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A Guide toAngel Investingin Atlantic Canada

These materials were derived from the Atlantic Angel Summit, March 2006.

So YouWant to BeAnAngel?

Angel Summit Report 5/31/07 2:28 PM

Contents

Keynote speaker: Bill StanleyExecutive Chairman, Atlantic Hydrogen Inc. 1

Angel investing 101The art of angeling in groups 2

Confession session 5

First Angel Network 6

Atlantic Angel Investor Summit 9

Cleantech and Sustainable Development Technology of Canada 13

Wisconsin Angel Network 21

TSX Venture Exchange Capital Pool Company® Program 23

The Atlantic Angel Summit held in Saint John,

New Brunswick in April 2006 brought together angel

investors and stakeholders to discuss the promotion of

angel investment in Atlantic Canada, and to provide

information and resources useful to angel investors.

This report summarizes key presentations made during

the Summit, and is intended to serve as a reference and

working document for Summit participants.

ATLANTIC ANGEL SUMMIT POST CONFERENCE REPORT

ATLANTIC ANGEL SUMMIT REPORT

Angel Summit Report 5/31/07 2:28 PM

Bill Stanley believes that the angel network nowforming in Atlantic Canada will serve as an effectivematchmaker between the many companies that havegreat ideas, and the financing needed to bring thoseideas to fruition.

The selection of an angel is very important to aventure. Although angels typically do not wish to beinvolved in the day-to-day operations of businesses,ventures need partnerships with respectedbusinesspeople who have the resources andbackground needed to ensure success. An angelinvestor’s track record and past successes areimportant.

For their part, angels look for promising businesssectors, products that will sell, and realistic businessplans. Ventures need those three key elements if theyare going to attract quality angel investment.Although financial reward is the obvious motivationfor angel investment, Bill suggested that angels arealso looking for an opportunity to participate in theeconomic growth of the community, the adventureof developing new technologies, the satisfaction thatcomes from helping to fulfill a social need, and lastbut not least, the reward of knowing they haveplayed a part in improving the environment that weall enjoy.

Bill StanleyExecutive ChairmanAtlantic Hydrogen Inc.

The National Angel Organization was

pleased to have Bill Stanley, Executive

Chairman of Atlantic Hydrogen Inc., serve

as the keynote speaker at the first annual

angel conference in Atlantic Canada. Bill’s

career has been long and distinguished – he

founded Fundy Communications in 1975

and built it into a highly successful

company, finally taking it public in 1993.

An angel himself, Bill has experienced the

highs and lows of angel investing. Because

of his reputation and experience, he is

often approached by entrepreneurs with

great ideas.

Bill’s newest passion, Atlantic Hydrogen Inc.,

has benefited from the assistance of 17

angel investors who share his concern about

climate change, his passion for the fight

against global warming, and his enthusiasm

for Atlantic Hydrogen’s role in reducing

harm to our environment.

Visit Atlantic Hydrogen at www.ah2inc.com

1ATLANTIC ANGEL SUMMIT POST CONFERENCE REPORT

KEYNOTE SPEAKER BILL STANLEY

Angel Summit Report 5/31/07 2:28 PM Page 1

http://www.ah2inc.com



Historically, angel investing served as a middleground between investments by family andfriends and partnerships with venture capitalists.However, as angels have become moresophisticated, they have begun to worktogether and move up the food chain. Forexample, in the past angels were largelygoverned by the ‘two hour rule’. (If onecouldn’t drive to something in two hours, itwasn’t a viable investment alternative.) Angelsnow tend to be less geographically bound.

Why become an angel?Angels report a number of reasons for investing,including a desire to:

• Be involved in something exciting,challenging or fun

• Influence the growth of enterprises• Realize significant upside potentials • Balance their portfolios.

It is interesting to note that most angels are‘repeat offenders’. It is also important to keep inmind that not all angels are equal. Some aresophisticated archangels (for example, TerryMatthews, who has angeled 62 companies).Some are looking to make their first deal andhave no idea how to go about it, while othershave done a dozen deals. Some don’t evenknow they are angels. Some have only a fewhundred thousand dollars to invest, while othershave several million. Some will invest and act aspresident or CEO, but most will simply want toinvest and act as mentors.

The 20/60/20 rule predicts that about 20% ofdeals will fail, 60% will provide acceptablereturns, and 20% will be highly successful.Angels who are able to set clear objectives,develop a disciplined strategy, moderate risk,and think beyond the current angel round tendto be successful. These angels are typicallyhands-on entrepreneurs with business acumenand excellent instincts for commercializinginnovation.

Role played by angelsIn 1999 and 2000, angels typically made singleinvestments, writing cheques on the basis of‘good ideas’. They often entered the market fora quick flip with huge multiples. They tended tobe passive. And most of their investments failed.

The situation has changed significantly. Today,angels tend to invest in groups (through angelorganizations) and become serial angels. Theyare likely to undertake formal due diligence,initiate term sheets, serve on boards of advisorsand as mentors, coaches and monitors, fill holesin management teams, or act as CEOs orpresidents. While angels today still tend tofollow the two-hour rule (or two- to four-hourrule), that too is changing.

Daniel MothersillDaniel Mothersill described the

development of angel investing from its

beginnings with the high-risk backers of

Broadway productions in the 1920s to the

principal seed financing engine it has

become today.

Dan is President and Founding Member of

the National Angel Organization (NAO),

Chair and Founder of the Ciris Group of

Companies, Chair and Co-founder of

Toronto Life Science Angels, Chair and Co-

founder of Toronto Industrial Angels,

Founder of Entrepreneurial Bootcamps,

Coach-in-Residence and Member of the

Toronto Angel Group, CEO of the Centre

for Commercialization, Selection

Committee Member for the Canadian

Venture Forum, Advisor to the Banff

Venture Forum, Board Member for the CEO

Fusion Centre, advisor to several

technology and life sciences companies,

and a serial angel entrepreneur.


ANGEL INVESTING 101 THE ART OF ANGELING IN GROUPS


Angel groups in CanadaCanadian angel groups include the following:

• Toronto Angel Group• Toronto Life Science Angels• Toronto Industrial Angels• Kingston Angels• Ottawa Angel Alliance• First Angels Network (Halifax)• Waterloo Angels• Peterborough Angels

In addition, there are more than 15 othergroups throughout Canada, and numerousindustry clusters (such as oil and gas).

Finding success as an angel investorSuccessful angel deals:

• Include reasonable valuation, allowing forfollow-on financing

• Deliver at least a three-times return oninvestment (ROI)

• Provide for a successful exit within 3-7 years • Include active angel involvement• Include the management talent needed to

take the venture to profitablecommercialization.

Examples of successful angel investments haveincluded:

• RIM, a market darling• Mitel, which rivaled Nortel in the PBX

market • Newbridge, which was sold at a profit to

Alcatel • Roots, which was built on the basis of a

bright idea • Workbrain, which has grown from $3.7

million to $89 million since 2001.

A successful angel investor:

• Sets clear investment objectives• Develops a disciplined angel strategy• Understands how to moderate risk• Thinks beyond the current angel round of

financing.


Share structureAngel investment may involve anumber of different share types:

Common sharesSimilar to public shares.

Preferred sharesVarious series of shares that holddifferent rights, especially regarding theorder of payout.

Convertible debentureDebt that can be converted to stock,often accruing interest.

Warrants“Sweeteners” similar to options,providing a right to own more stock.

DebentureStraight debt, as would be negotiatedwith a bank, with a coupon thatprovides interest. This has preferenceover other types of stock.

Debenture with warrantsAlso called “venture debt”. Fixed rate debt and warrants.


Finding the right dealOnce an angel group is in place, the next step isto find the right deal. Three types ofopportunity include business succession,innovation-based opportunities at universities,and start up or new market opportunities.

• The CFIB estimates that some 5% of itsmore than 100,000 members havecompanies that are looking for takeoveropportunities.

• In Atlantic Canada, innovation opportunitiesat universities are often missed. Universitiesare warehouses full of innovation justwaiting to be commercialized, and angelsshould take advantage of the opportunitiesbrought about by that innovation.

• Law and accounting firms, chambers ofcommerce, venture capital firms, andindustry associations can all provide accessto ventures that are looking forcommercialization funding.

Typical ‘deal killers’ include the following:

• A company that has no competition• A founder determined to remain president

(‘founderitis’)• A ‘take it or leave it’ attitude towards

valuation• A company that is interested only in money

from an angel investor, without otherinvolvement

• The belief that ‘if we build it, they willcome’

• Lack of a business plan

• An inability to explain the technology insimple terms

• Intent to use the investment to pay salariesand retire debt

• No proof that the company owns the IP• A company that has talked to dozens of

angels and venture capitalists

Angel modelsIt is important in an angel group to haveaccredited members and a champion who iswilling to promote the cause, attract newmembers, and influence the structure of theinvestment group.

There are three common models used for angelorganizations:

1) Facilitated (for example, the Toronto LifeScience Angels)

2) Member managed (for example, theOttawa Angel Alliance)

3) Clusters/Forum (for example, the NAO)

Facilitated angel groupsFacilitated angel groups have a salariedExecutive Director who performs functions thatinclude:

• Marketing and public relations• Logistics — lunches, dinners, breakfasts• Membership database• Working with companies on presentations• Due diligence process.

In these groups, angels invest individually, invoting trusts, or with other angel groups andseed venture capitalists.

Member managed• Angels act as managers• Undertake same process as facilitated angel

groups• Usually not paid

Clusters• Informal groups• Meet on a reasonably regular basis• Companies sometimes present,

sometimes not• Angels refer deals to the group



In 1999 Daniel invested in a company afterfalling in love with its Internet browsertechnology. The size of the company’s marketwas estimated in the billions (although therewere already major players in the market), andthe target was a 10-20 fold return within threeyears. Doing no due diligence, Daniel wrote thecompany a cheque for $250,000.

Unfortunately, the owners had no business plan,go-to-market strategy or business acumen. Thecorporate structure was poorly defined, withcommon shares and no anti-dilution measures,tranches, or performance measures. The twopartners hadn’t formalized their ownshareholder agreement and could not evenproduce a chain of title. Finally, once thecheque was written, Daniel had no further rolein the company. The result was the completefailure of the business.

Although it was a hard way to develop a list ofbest practices, Daniel learned a lot from thatfailure. He now believes in the strength of angelgroups that foster learning and growth. Angelgroups allow angels to support one another andhelp to provide proper due diligence beforebinding commitments are made.

Daniel makes the following recommendations toother angels:

• Join an angel group and learn from others. • Remember that 60% of financing decisions

are based on the strength of management. • Undertake a formal process:

– Due diligence (a checklist)– Valuation (set the value and negotiate

with the founder)– Term sheets (follow a model) – Milestones (invest on accomplishments

met)• Be an active angel and offer mentoring and

advice.

In his ‘Confession Session’, Daniel

Mothersill, president of the National

Angel Organization (NAO) provided

an example of what not to do when

angel investing.


CONFESSION SESSION


Why angels investAngels are typically motivated to makeinvestments due to:

• Expectations of great financial reward• A desire to play a role in the entrepreneurial

process • A recognition of the fun and satisfaction

that comes from involvement inentrepreneurial ventures

• The wish to create a job for oneself, and toearn an income

• A sense of social responsibility.

Why angel groups makesenseAngel groups provide a more efficient means forthe matching of entrepreneurs and investors. Inaddition, market recognition of an angel groupleverages its public presence and helps to growits membership, increasing quality deal sourcingand opportunities.

Group evaluation allows for “checks andbalances” analysis. This also gives new angels anopportunity to learn about all aspects and stepsof investing from experienced angel investors.

Of course, there is also the enhanced economicpower inherent in group investing, and theintangible value of camaraderie and the sharingof common goals.

Building a frameworkAngel groups need to select the rightorganizational structure, management, andmembership structure.

• Member vs. manager-led structure• Legal structure• Investment options • Membership options

Member vs. manager-led structureMember-led structure

Pros:

• Greater connection to deal screening• Hands-on education

Cons:

• Difficulty maintaining a consistent volunteercommitment

• Potential for inconsistent operations

Manager-managed structure

Pros:

• Professional operation• Screening by experienced management• Consistent member relations

Cons:

• Higher operating costs

The First Angel Network (FAN)Association is a member-owned, non-profit organization created to bridgethe gap between entrepreneurs andprivate capital in Atlantic Canadathrough communication, education andnetworking. One of the many purposesof FAN is to organize angels in order toprovide a more efficient matching ofentrepreneurs and investors. Theaverage size of a FAN angel group is 50members, although the majority ofthese groups have no limits on thenumber of members.


FIRST ANGEL NETWORK


Finding a manager for a manager-managedstructure can be a challenge. Qualifications for amanager include the following:

• Business expertise and savvy • Experience at a financial institution • Motivations parallel to those of the group • Domain or investment-focused expertise • Organizational operation insight • Communication skills and diplomacy • Leadership qualities • Process-management skills

Legal structureA number of possible legal structures may beappropriate:

• Affiliation - no formal structure• Non-profit• Corporation (for profit)• Limited Liability Partnership• Limited Liability Corporation (LLC)

Investment options Investment options include:

• Group investment– Pooled– Pledged or committed funds

• Individual investment– Based on group due diligence– Based on individual assessment

Membership options The investment focus may determine theappropriate backgrounds and experience formembers. Criteria for membership may includegeographic restrictions, investment experience,and members’ commitment to shared goals.Other factors may include membership tiers,limits on the number of members, and timecommitments.

A 2003 survey revealed that 66% of angelgroups have no limit on numbers of members,and that the average size of an angel group is50 members. Of those groups that do limitmembership:

• 53% are LLCs• 20% are informal groups• 13% are not-for-profits• 13% are incorporations.

Financing angel groupsMoney may be needed for:

• Facilitation (office space and administration)• Meeting space, meals and travel• Introductions (introducing entrepreneurs to

investors)• Proposal screening• Due diligence research• Standard term sheets• Legal services• Investment and valuation analysis.

Sources of operating funds may include:

• Membership dues• Company fees• Sponsorships• Percentages of deal flow• Percentages of committed capital• Events and programs.

Best practicesBest practices apply to many aspects of angelinvesting and angel groups, including:

• Managing participation of members• Guiding company presentations• Finding the right deals.

Fostering best practices involves:

• Developing standard tools (for example,checklists and presentation templates)

• Ensuring compliance with criteria• Developing collaborations and synergies• Tracking investment performance• Supporting the evolving angel investment

“industry”.



Suggested tax incentivesFAN suggests that it is in thegovernment’s best interest to provideincentives to angel investing groupswho serve an educational role, andproposes that the government considerfavorable tax legislation which wouldallow angels to withdraw investedcapital from businesses with limited taxconsequences. In the UK, up to 60% ofangel investment is thought to be dueto the ability of investors to exit withouttax consequences. FAN hopes thatsimilar legislation can be used toencourage more angel investment inCanada.

Managing member participationIt is important to stay in touch with membersand to ensure that all members are involved inopportunity review and key decisions. Effortsmust be made to integrate new members intothe group and provide them with opportunitiesand leads. Ongoing participation in companiesshould also be encouraged.

Guiding company presentationsWhen assisting with company presentations, it isimportant to:

• Set standards• Explain the angel group dynamics• Find the best fit and value• Review and refine• Give feedback.

Finding the right dealsFinding appropriate deals depends on:

• Fostering external communication• Providing entrepreneur education • Clear investment criteria• Using a website to facilitate group work and

communication • Increasing visibility by speaking at

networking events• Establishing a safe, constructive

environment.

Example – organizing the First Angel NetworkFAN is a member-owned, not-for-profitorganization created to bridge the gap betweenentrepreneurs and private capital in AtlanticCanada through communication, education andnetworking. A manager-managed frameworkwas chosen for this organization. FAN has a not-for-profit legal structure, relies on individualinvestment, draws funding from membershipdues and presentation fees, and has a pan-Atlantic, high net worth membership.

Member benefits at FAN include:

• Qualified opportunities• Networking opportunities • Synergistic investing – you are not alone• Better valuation• In-depth opportunity reviews • The option to refer entrepreneurs to the

network.

Entrepreneur benefits include:

• A large source of capital • A broad pool of knowledge and contacts• Efficient processes • Capital connections.



Canada has an investment gap in seed and earlystage funding (see Figure 1). One solution tothis shortage of capital is to encourage andprovide incentives for seed and early stageinvestors, including angel investors. TheNational Angel Organization (NAO) is a strongadvocate in this regard. The NAO is a non-profitassociation of private individual investors, and isthe umbrella organization for local angel groupsin Canada.

NAO’s primary purpose is to represent the viewsof angel investors across Canada. The NAO isalso a forum for networking and a source ofinformation for investors, allowing angels toshare best practices.

The importance of the formal structure NAOprovides should not be underestimated. TheNAO and other groups like it have beenorganized to help prevent future angel investorsfrom repeating the mistakes of the past.

Importance of individualinvestorsIndividual investors are a poorly understood butimportant part of the investment food chain.These investors invest primarily at the seed andearly stage of a business’s development. In theUnited States, three million angels invest $50billion annually in start-ups, creating 30-40times as many companies and providing 3-5times more capital than venture capitalists. In


ATLANTIC ANGEL INVESTOR SUMMIT

Figure 1: Pre-commercial gap and sources of funding


Canada, 18% of business owners report thatthey invest in other companies. Less than 1% ofCanadian companies are venture capitalistfinanced; the other 99% are funded byindividuals, including individual founders.

Small and medium sized enterprises needfunding to cover the $5 billion financing gap.Angel capital increases the investment readinessof start-up firms, and angels themselves canhelp further the business by providingmentoring and guidance. Angel investors alsohelp with the search for future funding, and canspeed the pipeline of businesses with highgrowth potential (‘gazelles’).

Angel-backed companies are more successful. Infact, research indicates that high-growthcompanies have more angels than slower-growth firms. Angels invest in companies basedon their considerable knowledge andexperience, tending to select those companiesthat are primed for growth. Entrepreneurs alsovalue the experience and skills of angels and usethose skills to benefit their companies. (TerryMatthews, for example, has backed 62businesses operating in the telecom andnetworking sectors – sectors in which he has agreat deal of knowledge and experience.)

Growing challengesCanada has large current account surpluses,whereas the US has ever-increasing deficits andrising interest rates, and may be facing arecession in the next few years. In Canada, thestrengthening of the Canadian dollar (currentlyat USD $0.88, but facing a possible eventual riseto $1.00 over time) is creating a tremendouschallenge for exporters.

However, the provinces are not facing thesechallenges on an equal footing. The strongwestern resource economy means that thewestern provinces have strong growthprospects. With oil prices at the $75 a barrellevel, some $40 billion will be invested in the oilpatch in 2006, and $100 billion will be investedin the Oil Sands by 2010.

Governments need to provide the frameworkfor commercializing innovationGovernments need to play a role in balancingprosperity across the country. Canada shouldcommercialize its taxpayer-funded intellectualproperty to promote the commercialization ofresearch and development (R&D). In centraland eastern provinces, Canada’s R&D is its ‘oilin the ground’, and it is time that governmentshelp to provide incentives to angel investors topromote the commercialization of government-funded R&D in order to create profitablebusinesses. Business investment must beencouraged.

Money flows to the source of greatest returnwith the least risk. It is not surprising thatwealthy Canadians are investing in Alberta’s oil,gas and resource flow through shares. In fact,even provincial treasuries are subsidizing otherprovinces’ resource development. In addition,the strengthening Canadian dollar triggered bythe strong resource sector is putting pressure onother sectors, such as manufacturing andtechnology.

The NAO believes that the commercialization ofR&D will provide a huge potential opportunityfor angels over the next few years, in partbecause the government does not itselfeffectively commercialize R&D. If givenincentives, angel investors would be moreinclined to invest in these risky investments.



Innovation and productivitytax credit By organizing in groups, the angelcommunity is able to realize opportunitiesthat would otherwise be out of reach forindividual angel investors. To help encourageearly stage investment, the NAO recommendsthat governments provide an innovation andproductivity tax credit – a 30% tax credit forinvestment in eligible small businesses. Afederal and provincial program should beinstituted to increase investment and createjobs (50% federal, 50% provincial).

For additional information about New Brunswick's Small Business Investor TaxCredit Program, visit the New BrunswickDepartment of Finance at:www.gnb.ca/0162/tax/sbitc/smallbusiness.asp

Comparison of the investor tax credit in three provinces

11


http://www.gnb.ca/0162/tax/sbitc/smallbusiness.asp








Other jurisdictions with direct investor taxcredits include the following:

• United Kingdom• Canada:

– British Columbia– Newfoundland– New Brunswick – Nova Scotia

• United States:– Arkansas– Hawaii– Indiana– Kansas– Maine– Missouri– New York– North Dakota– Ohio– Oklahoma– Wisconsin

Government support of such a proposalwould be good public policy, and would bringa number of important benefits:

• Job creation • Angel investment leverage, resulting in a

five-fold increase in additional investment• An investment payback to the taxpayer

within about two years (excluding thecapital gain payback)

• Leveraging of taxpayers’ R&D dollars withprivate investment of 70%.

The NAO recommends that governments:

1. Measure the commercialization ofinnovation (R&D)

2. Promote the importance of angelinvestors and convey the message thatangel investment is not about makingangels rich, but about attracting thecapital needed by small and mediumsized enterprises

3. Help establish thriving angel groups 4. Create an environment of innovation and

productivity 5. Implement a national equity investment

program to commercialize innovationand attract investment.


Support for such a tax credit is broad. Supportersinclude the following agencies and organizations:

• Canadian Federation of Independent Business• Conference Board of Canada • BC Technology Industries Association (BC TIA)• Brightspark Capital Partners• Canadian Advanced Technology Alliance• Canadian Task Force on Early Stage Funding• Information Technology Association of Canada• Foragen Technology Ventures Inc. • Kingston Angel Network• MaRS Discovery District for Medical and

Related Sciences• National Angel Organization• Ottawa Centre for Research and Innovation

(OCRI)• Primaxis Technology Ventures - Petroleum

Technology Alliance Cda• Saskatchewan’s Minister’s Advisory Council on

Information Technology• Saskatchewan Advanced Technology Association

(SATA)• Sustainable Development Technology Canada

(SDTC)• Toronto Angel Group (TAG)• Toronto Industrial Angels • Toronto Life Science Angels• Toronto Network of Angels • Trillium Medical Technology Association


What is cleantech? Clean technology (‘cleantech’) is anyknowledge-based product or service that:

• Improves operational performance,productivity or efficiency, while

• Reducing costs, inputs, energyconsumption, waste or pollution.

Cleantech is not:

• Tied to a particular industry• A classic “environmental” technology.

The SDTC is the largest cleantech investmentpool in Canada, with funding of $550 million. Itprovides an early stage venture capital fundwith a focus on clean technologies. There is anopportunity for angels to partner with the SDTCto leverage research, share skills, increase dealflow by minimizing search and analysis time,reduce risk by performing due diligence, andget to the market faster by finding thosetechnologies that are nearly ready forcommercialization.

Evolution of cleantechThe roots of cleantech began in the 1970s and1980s with ‘envirotech’, which was largelychemical science and ‘end of pipe’ technology(for example, scrubbers on smoke stacks).Envirotech was rooted in a ‘save the world’mentality and driven by regulation andcompliance requirements. It made little use ofinformation technology and supported onlyslow-growth markets (for example, wastemanagement).

Cleantech took form in the mid 1990s.Encompassing biological and materials scienceand ‘front of pipe’ technology (for example,zero-emissions plants), cleantech is based on anentrepreneurial approach and economic marketdrivers, and makes extensive use of informationtechnology. Productivity-based purchasing hasled to rapid growth in markets such as solarenergy.

Examples of cleantech now include:

• Energy generation: wind, solarphotovoltaic, solar thermal, geothermal, fuel cells

• Energy infrastructure: smart meters, powerconditioning equipment

• Energy storage: batteries, flywheels,hydrogen

• Energy efficiency: solid-state lighting, LEDlighting, voltage regulation

• Fuels: ethanol, biodiesel, hydrogen, bio-oil,syngas

• Waste management: aerobic digestion,anaerobic digestion, gasification, pyrolysis,composting

• Transportation: hybrid vehicles, lighter andrecyclable materials, fleet management anddriver behaviour monitoring, emissionreduction

• Soil: bio-remediation, phyto-remediation,chemical treatment

• Water: membrane filtration, ultraviolettreatment, sensors and monitoringequipment for pathogen and leak detection

Zoltan TompaZoltan Tompa from Sustainable

Development Technology of Canada

(SDTC) spoke about ‘cleantech’. The

government created the SDTC to address a

need for capital and provide grants at the

point in the business lifecycle where risk in

the business model is too high to attract

loans from banks. The focus of SDTC is

clean technology and knowledge-based

products and services that improve

operational performance, productivity or

efficiency while reducing costs, inputs,

energy consumption, waste, and pollution.


CLEANTECH AND SUSTAINABLE TECHNOLOGY OF CANADA


Drivers behind cleantechThe primary driving force behind cleantech isthe high price and volatility of oil, which hasmade it difficult to commit to any large capitalexpenditures in the energy sector. Other driversof cleantech development and cleantechmarkets include:

• Energy security concerns• Carbon trading • Stricter environmental regulations• Deregulation in electricity markets• Federal, provincial, state and municipal

government policy initiatives • Resource constraints• Outdated electricity infrastructure• Outdated water infrastructure • Innovation and economies of scale • Technology spill-over from other sectors• Serial entrepreneurs from other industries.

Cleantech investment activity

Cleantech investorsInvestors in the cleantech sector include:

• Multinational corporations - GE(Ecomagination), Dupont

• Oil companies - Suncor, Encana, BP• Corporate investors - Hydro-Quebec

CapiTech, OPG Ventures • Mainstream venture capitalists - Vantage

Point Venture Partners, Ventures West,Pangaea

• Dedicated cleantech venture capitalists -Chrysalix, Expansion Partners, EnertechCapital

• Serial entrepreneurs who began in IT -Bob Metcalfe (inventor of Ethernet), SteveCase (AOL founder), Bill Gates, John Doerr(early investor in Google and Amazon), PaulAllen (Microsoft co-founder)

• Institutional investors and major pensionfunds - CalPERS, CalSTERS, OTPP

Venture investmentBetween 2000 and 2003, cleantech ventureinvestment averaged more than $1 billion peryear, compared to about $350 million per yearprior to 2000.

Before 1999, cleantech attracted less than 1%of venture capital investment. In the past twoyears, that has risen to between 5 - 8%.

Canada’s cleantech investments exceeded $618million between 2002 and 2005. Energytechnology and advanced materials technologyaccount for over 50% of cleantech fundsinvested since 1999. Ninety-five percent ofCanadian cleantech private equity isconcentrated in Ontario, British Columbia, andQuebec, as compared to 1% in New Brunswick.

IPOsThere were only nine IPOs 1987 and 1995.There were 58 IPOs between 1996 and Q22004.

M&AThe deal count rose from 117 between 1990and 1995, to 613 between 1996 and 2003.

ReturnsReturns have averaged approximately 620% ofinvested capital (based on data from 56 IPOsand 21 M&A transactions).



Growth of cleantechMany in the business community haveunderestimated the growth of cleantech andthe effect it will have on the investing landscapeover the next decade. In fact, it is currentlyrelatively underinvested when compared to themajority of venture capital dollars and therelative size of the potential market. Key pointsinclude the following:

• In 2004, more processed silicon was used tomake solar panels than semiconductors.

• Cleantech markets represent annual globalrevenues of more than $150 billion.

• Wind and solar power have 5-10 yearcompound annual growth rates as high as35%.

• Total venture capital investment in NorthAmerican cleantech ventures from 1999-2005 was $7.3 billion.

• Cleantech is now the sixth largest ventureinvestment category.

Investment outlookThe sector remains relatively underinvested andthus sheltered from inflated deal valuation.Between 2006 and 2009, cleantech is expectedto represent an average of 8-10% of all ventureinvestments, totalling $6.2 billion - $8.8 billion.

SDTC’s investment envelopeSDTC has invested $1.1 billion into cleantech inNorth America each year. In fact, SDTCrepresents the single largest cleantechinvestment pool in Canada. It leverages a $550million fund 2-3 times with consortia partners,which will create an investment envelope ofbetween $1.6 billion and $2.2 billion by 2009.To date, SDTC has approved $169 million inproject funding, with an additional $449 millionin leveraged funding, for a total of $618 million.


Forecasted growth for selected cleantech markets

Market 2000 est. 2012 est.

Wind power $5B $49B

Solar power $3.5B $27.5B

Power quality $5B $15B

Industrial water purification $5-6B $20B

Desalination $45B $75BSource: Frost & Sullivan, Clean Edge, Water Technology, Charles Schwab


Innovation chainCleantech’s innovation chain starts withfundamental research, which is then applied,developed, demonstrated and commercialized.As innovation progresses, the risks associatedwith the technology are greatly reduced.

Sources of fundingSources of funding for cleantech includegovernments, industry, angel investors, venturecapitalists, and banks.


Figure 2: Stages of technology development

Figure 3: Risk Profile


Role of the SDTCThe SDTC operates as an early stage venturecapital fund, with a focus on cleantechnologies, providing solutions to air, waterand land issues. It de-risks technologies at theexpensive development and demonstrationphases (post R&D but pre-revenue). It investsin “go to market” consortia that must have atleast one private sector entity and that oftencontain a strategic investor.

Enabling or cross-cutting technologies are alsoevaluated. SDTC covers all the primaryeconomic sectors in Canada, including:

• Agriculture and forestry• Power generation• Energy production• Transportation• Energy utilization• Waste management.

SDTC fundingSDTC funding fills the traditional pre-commercialization funding gap. SDTC’scurrent investment in 75 projects totals $169million (up to the last Board fundingapproval, October 5, 2005).

17

Figure 4: SDTC Sector Funding by Province

Figure 5: SDTC Leveraged Funding by Province


Results to dateSDTC’s funding has led to tangible results:

• Applications to date (eight rounds) – 1084 applications (more than 2,800

entities)– $2.3 billion in funding requests– $9.2 billion in total project value– 82% industry led

• Projects approved (seven rounds)– 75 projects– $169 million from the SDTC– $449 million leveraged from consortia

members– $618 million in total eligible project value

• Emission reductions (undiscounted applicantprojections for market rollout)– 125 million tonnes annually undiscounted

• SDTC discounted emissions– 12.5 million tonnes annually in 2010

Partnering with the SDTCPartnering with the SDTC offers a number ofbenefits:

• Increased deal flow: SDTC accesses allemerging clean technologies in Canada,encourages competitor analysis, andminimizes investor search and analysis time.

• Reduced risk: All applications are pre-screened on their technical, market andfinancial merits, in addition to beingassessed in terms of emissions intensity.

Due diligence is equivalent to venturecapital industry processes. Only highpotential applications are approved. SDTCfunds projects that de-risk the technology.

• Faster market entry: All technologies arepre-revenue but close to marketcommercialization. SDTC manages hands-off, and exits to the investment community.

• Superior arrangements: SDTC takes noequity position, so the funds are non-diluted. SDTC takes no IP ownership in theprojects. Project contracts are rigorous.

• Strengthening team and technology valueproposition: SDTC builds consortia, seeksstrategic and follow-on investors, andassembles entrepreneurial capacity.



Fast track opportunities• Carmanah Technologies Inc. - Carmanah is

demonstrating an adaptation of solar-powered LED technology for edge-litsignage, which will lead to the developmentof a more diverse and robust solar industry.This project is expected to allow solarpowered lighting to enter mainstreamapplications. Consortium members includeB.C. Hydro, and the British ColumbiaInstitute of Technology.

• Railpower Technologies Corp. - Railpowerplans to demonstrate an ultra-energy-efficient switcher locomotive. Most railwayswitcher locomotives incorporate standarddiesel-electric configurations which, becausethey are not built for the very demandingstop-go environment of the railwayswitching yard, tend to operate inefficientlyand emit large quantities of particulates.Railpower’s prototypes are powered bycustom-designed lead-acid batteries whichare kept at full charge by a computer-controlled, smokeless diesel generator.Consortium members include AlstomTransport Service, Southern Railway ofBritish Columbia Limited, and TransportCanada (Freight SustainabilityDemonstration Program).

Transportation opportunities• Nanox Inc. - Developed a low-temperature

catalyst powder that it claims will replaceplatinum group metals (PGM) as thecoating on catalytic converters for theautomotive industry. This catalyst is capableof converting volatile organic compounds(VOC) and methane from engine exhaustinto water and carbon dioxide at lowertemperatures than PGMs (which onlycatalyze pollutants when the converter ishot). In conventional PGM catalyticconverters, there is a significant periodbetween cold start-up and optimumtemperature when little or no catalysis istaking place. During this period, thepollutants are exhausted directly into theatmosphere. Consortium members includeBusiness Development Bank of Canada,Hydro Québec CapiTech inc., PangaeaVentures, Sovar s.e.c., the Solidarity FundQFL, and Université Laval.

Oil and gas opportunities • Synodon Inc. - Plans to develop a

commercial mobile remote natural gassensor capable of detecting leaks inpipelines. This detector, called realSenstm, isbased on remote sensing methods andinstrumentation developed at the Universityof Toronto. Certain components upon whichrealSens is based are currently in use onNASA’s Terra satellite. The proponent hasnearly completed testing a prototype, andSDTC funds will be used to build a full-scaleunit and test/demonstrate it in partnershipwith TransCanada Pipelines’ Leak Detectionand Repair Division. Consortium membersinclude Airborne Energy Solutions Ltd.,Mosaic Mapping Systems Inc., andTransCanada Pipelines Ltd.

• Suncor Energy Inc. - This project addressescarbon sequestration and enhancedmethane production in a closed cycle pilotproject designed to capture CO2 emissions,inject and sequester these emissions into alocal subsurface coal reservoir, and produceenhanced volumes of coal bed methane as aresult. Consortium members include theAlberta Energy Research Institute, AlbertaResearch Council, Encana Inc., FederalGovernment (TEAM and PERD), MGVEnergy Inc., and TransCanada Pipelines Ltd.



Renewables opportunities• Paradigm Environmental Technologies

Inc. - Paradigm developed a process forefficiently breaking down biologicalwastewater sludge. This technology, whichthe proponent calls MicroSludge, useschemicals and rapid depressurization anddeceleration from a high pressurehomogenizer to pre-treat waste sludgebefore it goes into an anaerobic digester,where decomposition is far more efficient.Conventional waste-treatment methods areinefficient, and only break down 35% of thesludge. The remaining 65%, teeming withmicrobes, usually goes into a landfill, wheresubsequent uncontrolled decompositionreleases significant amounts of methane intothe atmosphere. Consortium membersinclude CH2M HILL, Chilliwack Waste WaterTreatment, the National Research Council,Natural Resources Canada, and PowertechLabs Inc.

• DynaMotive Energy Systems Corporation -DynaMotive is demonstrating its combinedfast pyrolysis technology (called BioTherm)for the production of liquid fuels (bio-oil)from forest and agricultural residues (forexample, wood, bark and straw) in anintegration platform with a 2.5 MW gasturbine developed specifically to run on bio-oil. Consortium members include ClassicPower LLC, Erie Flooring and WoodProducts, Ontario Power Generation, Inc.,Orenda - a division of Magellan AerospaceCorporation, and UMA Engineering Limited.

• Ensyn Technologies Inc. - Ensyn plans todemonstrate an industrial integratedbiomass refinery concept, including the coreRapid Thermal Processing (RTP) process thatproduces intermediate products and themultiple downstream refining that producesthe final chemical, fuel and carbonproducts. Consortium members includeOpeongo Forestry Service and the RenfrewIndustrial Commission.

Hydrogen economyopportunities

• Cellex Power Products Inc. - Cellexdeveloped fuel cell based power productsfor use in industrial vehicles. This projectfocuses on demonstrating a fuel cellpowered lift truck (that is, a forklift). Cellexaims to target the electric- and ICE-poweredlift truck market. Cellex believes that, withSDTC’s help, it can be in a position toassemble Cellex Fuel Cell Power units forcommercial use. Consortium membersinclude Arpac Storage Systems Corporationand Fuel Cells Canada.

• Hydrogenics Corporation - Hydrogenicsplans to develop, demonstrate, andcommercialize fuel cell powered forklifts.This would involve outfitting two Class-1forklifts with motors and fuel storagesystems, as well as developing refuelingfacilities and demonstrating the newlyoutfitted forklifts to industrial end users. Oneof the technological challenges Hydrogenicshopes to overcome is refueling time,currently a major cost to warehouseoperations. Consortium members includethe Canadian Transportation Fuel CellAlliance, Deere and Company Inc., FederalExpress Canada Ltd., General Motors ofCanada Ltd., and NACCO MaterialsHandling Group Inc.



The Wisconsin Angel Network (WAN) is anumbrella organization providing services andresources to the angel capitalist and early stageinvesting community. It brings together acombination of entrepreneur resources to worktoward the common goal of concentratingeconomic dollars in the most efficient waypossible.

WAN members include:

• Angel networks• Angel funds• Early stage venture funds• Corporate strategic partners.

There are currently 25 member organizations.

Services providedWAN provides a range of services and supportto angel capitalists and entrepreneurs,including:

• Deal flow• Angel network development• Education• Communications• Resources.

Deal flowThe deal-flow pipeline (DFP) contains executivesummaries written by entrepreneurs about theircompanies. WAN does not screen theseexecutive summaries; instead, each WANmember receives an automatic notification via

email that a new summary is available on thewebsite (www.wisconsinangelnetwork.com).The website hosts a searchable database ofthese summaries, and serves as a bridgebetween entrepreneurs and investors. Videopresentations are included as an added featureon the website.

The DFP was opened June 1, 2005. As of April2007, more than 500 entrepreneurs havecreated DFP accounts, and more than 150executive summaries have been uploaded. Morethan 250 investors have access to thesesummaries.

Angel network developmentWAN also consults with other angels who wouldlike to start a new network in their city orgeographical area (as it is doing with angels inAtlantic Canada). To educate angel investors, orpotential angel investors, WAN offers bootcamps and seminars in which experienced angelinvestors share their experiences, outline therules of the road, and communicate bestpractices. WAN also helps with memberrecruitment.

At the end of 2004, there were six active angelnetworks/funds in Wisconsin (networks thathave made at least one investment). Todaythere are 14 active networks, with another twomeeting regularly.

Joe KremerJoe Kremer is a walking lesson in how to

form a successful angel group. He has had

great success in Wisconsin, and shared his

experiences with the Summit.

Note: This section documents Joe’s presentation atthe 2006 Summit, but has been updated toinclude 2007 data.


WISCONSIN ANGEL NETWORK


http://www.wisconsinangelnetwork.com



EducationEducational seminars planned for 2006 by WANincluded:

• Power of angel investing • Early stage tax credits• Introduction about how to perform due

diligence on companies in the Life Sciencesand the Biotech industry

• Entrepreneurial “boot camps” and seminars.

The schedule for 2005 included four one-dayseminars and three workshops.

CommunicationsWAN also promotes effective communication byhosting networking events and acting as anintermediary for the distribution of information.WAN’s website helps angels find a variety ofinformation and resources, including usefultemplates and forms for evaluating investmentopportunities.

Angel network communications includes:

• Networking events• Promoting resource sharing and deal

syndication• Serving as an information distribution

channel • Government and public relations• Increased awareness of angel capitalists• Coverage of individual investments.

ResourcesWAN provides various tools for investors andentrepreneurs, including:

• Templates and forms, including a VentureCapital friendly deal structure, investorpresentation template, and business plantemplate

• Links to online information and tools,including investment tax credit information

• ePlan, a cutting-edge technology to helpentrepreneurs communicate with investors

• fee-based consulting services focusedexclusively on helping entrepreneurs raisemoney.

Components of successKey elements in WAN’s success have included:

• A team approach• A Governor that recognizes the importance

of early stage (angel) investing to the State’seconomy

• A legislature that creates opportunities andprograms focused on early stage investors

• Champions within the administration thatactively worked to create a statewidefoundation of support

• A statewide organization to launch andhouse the new initiative

• A media expert with industry contacts tohelp ensure coverage and access across thestate

• An advisory committee of leaders frombusiness and government

• Experts to provide support and developservices for angel networks

• Entrepreneurs able to implement plans andadapt to market trends.



Overview of the publicventure capital marketIn November 1999, five junior stock marketswere consolidated to form the CanadianVenture Exchange (CDNX). The TSX thenacquired the CDNX in August, 2001. TSXVenture Exchange is one of a number of TSXcompanies, and serves as Canada’s publicventure marketplace.

TSX Venture Exchange provides a vehicle forgrowth and an evolving market for emergingcompanies. The Venture Exchange meets a needin the marketplace by giving entrepreneursaccess to the capital they need to fuel growth.Start-up companies can get seed money directlyfrom government or angel investors, fromventure capitalists, or from the VentureExchange.

Going public on the TSXVenture ExchangeCompanies do not have to be part of relativelylarge IPOs to be listed on the TSX VentureExchange. The Venture Exchange caters tosmaller companies who are pre-revenue or pre-income, allowing such companies to raisemoney strategically, in non-dilutive chunks. TheVenture Exchange offers financing between$500,000 and $25 million through multiplefinancing rounds, which provides more ground-floor investing opportunities. Business ownerscan use the Venture Exchange to reap thebenefits of blended financing alternatives, an

approach which has become an emerging trendover the last few years. Venture Exchangecandidates can be in the R&D or prototypestage, the commercial stage, or the stableproduction stage.

Going public on the Venture Exchange allowscompanies to take advantage of employee stockoptions, mentoring, and a streamlined path tothe TSX and senior markets. In addition,graduates leave with an established trackrecord.

To be listed on the Venture Exchange, acompany must be both unique and successful,the number of securities issued must correlatewith the value of assets received, and themanagement board must demonstrateadequate business expertise, experience withpublic companies, and commitment (since thesuccess of emerging companies relies more onmanagement abilities than on financial factors).

Seventy one companies (5.6% of CPCs) arecurrently listed on the TSE. As of January 31,2001, 70% of CPCs were operating companieswith a market cap below $25 million, and 9%had a market cap above $25 million. In theperiod Jan. 1 to Apr. 30, 2001, there were atotal of 12 graduates, 6 of them former JuniorCapital Pool (JCP) companies. Seventeenpercent of new TSE listings were former CPCs.

Ungad ChaddaUngad Chadda is Director of Listed Issuer

Services and NEX at the TSX Venture

Exchange. Ungad spoke about the TSX

Venture Exchange and its Capital Pool

Company (CPC) program, which is gaining

popularity. The Venture Exchange gives

emerging companies an alternate source of

capital in the form of public funds, while at

the same time providing a realistic exit

strategy for angel investors.


TSX VENTURE EXCHANGE CAPITAL POOL COMPANY® PROGRAM


CPC processThe capital pool company process includes thefollowing milestones:

1. Seed financing of the company by 3-5founders/directors

2. CPC IPO to create a corporate vehicle withpublic distribution

3. Qualifying Transaction, during which atarget business is identified, disclosed andacquired

4. Aftermarket and growth, during which thecompany trades and executes its businessplan

Seed financingDuring seed financing, founders set up the CPC.This typically involves $100,000 to $1.8 millionin seed funding, of which up to $500,000 maybe discount seed funding.

A board of directors is appointed for the CPC.Not all seed investors will necessarily becomedirectors. The directors contribute a minimumtotal seed of $100,000, a minimum of $5,000from each director.

Initial public offeringDuring the initial public offering (IPO), thefollowing items are put in place:

• President’s list• Broker’s list• Stock options• Agent compensation

Qualifying the transactionA qualifying transaction (QT) is selected.Considerations include:

• Significant growth opportunities • Strong management• Capital needs - $1 million to $20 million • Readiness for commercialization• Stock options and acquisition currency • Market appetite • Financing of 12 to 18 month cash

requirements.

Aftermarket and growthThe aftermarket and growth phase includes thefollowing activities:

• Investor relations program• Execution of the business plan• Private placements• Acquisitions• Governance/compliance with securities laws

and exchange policies

When and why to use a CPCUse a CPC when the company requires:

• Alternative access to capital while retaininghigher ownership

• Benefits of a public company (M&Acurrency, stock options, and visibility)

• Greater flexibility, certainty and control inprocesses

• A way to reduce risks while going public.

The appropriate time to use a CPC is when:

• The company is at too early a stage for abroadly distributed, regular IPO

• The IPO market is not strong enough ingeneral

• Venture capital financing is not viable ordesirable

• The market appears ready to reward growthin the target company’s sector.

Success factors for a CPC include:

• Management – company builders who canbe a driving force and have experience withpublic companies, fundraising, operationsand the industry

• A long-term strategy to grow as a publiccompany

• Reasonable valuation and a viable sharestructure

• Investor support – investors that believe inmanagement and have committed to long-term support of the qualifying transaction

• Appropriate advisors (lawyers, brokers, andinvestment bankers) who understand rolesand benefits and have a long-term view oftheir relationship with the company.



Reasons to found a CPC You may wish to found a CPC to:

• Leverage private equity with public funds • Accept high risks for high rewards (graduate

performance) • Control structuring, timing and financing• Serve as a consolidation tool• Reduce escrow time and enjoy other

benefits associated with early investmentsonce the company graduates to the TSX

• Spread risk.

Performance to dateThis unique way to list was introduced in 1987.Since then, 1,585 CPCs have listed, 1,357 CPCshave completed qualifying transactions, morethan $652 million has been raised in seed andIPO financings, 202 former CPCs now trade onthe senior exchange, and 33% of TSX VentureExchange graduates to the Toronto StockExchange in 2005 were CPC issuers.

CPC success stories

RailPower Technologies Corp. (TSX:P)Based in Vancouver, this company provideshybrid yard locomotive technology solutions forrail operators. It went public on the TSX VentureExchange in 2001 as a CPC. It raised $20.2million on the Venture Exchange, graduated tothe TSX in March 2004, and as of April 18,2006 had a quoted market value of $243million.

Kaboose Inc. (TSX:KAB) This Toronto-based Internet entertainmentcompany has one of the top ten family websitesin the US. It went public on the VentureExchange as a CPC in November 2005. It raised$10 million at the time of the QualifyingTransaction, and graduated to the TSX inFebruary 2006.

Killam Properties Inc. (TSX:KMP)This Halifax-based real estate company focuseson multi-family residential properties. Itcurrently owns and manages 71 properties with7,832 apartment and manufactured home units.It went public on the Venture Exchange as aCPC in 2000. It raised $6.5 million while on theVenture Exchange, graduating to the TSX in2003. It has since completed three privateplacements on the TSX to raise a total of $121million (with $57 million raised in May 2005).

Important note: The information provided inthis document is not an invitation to purchasesecurities listed on Toronto Stock Exchangeand/or TSX Venture Exchange or Natural GasExchange. TSX Group Inc. and its affiliates donot endorse or recommend any securitiesreferenced in this document. Please seekprofessional advice to evaluate specificsecurities. While the information herein iscollected and compiled with care, neither TSXGroup Inc. nor any of its affiliated companiesrepresents, warrants or guarantees theaccuracy or the completeness of theinformation. You agree not to rely on theinformation contained herein for any trading,business or financial purpose. This informationis provided with the express condition, towhich by making use thereof you expresslyconsent, that no liability shall be incurred byTSX Group Inc. and/or any of its affiliates asa result of any errors or inaccuracies herein orany use or reliance upon this information.



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