One of the realities facing many Canadian startups is the challenge to attract growth capital, particularly to develop leading-edge technology. This was a fact of life for Toronto-based OutsideIQ, which spent several years developing technology that uses artificial intelligence and cognitive computing to automate due diligence reports for large financial institutions and insurance companies.
Looking for alternative growth capital
Dan Adamson, OutsideIQ’s founder and CEO, said the lack of capital from Canadian investors meant R&D was fueled in three ways: tapping into angel networks, accessing venture debt, and leveraging financing from the federal government’s FedDev program. OutsideIQ’s approach to raising capital saw it embrace angels and venture debt at the same time. It worked with the Angel One Investor Network, one of the most active angel groups in Canada, and Espresso Capital, the leading provider of venture debt to startups. Adamson said dealing with Angel One and Espresso not only provided OutsideIQ with much-needed capital but also allowed it to qualify for funding from the FedDev program. “Part of the FedDev requirement is that we needed an organization behind us that was approved and accredited by the federal program” he said.
“The angel network worked because we could show we had enough money from Espresso. Espresso worked because we could leverage the Angel One network. It was a nice synergistic loop.”
– Dan Adamson, Founder & CEO @ OutsideIQ
Adamson said the mix of angel investors and venture debt succeeded because Angel One and Espresso recognized the strengths that both sides brought to the table. “Espresso and Angel One realized the quality folks involved, and they have become trusted partners. Another benefit in working with Espresso” Adamson said, is having a business relationship that delivers valuable insight. He said Alkarim Jivraj, Espresso’s president and CEO, has provided valuable feedback and advice because he has a combination of operational, startup and financing experience.
“OutsideIQ is typical of many Espresso customers. A super smart team that has developed and validated a disruptive technology. It has attracted initial funding and pioneering customers, but it is not quite ready for prime time venture capital. That’s where Espresso comes in, providing, the funding needed to scale revenue and traction necessary for a Series A or B [as the case may be].”
– Alkarim Jivraj, CEO @ Espresso Capital
Fueled by capital from Angel One and Espresso Capital to develop its technology, OutsideIQ was able to raise a $7-million series A round last year.
Venture debt plays a key role
While the company plans to raise additional capital this year, Adamson said venture debt will continue to play a key role in OutsideIQ’s financing activity. “When you are looking at a company growing at a certain rate, it is healthy to have a certain amount of debt and not have further dilution in raising capital as straight equity” he said. Debt is often the smart way to go, and Espresso has been helpful in helping us structure our financing. OutsideIQ is a great example of how fast-growing companies can leverage a combination of equity and debt financing to successfully drive product development and attract customers, while minimizing dilution for shareholders and setting the foundation for the next milestone financing.