What is the Ottawa Angel Alliance?
The Ottawa Angel Alliance is a not for profit alliance of angels who are interested in investing in Ottawa based companies. It is not a fund. Investments are individual, and all tax benefits flow to the individual angels.

Why do we need an alliance?
The alliance is intended to increase the efficiency and reduce the risk of angel investing.

Experience has shown that it takes about 600 hours of effort to find a high quality investment. For each company that is actually funded, roughly 40 business plans are reviewed. Of these, about 10 are selected for a detailed review. Of these, about 3 are selected for very detailed due diligence. Finally one is selected for an actual investment, and the deal is created. These are rough averages, but it indicates that it takes about 600 hours to find and complete a quality deal. Even if an individual angel is willing to invest the effort, there are significant advantages of having a larger number of people, with different backgrounds and experiences, review the opportunities.

Research has also shown that in order to have a reasonable expectation of a high return, angel investors must have a portfolio of 7 to 10 companies.

Unless an angel investor is working at it full time, this amount of effort is problematic. A portfolio of 10 companies would require 6000 hours of effort. If 10 companies are selected without the appropriate level of due diligence, it is unlikely that the portfolio will have the quality required to achieve good returns. If only a few companies are selected, the portfolio is not diversified enough to achieve good returns.

What are the tax benefits of investing as an individual?
Up to $500,000 of capital gains on qualified small business corporation shares may be exempt from tax. This amount is a lifetime limit and is impacted by certain amounts such as the CNIL balance or use in the past of Allowable Business Investment Losses (”ABILs”) of the individual. In effect, CNIL is basically the excess of investment expenses over investment income that has been previously incurred by the individual.

Traditionally, capital losses may only be applied to reduce the capital gains income of an individual. However, where the corporation upon which the loss incurred is a small business corporation, the investor may be eligible to apply 1/2 of the capital loss incurred against other sources of income. This loss then becomes known as an ABIL.

The tax incurred in respect of gains related to investments in eligible small businesses may be deferred where proceeds from the investment are used to make other small business investments. There is no limit to the amount that may be reinvested. Certain rules exist that determine eligibility for benefit from this rollover.

A special election also exists that allows an individual to take advantage of the capital gains exemption for qualified small business corporation shares if the corporation goes public, without having to actually sell the shares.

Will an alliance really reduce the risk?
We have identified five key risk areas:

Size and structure of the seed round Typically companies require between $500K and $1,500K in order to build demonstrable value and prepare for subsequent financing. It takes considerable effort for the entrepreneurs to raise this amount of money by working with individual angels, time and effort that would better be spent building a quality company. By working as a team, the angel community can reduce the effort required to launch a quality company. Research has shown that Canadian VCs typically invest in more companies, but fund them at a lower level than their American counterparts. We suspect that Canadian angels also invest in too many companies, but underfund them. We believe that it would be better to pick the higher quality opportunities and fund them at an appropriate level. If the company ultimately requires VC funding, the terms will be significantly better if the company has been able to build demonstrable value, and has sufficient time to market the series A.

Due Diligence As discussed above, it takes a considerable amount of effort to create a pipeline and find quality investments. This amount of effort is only feasible if angels collaborate.

Company formation, guidance and governance It is not enough to simply find a good opportunity and fund it. Angels add significant value by helping with the company formation (structure, management team, etc) and ongoing guidance and governance. Collaboration among angels will significantly improve our ability to help in these areas.

VC Partnerships Many companies will require funding by VCs after the seed stage. This can be made much more efficient by involving the VCs at the seed stage. Our VC partners have made a good faith commitment to invest in some of the seed stage companies, and to also lead a subsequent series A for those companies. VCs can also help with some of the due diligence, in particular by providing access to research that is available to them.

Portfolio Diversity As mentioned above, research shows that angels should have a portfolio of 7 to 10 companies. This portfolio should be distributed over a variety of market segments and asset classes. In particular, as an angel there are many investments available to us that are not suitable for VCs. Companies may not be suitable to VCs because they do not require follow on financing (fully funded by the angel round), or because they do not provide a suitable exit (for example, an income trust is not acceptable to a VC but may be very interesting to an angel investor).

What do I have to commit?
The fees to join the OAA are $750 per year.

The angel must make a good faith commitment to invest in two deals per year at a level of $25K per deal.

We also expect the angels to participate in 50% of the meetings (they will be held in the evening) and to help in the due diligence of two companies per year.

Who is going to do all of the work?
Experience has shown that in every organization, there is a small portion of the membership that does most of the work. The OAA recognizes this and will provide the structure to accommodate this. The three founding angels (Irving Ebert, Rainer Paduck, and Laurie Davis) are prepared to do the bulk of the work. Why? Because we are already doing the work for the deals that we already invest in. By bringing a larger community together we can reduce the investment risk for all of the reasons discussed earlier. If other angels would like to contribute effort to the alliance, the offer would be gratefully accepted. Part of the funds collected by the alliance will be used to provide a “deal support stipend” to the members that put significant effort into helping with the process.

What fees are collected?
Dues are collected from the angel members ($750 per year) and the VCs ($5000 per year).

Each company that is funded returns up to 3% cash and 3% warrants to the OAA.

How the fees used?
The membership fees are used to cover the administrative expenses of running the alliance. OCRI has offered to help with some of the administrative overhead such accounting. This should help to keep the overhead to a minimum.

The 3% cash and 3% warrants provided by the company is distributed to the members that provided significant effort to the alliance (in proportion to the effort) â?? a “deal support stipend”. If no external effort is forthcoming, this will be distributed to the managing angels.

Members that bring a well-formed deal to the alliance and champion the company through the investment process are allocated 1% cash and 1% warrants from the company.

Members that volunteer to help with the detailed due diligence of a company are allocated 1% warrants.

Why are there VCs in an angel alliance?
For companies that will require follow-on financing, we believe that it is important to have the VCs involved as soon as possible. The VCs that have joined the alliance have agreed to participate in the seed rounds where appropriate. They have also made a good faith commitment to lead the Series A for those companies in which they have participated in the seed round.

Having VCs involved in the seed round will also help to ensure that the deals are structured to facilitate the later rounds.

How many deals does the alliance expect to complete?
We have set a minimum target of four completed deals per year. We certainly would like to do more, but this will be determined by the amount of cash (the number of members and/or their willingness to invest beyond the minimum commitment) and the amount of effort (beyond the three managing angels) that is available.

How is the OAA structured?
The structure is based on what we have learned by studying other prominent angel organizations. There is a board of directors that provides guidance and governance to the organization. The board will consist of membership from the economic development organizations (OCRI and the Life Sciences Council), from the managing angels, and from the membership at large.

One of the roles of the board will be to appoint the managing angels. The managing angels will do the bulk of the day-to-day management of the organization. They will be augmented by any of the members that are willing to put effort into company evaluation, company guidance and deal creation.

I am already part of an angel group. Are we competing?
Our goal is fundamentally to encourage angel investing. If you have a group that works, it should be encouraged. Generally most angel groups do not have the means to fully fund a company. They must find syndication partners to complete the financing. Within the OAA any member or group of members can champion a deal. If your group has already done a great deal of due diligence on an opportunity, you can champion the deal into the OAA. The OAA would review the due diligence and jointly we would present the deal to the investment committee and potentially to the members at large. Your group would share in the deal support stipend.

The OAA is a complement to existing angel groups, not a replacement. In order to encourage the formation of angel groups, the OAA dues for a group are $5000 â?? the members become individual members of the OAA.

I already do some angel investing, do I need to commit to an additional 2 X $25K
Our goal is to encourage angel investing. If some of your angel investments are outside the OAA we would count that towards your membership commitment. We would expect, however, that it is likely that in most cases you would need the syndication capability of the larger community in order to fully fund the opportunity.

Will I be pestered by wannabe entrepreneurs?
Membership in the OAA will not be publicly available. You can optionally choose to keep your membership hidden from other members (although this presumably means that you would not be coming to any of the meetings).