Canadian ventures in need of more capital

Information Technology Association of Canada (ITAC) asked emerging IT companies what obstacles they encounter to growth, it was surprised by some of the answers it got.

There were, of course, the old standbys – such as skill shortages in the high-tech industry, which was, as always, on everyone’s mind. But Bob Morine, ITAC’s vice-president, chair and general manager, said some new themes arose when ITAC asked the Gloucester, Ont.-based Branham Group Inc. to survey companies in the Canadian IT sector.

“For the first time, some new issues really emerged at the top priority level. And these are things like venture capital climate in Canada and the need to form an exchange between new and old IT companies,” he said.

What surprised Wayne Gudbranson, the president and CEO of Branham Group, was the 13 per cent response rate that its survey received – most organizations conducting surveys receive only about a five to seven per cent response rate, he said.

“The results indicate a need for ITAC to focus on three areas primarily: access – understanding how companies can get better access to investment funding; how to get appropriate management of resources; and how to attain adequate knowledge of marketing and sales approaches,” he said.

As a result, ITAC is creating a new program aimed at providing learning, support and networking opportunities between emerging IT companies and the established IT community.

One of the most surprising aspects of the survey results was that companies said finding sales and marketing help was even harder to do than acquiring and retaining skilled IT workers.

Lack of capital was also one of the main concerns of the emerging companies: 63 per cent of the respondents indicated gaining access to operating capital, and 43 per cent said getting access to capital to fund growth, were two of the main challenges they faced in the first year.

Justin LaFayette understands those kinds of challenges. His company, the Toronto-based DWL, which specializes in enterprise Internet architecture software, survived its first three years without any outside funding.

The 31-year-old former Chicago Blackhawks NHL professional hockey player started the company in 1996 with Al Digout. He left his corporate job with only 21 days worth of salary.

“Beyond three weeks, there was nothing. And that kind of pressure of necessity can really drive you to succeed. I don’t know of many businesses that succeed that don’t at some point have someone step out when there is no safety net,” LaFayette said.

He did everything at the company, from programming, to bookkeeping to cleaning the office.

Surviving without capital is a very valuable phase for a company to go through, he said, noting that it was the act of proving itself during those lean years that helped get the company where it is today. Last year the company raised close to $40 million in venture capital (VC).

Along the way, DWL also avoided taking money that came with too many strings attached, LaFayette said.

“We didn’t take some of the easy money that was available from less reputable or less institutional investors. They demand huge pieces of control of the company.”

LaFayette and Digout started off by turning to Schedule A banks and their own banks.

The experience was “frustrating.” The lines of credit they received always amounted to less than one payroll cycle, and the company was growing.

Next was the Business Development Bank of Canada. The process was gruelling, and the pay off, very little.

“The first time people raise money, it will be the hardest, and it will be for the least amount of money,” LaFayette said.

Then DWL went to the VC community, had luck with the Toronto-based VenGrowth Capital Management Inc. and raised its first $5 million.

In further rounds of raising money, DWL also went down to the U.S.

In this they are not alone.

According to the Branham Group survey, almost 85 per cent of Canadian companies end up going to the U.S. for financing.

“I think that’s reasonably alarming, given that the amount of equity money in Canada has tripled in the last couple of years. I think it’s fair to say that the venture capital community in this country has really pulled up [its] socks,” Gudbranson said.

Still, the VC community doesn’t play as important a role in nurturing start-ups as one might think, he said.

“They are not a proactive group. Generally speaking, they are reactive. And I don’t want to specifically say that they watch for the flavour of the month, but they come pretty close to doing that.”

But start-ups face another challenge, according to Gudbranson.

Executing the business model was also a major concern with 43 per cent of the 93 total respondents.

A good number of the executives running emerging companies are typically less than 40 years old, and are quite often less than 30, Gudbranson said.

“So, although they have a great way of perhaps indicating a value proposition in a business plan, and potentially getting organizations to invest in the company, they have a great deal of difficulty executing on the business model,” he said. “You typically just can’t replace 10 to 20 years of managing experience overnight.”

LaFayette avoided such problems by recognizing where his limits lay.

“Al and I, we had certain skills that we were really confident in, and other things that we felt that we could learn. We realized early on that the best way to succeed was to bring in experts and experienced people on things that we didn’t know about.”