Software firms cope with growth hurdles

They may be on the opposite sides of the border, but emerging software company CEOs in both Canada and the U.S. are on the same side in agreeing on some of the challenges the software industry will face in the next two years, according to a recent report.

The top challenges of the software industry include growing revenues with quality customers, maintaining a technology lead in vendors’ respective markets and establishing effective sales channel partnerships, according to the second annual PricewaterhouseCoopers (PwC) Report on Emerging Canadian Software Companies: The CEO Perspective.

The report identifies opportunities and challenges facing the CEOs of Canada’s emerging software companies. Both Canadian and U.S. CEOs noted that their strengths were in offering best-of-class enterprise applications, said Susan Allen, report author, partner and leader of PwC’s Emerging Company Practice. “Business intelligence is coming up as the number one area, (along with) CRM, supply chain management and ERP applications.”

Canadian respondents also noted that they feel they have an edge over the U.S. when it comes to software pricing, Allen said. “In spite of the fact the [Canadian and U.S. CEOs] had the same strength issues, Canadians felt that they needed to discount their products to sell them.” She added, “In the U.S., they felt that they could premium-price their products.”

While both sides generally agree on the same growth challenges, there are differences of opinion, particularly in the cultural mindset, Allen said. For example, the survey found that the majority (60 per cent) of U.S. respondents were hired into the CEO position, whereas two-thirds of the Canadian companies had founder CEOs managing their companies.

Many Canadian respondents are disappointed with the size of funding they receive and feel undervalued against their U.S. competitors, the report found. This perception has increased significantly from last year, where only 50 per cent of respondents indicated that they were under-funded, according to the report. Both U.S and Canadian CEOs in the survey agreed that a seasoned CEO can impact success in raising capital, Allen said. It’s possible that Canadian firms could adopt a similar practice to that of the U.S. and begin hiring experienced CEOs at earlier stages of companies’ life cycles, Allen offered.

And when it comes to raising capital, Canadian CEOs still struggle with accessing venture capital from U.S. sources, with 71 per cent also holding the view that accessing venture capital in Canada is a challenge.

Cynthia Howroyd is the founding president and CEO for Virtual Expert Clinics Inc. (VEC), an emerging Fredericton-based software firm that develops Virtual Autism Clinic, a Web-based software product for autism treatment and diagnosis. Howroyd agreed that as an emerging firm, a big challenge for her is that of creating effective partnerships in the sales channel.

The software targets a niche market and the strategic goal is to develop a strong subscription-based Internet model targeting the therapeutic and special education market, Howroyd said. VEC has been able to access venture capital “but Canadian companies, especially ones not located in central Canada, tend to have real difficulty accessing the level of venture capital needed to deliver the solution that you want to deliver,” Howroyd said.

Toronto-based PlateSpin Ltd. is a developer of adaptive data centre management technologies and solutions. Stephen Pollack, the founding CEO for PlateSpin, agrees with the top challenges and noted that the Canadian challenge is in developing the company to be able to compete in the global marketplace.

“Consolidation in the IT space has made it difficult to develop relationships with companies.…We’re down to a handful of large players, almost no middle-tier players and a whole bunch a small players,” Pollack said. But in Canada, enterprises appear to be turning the corner when it comes to boosting IT spending, Pollack said. “The return of investment is much more tangible…so companies realize that if they spend money they will gain from it,” he added.

Indeed, “95 per cent of Canadian CEOs expect their revenues to increase in 2005,” Allen said. The report found that almost half of the Canadian respondents are expecting revenue growth of greater than 50 per cent. In the U.S., more than half of them are expecting revenue growth in 2005 of greater than 100 per cent, Allen said.

Overall, Canada has an edge over the U.S. in that there is a huge IT market for emerging software companies to tap into, particularly in the SMB space, Allen said. IT spending is significant in SMB and has been under-serviced in the past, she added.

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