the things we've been looking at.

We've done some water testing equipment that is really innovative for a company out of Edmonton, actually, that we invested in a couple of years ago. We're currently looking at some immersive theater type technologies. You're, you're. Your, your listeners are probably aware of the sphere in Vegas.

There are all sorts of immersive light theaters that are being built all around the world. And these these theaters or or locations will need content. They'll need action. If 3d light show content. So we're, we're currently looking at investing in a company that produces it. You know, there are, there are Emmy award winning producers and they produce this kind of entertaining immersive experience.

So we're, we're currently looking at that as well. So you can see the whole range from, you know, and then, then the medical devices we've looked at some. At our annual winter summit, we looked at a device that you would wear on your hand that would, if you had some kind of tremor in your hand as a result of say Parkinson's and you were unable to to hold a cup of water without spilling it on yourself, here's a wrist band that you wear that uses the same kind of anti tremor technology that they use on buildings in earthquake zones, where the device reads the tremor, measures the tremor, and then issues a tremor in exactly the opposite cycle to, to prevent your hand from shaking.

And, and it's absolutely incredible to wear this because you try and shake your hand and it doesn't shake. And it won't shake like it, the, the wristband prevents it from shaking. So truly remarkable innovations that are out there that we, we, we look at. So.

Kelly Kennedy: I was going to say, I'm a little jealous because you guys get to see tech so far ahead of the rest of us that you have a pulse on what the future is way ahead of the consumer public.

Michael Badham: My favorite line at at, at investor meetings is, and now for something completely different, . Yeah, absolutely.

Kelly Kennedy: It is amazing. It is amazing and super exciting. And you know, I guess one of the questions that I have is, we probably have a lot of founders listening to this who just don't really understand.

Yet, how, how investment works. And I know we have a lot of listeners because, you know, I mean, I'm one of them. We had this conversation. We're like, teach me, Michael, how does this, how does this world work? Because unless you're a part of it, I think it can be really hard to understand. And one of my goals with the business development podcast has been to have Edmonton Unlimited come on, Alberta Innovates come on, and really just Educate people about how the investment ecosystem works within Canada.

But this is a big missing side. And like I said, I'm really excited to have you on today to be able to really explain to our listeners what are the different types of financing? You know, what is angel investing versus venture capital? What are the seeding stages? If you could maybe just run us through, you know, essentially a one oh one on on tech investment.

Michael Badham: Yeah, sure. But let me also say that one of my screening questions is, is are you as a founder team involved in some kind of accelerator or incubator in Canada? Because the startup community all across Canada and, you know, in the Maritimes in Quebec, Ontario and, and I was recently in Alberta and I know the There is all kinds of really interesting activity in Calgary and Edmonton that are emerging, and there's certainly in Vancouver.

The, so these accelerators or incubators are great places for founders to go and learn, register in their program and start and start learning about it. But if you think about the life cycle of a startup business, you, you're a founder, you've gotten an idea. And you're going to go first to your family and friends.

And you're going to say, I've got this idea. I'm, I'm doing it as kind of a part time gig right now. But I've got a couple of partners and you're going to do it, you know, all through the night as a, as a side hack. You're going to build, you're going to find some low cost sources of either the materials or the designs or you're going to, you know, get some software developers to work with you and you're going to basically build the software and the hardware and you're going to do it at nights in, in your garage basically and you're going to bump along for a couple of years.

And, And then you're going to get to a stage where you have kind of a minimally viable product or an MVP. And at this point, you're going to say, now I need to be able to spend some money on getting something that's a little more than, you know, scotch tape and band aids and holding this thing together.

And you're going to raise what we call a pre seed And that might be from a couple of friends. It might be from an incubator or accelerator that you sign up with that says, look, if, if you get accepted or enrolled in our program, we'll invest a little bit of cash to get you to the next level. You want to use all of that cash.

on your product. You don't want to spend money on on lawyers and accountants and I. P. U. You basically, you know, keep that, you know, together as best as you can. But you try and get your product into a place where you can start working on it. product market fit. What are your customer? What feedback are you getting from your customers?

And you go on a very rough journey to achieve what we call product market fit. You're going to pivot your product. You're going to take features off it. You're going to add new features, but you're basically soliciting feedback from your target customer. And when you get Product market fit when you really can see that if I could make more of these, if I could offer my software, you know, if I could get this into customer's hands, they would pay for it.

As soon as you get to that stage, you're ready for angel investment. And a typical angel round of financing is somewhere between 500, 000 and a million and a half dollars. And you're going to give up. Probably 20 percent of the equity for, for that amount of money. And, you know, it'll be less if you're raising 500 and it'll be more if you're, you know, raising a million and a half dollars.

And it's interesting because everybody uses the phrase pre money valuation. And it's not really a valuation of the company because we all know that. Probably the true fair market value as defined is probably close to zero. You may have a little bit of kicking around in some value, but what it really represents is sharing the value between the founder and their sweat equity.

And the investors and their money, and it's that really interesting debate around which is worth more, the money or or the sweat equity and the idea and the design. And the answer is you need both because the investors aren't going to work on this. They're only going to be investors and the founders really need money to get it to the next level.

The 80 20 split at the angel investment stage. And I'm just being very broad because it can be much, much less than that. And, and, and sometimes it can be a little bit more, but the split is really based on how many rounds of financing do you think you will need going forward? And so when we talk about a financial plan, it's not just a budget of revenues, less expenses, but it's also a development budget.

So if I were to actually get this. innovation into the market and market it, how many tens or hundreds of millions of dollars will I need to get this product into the market? And therefore you, you sort of lay out what your capital raising strategy will be, you know, 10 years into the future. And what we look for as angel investors is to make sure that the founder doesn't get so diluted By the venture capital rounds going forward, that there's nothing left for them at the end of the day.

And that's oddly enough, if you think it's hard at the beginning, it gets really hard later on. And you just don't want the founders throwing up their hands and going, I can't do this anymore. Like I'm just going to sell. Yeah. And, and it's because we drive too hard a deal at the beginning that founders just throw up their hands and say, well, just let me sell it to Google and I'm out of here.

And we often complain, why are, you know, why are so many founders selling their businesses to the U. S. companies? And it's because we were a little greedy at the beginning and we should have been a little bit more jealous and we could have kept it here. And, you know, there's a whole policy discussion we can have around that.

And the other thing we view angel investing as a bit like a relay race where we take the baton from family and friends and we pass it on to early stage VCs. And so once you've got market traction, once you've done that, that angel round VC, venture capital companies are quite interested in taking you, scaling you up to the next level.

But we're all, I'm always aware of what VCs are looking for. And again, part of my screening process is. To go to a couple of my close VC relationships and say, if we put a million dollars into this company and they hit these following milestones in the next year, is this something that you would look at?

And if they say yes, then it really gives us the opportunity to pass that, that baton on to the next level. I see. Once, once a company has got that VC round of financing, then they're well on their way. They may pivot a little bit. They may refocus some of their product market fit, but they're in growth stage now, and when they're in growth stage, they might do multiple rounds of VC financing, series A, series B, series C, and at some point they're, they're going to either go with a strategic partner, they're going to go to a private equity fund, or ultimately they may be part, become part of a public company, either on their own or.

being bought by a large public company. So that's kind of the life cycle from pre seed all the way to what we would call exit.

Kelly Kennedy: Okay. Okay. That's really, really interesting. So it's all fitted together. And actually there's a relationship all the way down the line. Like you said, you know, from your initial relationship with the founders to make sure that they're looked after and that they're getting what they need to do to then, you know, after, even after your preseed the relations or sorry, your angel investment.

Your relationship then with the venture capitalists to make sure that they're also looked after and that it's, it's all about the relationship and you're, you're involved really on both sides. I didn't know that.

Michael Badham: Yeah. So think, but so think about the life cycle from family and friends to precede early stage angel to seed round with angel investors to an early round with VCs to then a series a series B and so on.

Now, the line is never so linear. It's never so smooth, right? So what happens is an angel or a company may do a series A and then something may not go perfectly well and they have to come back and do a second round with their VCs or that we do an angel round and it's not quite enough to get the VCs interested.

So they come back for a second angel round. I see, you know, there's a lot of bumps along the way as they, as they go through that, that growth cycle, that life cycle, right?

Kelly Kennedy: Okay. Okay. So you had mentioned something earlier that I found really interesting and you had mentioned that within Canada, the valuations have been really high.

Why do you think that is?

Michael Badham: I don't know that the valuations in Canada have been really high. They had been higher and, and, you know, we're coming down as a result of the public markets coming down in 2023. We generally, founders will say that the valuations in the U. S. are higher than they are in Canada.

And so, you know, one of these sort of unfortunate things that happens is that founders will come to us and say, here, here's our plan. Here's where we are with product market fit. And we think we have a pre money valuation of 20 million. And I'll look at it and say, Hmm, I think that's closer to 5 or 6 million.

And they'll say something like, Well, I've been down to Silicon Valley. They get it. They think I'm worth 20. You guys just don't get it here. And you know, that, that's an unfortunate discussion that, you know, I have to say. Well, when you're, when you come back from Silicon Valley and you think, That, you know, we can help, please don't hesitate to call me.

Right. But we would typically see for early product market fit companies, valuations in the range of, you know, five to 10. And and as I say, they came down a little bit in, in 2023. We think that there's, as the public markets get stronger valuations are Our, our bottoming out right now. And I think people are, are, are, are a little bit more confident again.

The number is not the value of your business. The number is really the sharing of the future value of the company. Right. And, and again, when we do our math. And we say, okay, in 10 years, if this is a business with a hundred million dollars in sales and it has a, you know, a market value that we can sell it to a large strategic company for, call it 200 million, you know, what are we getting for the million dollars we put in as angel investors?

Way back when, and, and we like to get, you know, 20, 30, 40 times our money. So we want to be able to make sure that our million dollars that went in, you know, is going to be worth, let's call it 40 or 50 million on the way out. So if it's a 200 million or 300 million valuation, you know, we got to be looking for 20 percent of it.

And that's, you know, After dilution from, you know, series A and series B and series C, cause we will get diluted over time, right? So we really start to map out what that, what that looks like going forward. And that's, you know, once I sit down with founders and I say, well, let's do a capital plan for the next five years.

What's that going to look like? How much do you get diluted? How much do we get diluted? What did the VCs take? Then you begin to see some. You know, rationality in the discussion and we can, and we can lay out an appropriate plan. Right. And that's what I say. These are the sorts of things that your, your listeners, your founders will get expertise at the various accelerators and incubators, right?

Kelly Kennedy: They will. I agree. But I honestly think the expertise that you have is actually more helpful because at the end of the day, you're the one buying them, not the, not the mentors at the startups or the accelerator runners, right? Right. They're hoping that you guys will buy them after. And so I think your information and your guidance is actually probably more valuable for that very reason.

Michael Badham: Right. And I spend, you know, a good portion of my time giving workshops at various accelerators and incubators. And, and again, we'll talk about this at another time, but this is how I got into the, the simulation business because we. You know, we wouldn't teach a pilot to fly a plane by saying, here, take the keys and practice your landings, right?

Like we wouldn't do that, but we expect young people to graduate from university, give up the two or three best years of their life and say, Hey, go start up a company. Don't worry, fail. It doesn't matter. Well, I'm telling you, failure is. PTSD stuff. Like, you don't want to do that. And so we built this simulator that allows you to experience over a two or three day period, all of the ups and downs of, of starting a business and raising capital and building your team and your product and all of that.

And like all. You know, hands on learning, it's really much better than, you know, you don't teach a kid to ride a bicycle with a PowerPoint and a checklist. You say here, let's, let me, let me put some training wheels on you and let's go. Right. And it's the same with pilots. And as I say, we, we've had a lot of success with this scale up.

Simulator for helping founders really understand what it's going to be like, right? Yes.

Kelly Kennedy: Yes. And I'm really excited about that. And just so that all of our listeners know, there will be a follow up show to this probably in two to three weeks that we're really going to delve deep into that simulation because I do think it's very valuable.

Michael Badham: So one of the things that makes angel investors successful is their ability to add value to the founders. And this is an area that I'm starting to focus more and more of my time on. Because many angel investors just want to invest their money and, and then, and then let the founders go. And many founders aren't actually that keen on having angel investors involved in their business, not because they don't want them, but because it's really hard to, for them to tell who's right when they're getting advice from people, it's almost like one of the most difficult things founders. One of the most difficult challenges founders face is determining who their advisors will be.

And often they're so interested in getting advisors that they'll take anybody, right? But, but actually they have to spend some time with their advisors, with their mentors, figuring out, are these people that I really can gain good knowledge from or, or not. And, and there's a bit of a skillset there in.

In finding good people, it's also part of a skill set in founders and in finding good partners. You know, you can imagine that over the years I've seen a number of founder partnerships dissolve because they just didn't work out as as good partners. And, you know, these are things that we, we tend to overlook a little bit in our, in our business school, right?

We, we, we teach the hard issues of, you know, finance and, and, and, but we don't necessarily talk about the people issues. You know, we talk a lot about branding and marketing and product development and product innovation. We got those covered. We talk about finance, but the. The human issues of teamwork and mentoring and coaching is an area that I find quite interesting as well, because a lot of the mentors that are in incubators and accelerators are very successful people, but they've not Develop themselves into the true mentors in the Socrates model, right?

They, they're not taking their mentorship to the next level. They're, they're saying, well, based on my experience, this is what I did. And often Kelly, you know, I'm not sure if it wasn't just luck in the end of the day. And now we're passing luck onto these founders as if it should be transferable. So it is another area that I'm starting to work on in terms of helping.

Business mentors become better at mentoring their, their founders, right?

Kelly Kennedy: Well, I can see that, especially from your stance, anything that you can do to give them an edge or give them a benefit benefits both parties. And so it, to me, it seems obvious that that would be a path that you would definitely want to venture down.

You know, you've talked on the importance of trust, especially, you know between your investors and the founders. Do you have any advice on how, you know, both can do better at establishing that relationship?

Michael Badham: Time together is probably the number one thing. And you know, we're, we want to move quickly.

We, we want to invest our money quickly. You know, The, the investors, you know, are used to a wealth management model where they talk to their, you know, their wealth manager, their financial advisor, who says, look, buy X, Y, Z shares. I can get them at the, on the stock exchange at this price. We can do the trade today.

You know, it's fairly simple, right? Because you can trade in and out of it. If you don't like it two weeks from now, sell it and you make a little or lose a little, it doesn't much matter if you're in a diversified portfolio of some size. But on these one to one investments where you're likely going to make 10.

25, 000 investments over a three year period. You, the founders want you to move quickly. They want to raise the money. You want to move quickly because you don't want to be spending a whole lot of time on each one, but there is a need to have a number of, of follow up calls to do a number of deeper dives and even a follow up meeting to, to establish that.

That true understanding between two human beings as to how this relationship will work. And remember, it is a relay race, so we're going to take the baton, but we are going to pass it on, right? We are going to say, at some point, you're going to leave our sphere and you're going to go to a VC sphere. We'll always be here for you, but, but we're going to, we, we want you to, to, to move on to the next stage of financing.

So, You know, the, the best people that I've met who are the best at hiring C level, C suite people, you know, talk about, it takes six dinners to hire a CEO, right? And, and, and that kind of thing. It's just about investing the time together. And, and that runs contrary to both sides. The founder doesn't want to spend the time and the investors don't want to spend the time, but they really need to.

And, and, and we're finding it in this you know, world of, of zoom meetings that, that we need to have more of them rather than fewer of them. Right. And we really need to work those. But it means being more selective with your investments and, and putting a little bit more time into each one.

Kelly Kennedy: Yeah. But it makes a lot of sense. And especially when the risk, you know, I mean, your risk, I imagine is quite high. You know, when I, when I heard you talking about, you know, just investing in stocks, for instance, like you said, if, if that investment goes South or, you know, I mean, you're not liking it for whatever reason you can get out like that.

You know, with something like this angel investing, I imagine that it's more challenging to get out of. And so you need to make sure that you really like this company before you're going to put your heart and heart, earn money into it.

Michael Badham: Yeah. It's actually almost impossible to get out of it. And even from a You know, a tax point of view, if you want to write off your 25, 000, you know, the CRA requires you to provide some evidence that the company actually went bankrupt or is closed.

And that evidence is actually hard to get, right? Because it may take another couple of years for the lawyers actually to wind everything up. So it, it, it becomes a little frustrating. And sometimes you can't even get the right off for having made a bad investment for a couple of years. Like it doesn't happen that, that quickly.

And at the same time, you can't spend forever trying to make a decision where you know, that, you know, at least half of your 10 investments aren't going to make it. And so you can't. You know, spend so much time that the founders have to find financing somewhere else, or you're just, you know, incapable of, of making that decision.

You have to be able to make the investment decision. So you have to have a level in each of the seven criteria that I talked about earlier where you can say, okay, that's good enough. Now we're, we're ready to go. Right. Yeah. And we're also talking a lot about strategies that involve putting in a little bit less money into more companies, but then having, you know, another round of angel investment ready so that, you know, if you put a smaller amount of money in 10 businesses, and only three of them look good.

Start to look good, then let's put some more money in those three. And there's a great book called the power law of investing that, that really says focus on the, on the winners, put a little bit less in each initial investment and then start putting more in the ones that are doing well. And and so we're starting to look at that kind of model as well.

Kelly Kennedy: And that makes a lot of sense. And you know, as we're going down this, this understanding of essentially the risks that you take, one of the questions that comes to my mind is what can founders do to reduce the risk for you making their investment more valuable?

Michael Badham: So, you know, there's what we call being angel ready.

And there's like lots of places you can search up for the 15 steps to be angel ready. Probably the number one issue that we're finding is communicate with the investors, give them regular monthly updates. It turns out that the businesses that we've invested in, that Our investors are most interested in are the ones where we get a an update every two months.

It doesn't have to be every month, but it's kind of like there's a regular update, there's a regular flow of communication and, and that provides an opportunity for the investors to say, Oh, wait a minute, I think I can help here, or I can connect. them and the help is, is really connecting with, with other people, with other advisors, with customers, with suppliers.

So the more information the founder shares with their, about their struggles with the investors, the more opportunity the investors have to help. And they're not, you know, the investors are very busy people. So they're not sitting around going, gee, I wonder how I can help them with their, they're, they're kind of waiting for, for a question they're waiting for to be asked.

Right. So probably the number one thing I think is. Communicate and, and provide investor updates.

Kelly Kennedy: That makes, that makes a lot of sense. Is there anything that they could do on that valuation stage to help to get them into something that makes more sense? You know, I mean, obviously like you said, going, maybe going to the states and doing your valuation there doesn't make sense for a Canadian company.

Do you have any advice there on how they can maybe come to a number that. It's like, Oh yeah, that actually makes sense.

Michael Badham: So it's all about product market fit. It's at the angel that the seed stage. It's all about proving that customers really want to pay for your product. So we we have a definition of product market fit that goes something like you've got a product that is so good.

That your customers spontaneously want to tell their friends about it. Right. And so, you know, you, you've had products like that, I'm sure. Right. You know, and I can, I can name two or three of them if you want, but they're just like, there's a piece of software that is just so darn good. I have to tell my friends about it.

Right. Absolutely. You know, and, and so that's the bar we, we want to apply and, and founders sometimes. Believe in themselves too much. They don't, they don't put themselves in their customers shoes and say, why are my customers not buying this? Why are they only buying it a little bit? Why aren't they spontaneously telling their friends about it?

And one of our, our members is very, very good at, at getting founders to, to say, well, why don't you follow up with the customers that said no to and find out why they think. said no. And don't take the first answer drill down. Ask that why question five times to, to drill down and then start to look at your product and its features and begin to adapt them.

So I would say that founders who want the highest valuation for their product are the ones that can really lay out the data. And their processes and the feedback they've had from their key customers as to why the customers like the product and why they chose not to get the product. Those are the ones that I think differentiate themselves in terms.

Of the ability to scale it up because once you have product market fit, then you're going to use the angel money to begin to develop a sales process that doesn't require one on one conversations between the founder and the customer because you can't scale that business. You know, you, you have to say, okay, am I building a sales force?

Am I selling through distributors? Am I doing this online with, with. The chatbots, how, how am I actually going to get my customers to buy this product without me having a conversation? I mean, think about the evolution of airline tickets. You know, you used to phone a travel agent who used to phone the airline and, you know, think of all the friction.

And now you just. Go online and you do it yourself. And if you, if you ever talk to somebody, actually, if you ever even print out a piece of paper anymore, it's, it's backward, it seems right. You just buy the ticket, put it on your phone and start the process of marching through security. You know, you know, it's, you know, it's, it is a sense with the airline, it's frictionless, right.

And, and so we, we look for people to get their product to that kind of level. And that's what earns you higher valuations.

Kelly Kennedy: I see. I see. Do you guys get any support from the government to protect you in any of these investments?

Michael Badham: So, in different provinces across Canada, there are different tax benefits, but British Columbia has a an incentive.

That they provide for angel investors who, who make qualifying investments, they'll get a portion of their investment as a, as a tax credit. We all, many of the angel groups and certainly the ones in Ontario all get financial support for our admin costs. It's through Fed dev in Southern Ontario. And I think it's Western diversification in Canada, in the West.

And I think there is a maritime group as well. So the government, you know, provides some coverage for our costs in getting all of this done, which keeps the membership fees a little lower for, for our members, but there is. Talk of in Ontario. I know the groups have, have pitched the government to have a, some kind of tax credit for, for investors.

You know, if you just think of the economics of it, they're fairly strong, right, for every million dollars that goes in, you know, that comes out of. Individually, you know, high net worth individuals pockets and goes into a founder's business. Most of that million dollars is spent on. Payroll in Canada, which is taxable.

Right? So a portion of that money flows back as revenue to, to the federal and provincial governments. And if, you know, if they were to look at that, it's a fairly interesting economic model where, you know, and I, you know, pick a number, if a, if a million dollars, if 80 percent of a million dollars goes into payroll.

So 800, 000 and that's taxed at an average 25 percent level. There's 200, 000 of, of, of that million went right back into federal and provincial tax coffers. Well, if I were in the government, I'd be looking at that going, that's a pretty good model. How can I encourage a high net worth individuals to invest more?

Right. So I keep their, you know, how, how do I, how do I do more of that? Cause that's earning me money. Right. So there, there is a, and so they, they do support incubators and accelerators. They do support angel groups. There's a lot of that going on. Right. And, and would a tax credit help? All of this helps, right.

Right. It all helps. And I think it actually. You know, is one of the reasons why the Canadian economy is as strong as it is. There's just a huge startup ecosystem all across the country. And remember, we're competing globally for smart people to, to come to Canada and, and, and for the people in Canada to, you know, quit their job and, and start innovating and starting up businesses.

Remembering that, you know, at least 50 percent of the economy, but on a revenue basis is is small and private businesses, right?

Kelly Kennedy: Yes. Yes. You know, I imagine that we're probably talking to quite a few high net worth individuals right now who maybe are not investing yet in companies through angel networks or anything like that.

Would you like to speak to them for a moment?

Michael Badham: Well, absolutely. And if you're interested in learning, and I think, Kelly, you said this earlier, it is fascinating to attend investor meetings and see what is being innovated whether it's in clean tech or health, tech or, or B2B, there's huge great ideas out there.

And we're seeing them at a very early stage of, if this is of interest to you, I suggest reaching out to your local angel group and, and attending some meetings. And I know most angel groups you know, are fairly open to having people attend as a guest for a couple of meetings before. Putting out some money into membership.

It's our membership dues are not that high. They're most of the groups charged between a thousand and 1, 500 a year to attend six to eight meetings. And you usually get a lunch or a dinner out of it. So it's not, you know, it's a, it's a pretty good opportunity to network with other people, learn about businesses and learn more about making investments in private businesses.

You know, there's also a lot of education that we could be doing to the next generation. Of investors and, and this is a group that I've started to speak with because you can imagine that the age of our members is probably older than you think. And if you think about angel investing is taking, you know, 5 to 10 years to mature a lot of these people are making angel investors for their next generation.

And, and so we've started to think about the next generation of people managing family wealth and family offices and saying, you know, if you're in your thirties or forties and you want to know more about making private investments, you think you're going to be a part of a an intergenerational transfer over the next 10 years, there's, again, there's an opportunity to join the ecosystem, learn about these things and be able to contribute to the, the, the management of, of your family wealth going forward.

So there's, it's a great opportunity to think about making investments in private businesses.

Kelly Kennedy: Yeah, I think it makes a lot of sense. And I think there's a lot of people too, especially high net worth individuals that maybe are just not quite sure what to do with that money. It can feel like there's not a lot of good options available.

And I think this one does sound like, especially if you can get the right company and build that relationship to maybe be one of the safer ones. Underneath that situation.

Michael Badham: You know, any, any portfolio diversification strategy should include some investment in what are referred to as alternative assets and, and angel and venture capital investing in alternative assets is, you know, should, should 10 percent of your portfolio.

So, yeah, and nobody really, you know, joining an angel group, joining a peer group is really the best way to do it.

Kelly Kennedy: Awesome. Michael, that takes us to the end of our show. I just wanted to say, amazing. Thank you so much. This was incredibly educational. I think you've helped Thousands and thousands of people with your knowledge, and I'm really, really looking forward to having you back to talk about strategy tools and how we're going to help, you know, the next the next generation of founders.

Michael Badham: Kelly, it's been a great conversation. You get me so excited. I'm just bursting with energy here. So I look forward to our next conversation, my friend.

Kelly Kennedy: Amazing. Amazing. This has been episode 116 of the business development podcast. We've been chatting with Michael Badham, managing director of the Georgian Angel Network out of Ontario.

It's been an absolute pleasure, Michael, and looking forward to having you back. Until next time, this has been the business development podcast, and we will catch you on the road. The flip side.

Michael Badham: This has been the business development podcast with Kelly Kennedy. Kelly has 15 years in sales and business development experience within the Alberta oil and gas industry and founded his own business development firm in 2020.

His passion and his specialization is in customer relationship generation. And business development. The show is brought to you by Capital Business Development, your Business Development Specialists. For more, we invite you to the website @ www.capitalbd.ca. See you next time on the Business Development Podcast.