A venture capital crisis is slamming the brakes on the growth of Canadian technology companies, according to professional services and financial advisory firm Deloitte & Touche.
Effects of the tech industry bubble in 2003 have reduced by nearly 50 per cent, the number of Canadian companies that made it this year to Deloitte’s North American Technology Fast 500, an annual awards program that ranks the fastest growing U.S. and Canadian tech companies. However, Deloitte analysts are bracing for the worst as the
global economic slowdown threatens to pull back even more Canadian companies.
“Canadian presence in the Fast 500 was down nearly 50 per cent. We’ll see much slower growth when the impact of this year’s economic downturn hits home,” said John Ruffolo, national leader, of the technology, media and telecommunications group for Deloitte.
In 2008, only 43 Canadian companies or eight per cent made it to the Fast 500, down by almost a half from the 68 local entries (14 per cent) in 2003.
Equally alarming is the drastic reduction in the growth rate of firms that made it to the Deloitte Technology Fast 50, the financial services company’s Canadian tech awards. The average growth rate of Fast 500 firms was 3,043 per cent, up from 1,823 per cent in 2007. Canadian companies that made it to the Fast 50 posted an average growth rate of 2,457 per cent down dramatically from last year’s average of 3,732 per cent.
“This growth rate decline suggests that in future years, Canadian representation could decline future unless we begin to remedy Canada’s venture capital crisis,” Ruffolo said.
It seemed only two years ago when the Fast 500 presented a much rosier Canadian picture and Ruffolo was quoted as saying: “The Canadian companies blew the competition away”.
In 2006, Canadian firms posted an average 3,876 per cent five-year revenue increase from 2001 to 2005 compared to the 1,927 per cent growth exhibited by U.S. businesses. That was the first time, since the program started nine years ago, that Canada had five companies among the top 10. This year, Canada only had one company, Nightingale Informatix Corp., a Markham Ont-based electronic health records firm, was in the top 10.
Nigthingale , which came in at No 10 is followed by: PlateSpin (No. 11), a workload provisioning a protection firm based in Toronto; MyThum Interactive Inc. (No. 44), a Toronto interactive media company; Vision Critical (No. 54) , a Vancouver software company; and Corinex Communications (No. 70), a Vancouver high-speed Internet signals solution company.
Ruffolo said the doldrums are an effect of the 2003 tech industry bubble which has turned off a lot of potential investors. Many companies made it through because of already existing capital infusion but soon after that funding were less likely renewed. (The tech industry was
“Events such as those tend to manifest their impact after five years. This is the first year that we are feeling its effects” “The impact of the current credit crunch,” Ruffolo warned, “does not appear on this year’s rankings. We’ll see that next year.” He’s sentiments were echoed by a local start-up insider.
“Venture capital activity in Canada is very low,” says Jevon MacDonald, principal of the Startup North , a business advisory firm.
He said a lot of funds have shut down because they were burned in the previous technology bubble.
“There’s a huge liquidity problem in the VC space because most of their investment choices have failed.”
For instance, he said despite the massive growth of the mobile application industry elsewhere in the world, the technology appears to be crawling in Canada.
“We don’t see much investment in this space and mobile app development has been sluggish in mainly because the market for such products and services are held back by high prices and lack of competition.”
Sam Chebib, president and CEO of Nigthingale, agrees that the tech sector is suffering from lack of VC funding. He says his company is among the lucky ones that is able to sustain growth with the help of previous projects.
“Early on our strategy was to offer solutions for large scale deployment. Our implementations involving the Nova Scotia government, Mt. Sinai Hospital in Toronto as well as other U.S.-based health centres are helping us weather this economic downturn,” he said.
As much as 70 per cent of Nigthingale’s revenues come from “recurring business” from existing accounts, Chebib explained.
“The investment picture has become a bit darker these days because of retrenching in the VC ranks,” according to Jeff Fador of ParkVu a messaging app development start-up.
There’s still a substantial number of but many of those Fador and his partner Terry Goertz approach said they were “overwhelmed with deals.”
To develop their product which enables users to create their “personal cloud” which culls messages and data from various devices such as office and home computers, cell phones and BlackBerrys, the duo signed up with Micorsoft’s BizSpark program. The start-up initiative provides fledgling business with less than $ 1 million in revenue, with free access to Microsoft developer tools.
The strategy allowed ParkVu to substantially cut development cost and speed up production.
The stimulate tech company growth, Ruffolo said, the Canadian government should start investing in venture capital groups. “The VCs have the expertise to determine which Canadian companies can make the most out of capital infusion. If the VC can get more funding they can stimulate more growth.”