After the gold rush, only the strong will survive. The dot-com dream has turned into a nightmare legacy for local high-tech startups looking for venture capital.
More established firms seeking second-round financing also are having a harder time finding investors than nine months ago, say analysts, chief executives and financial officers.
Companies unable to get a grasp on business fundamentals won’t find sufficient financing to survive until next spring, high-tech players predict.
“Everybody’s struggling with the legacy,” says Harold Kunik, chief financial officer for Clinicare Corporation, a privately owned Calgary-based developer and marketer of software for medical clinics. “Especially the public markets are looking with grim visage on these companies,” he says.
Even well-run companies are stumbling in the aftermath of a stock market frenzy that vastly overvalued dozens of dot-com firms, says Byron Osing, chief executive of Launchworks Inc.
As for the poorly-run operations, their days are numbered. Sixty to 70 per cent of startups fail whatever the market conditions are, “let alone startups that never should have been funded to begin with,” Osing says. “You’re going to see a ton fall by the wayside.”
Compared with the start of this year, “it’s been a colder climate” due to scared investors and uncertain equity markets, says Cindy Gray, of Synsorb Biotech Inc.’s investor relations unit.
Synsorb was one of 10 Canadian growth-oriented biotech companies — the only one from Alberta — selected to make presentations to potential investors and strategic pharmaceutical partners at a conference in Ottawa last week.
Synsorb’s presentation garnered interest, Gray says. And some biotech companies have managed to raise money during the last couple of months, she adds. “But we’re starting to see some IPOs and some financings get pulled, because the support’s not there right now.”
Brian Pow, technology analyst with Acumen Capital Finance Partners Limited in Calgary, says: “The capital hasn’t dried up, but certainly scrutiny on the business plan is much, much higher. And delivery on a business plan is really scored more and more.”
Kerk Hilton, director of investor relations for RightsMarket Inc. in Calgary, says: “If you’re in need of capital and you’re a public company already and you haven’t proven yourself, then you really face a big risk . . . .”
In hindsight, the dot-com gold rush that started around November last year and began bogging down in the muck of reality in April was foolish, industry players say.
“There was stupid capital chasing stupid deals,” Osing says. “When you’re putting $20-$30 million a shot into a portal deal that’s run by a 22-year-old who’s never run a company and it blows up — gee, big surprise.”
Jonathan Levine, president of privately owned Canada Connect and affiliate company Middle Digital, says he has no patience with the hype and buzzwords that too often are a feature of what he views as a still-immature Internet industry.
“People tend to fall into the trap of believing that they have to park their common sense at the door, along with most of their vocabulary, and sound like everybody else who’s out shopping for money . . .,” Levine says.
But in whatever language entrepreneurs speak, money’s getting scarce.
Look Communications Inc., a Toronto-based wireless Internet and digital TV company with customers across Canada, announced this month it was cutting its workforce by 35 per cent and considering selling assets in a scramble for financing aggravated by ailing markets. Encryption software maker Certicom Corp. also has come up short in its search for additional financing to keep growing.
Once-wide-eyed investors are realizing that some of what glitters on the Net might be only fool’s gold. DoubleClick Inc., the largest U.S. Internet advertising agency, cut more than 120 employees from its workforce this month — the third Internet ad agency to announce layoff in recent months.
Closer to home, former market stars in wireless like Wi-LAN Inc. sister firm Cell-Loc Inc. and WaveRider Communications (with its main research facility in Calgary) have seen their financing delayed. Cell-Loc, after reporting a $6.9-million quarterly net loss with sales revenue, has suspended building its wireless location networks. Michel Fattouche, company founder, chief executive and largest shareholder, said he will provide equity financing sufficient to meet working capital for six months.
Many investors and startup firms forgot all about business basics during the dot-com craze, says Clinicare’s Kunik, referring to some of the pet industry dot-coms that haven’t survived. “There was very little due diligence done in terms of the quality of management” at some companies.
Agrees Osing: “Before, if you had blue hair and you had a foosball table in the corner, hey, that was great because you were funky.
“Now, if you don’t have experience and a board that can demonstrate the ability to steer you clear of the potholes and in the right direction, that’s a big liability.”
Spooked investors have turned 180 degrees from risk-taking and stampeded back to security. The new buzz phrase among investors is “path-to-profitability.”
“It’s become very critical for companies to prove not only do they have a good idea, but they’ve got the plan to execute it and a plan that clearly achieves profitability very early,” says Veer Gidwaney, chief executive of e-support provider Control-F1 in Calgary.
It has always been tougher for startups to raise money in Canada than in the U.S., Gidwaney notes. And the current bear market — all grizzly, gripe and grab-the-profit — just makes it all that much harder. “There are a lot of early-stage companies that aren’t going to get the opportunity they need to get,” Gidwaney says.
Factors that fuelled unprecedented stock price growth nine months ago aren’t as crucial now, analysts say. Being first out of the gate with a product, showing “hyper-growth” and extending market share dominance don’t count for as much as demonstrating revenues.
“It’s the lemming mentality,” Osing says. “Now they (the venture capital houses) are all running the other way and if you can’t get profitable quickly, they won’t even speak to you.”
The good news is that there’s still much more venture capital available in Calgary than there was three to five years ago, says Acumen Capital’s Pow.
Many entrepreneurs who made millions during the gold rush are looking to invest. And investors in the traditional and now-red hot oil and gas stocks are flush with cash.
“We are finding companies today that do need capital and have executed on their business plan,” Pow says. “And the markets are interested in hearing about those stories.”
ElectroBusiness.com Inc., whose “translation hub” system helps facilitate e-commerce for buyers and sellers, is in the midst of a private placement and is finding the doors are still open.
“In fact, there’s probably as much money available (as in the past) — just not from individuals,” says company chief executive Cal Fairbanks. “But the (investment) houses all still have lots of money. You just have to give them a solid business case.”
If you’re already a public company, however, telling your story to the current market has become a lot more difficult, says RightsMarket’s Hilton. Despite landing some lucrative deals with CBC and other players, the Calgary software firm has seen its share price tumble from $3.90 to about 45 cents.
Fortunately, the company is in a strong cash position, with almost $6 million or essentially two years of operating capital still in the bank, Hilton says. Going public can produce a lot of headaches for an unprepared company, says Clinicare’s Kunik. Too many companies take the IPO plunge and then investors never or seldom hear from them.
“You want to have your strategic and business plan lined up so that as soon as you do go public and start executing your plan, you can inform the public and keep them interested and following your stock,” Kunik says.
Highly visible moves can also be misinterpreted. In November, for example, Canada Connect moved into a new 8,000-sq.-ft. office in the southeast. But that move hasn’t over-extended the company, chief executive Levine insists. It was done simply to take advantage of more space and because the new place actually is cheaper than the previous location, he says. “Just because you’re doing well doesn’t mean you have to go upscale.”
Levine notes that his company has been doing business for five years, a lot longer than many Internet firms. So far, Canada Connect has depended on private financing from sophisticated, technically minded U.S. investors. “It’s tough (to keep going),” Levine acknowledges.
“But business is always tough.”
He and other players believe the current shakeout of poorly conceived or badly-run companies will benefit Calgary’s maturing high-tech industry.
“If they don’t have the sound fundamentals, then they probably shouldn’t be playing in this space anyway,” says Synsorb’s Gray.
By next spring, more high-tech companies will have downsized, merged and formed other kinds of strategic alliances to keep going, the experts predict.
The new economy companies that make it will emerge stronger, just like the oil and gas and other traditional economy firms that came before them, says Dave Kennedy, senior vice-president and director of KPMG Corporate Finance Inc. in Calgary. “It’s evolution, it’s Darwinistic, it’s survival of the fittest,” Kennedy says.
The Net naysayers who carp that the new economy is dead are denying the revolution created by the Internet and the inventiveness of the human spirit, Gidwaney says.
“The world is notorious for continuing to create value,” Gidwaney says. “And I think we’ll keep doing that. There’ll be very successful companies that’ll do great things.”
EXPERT ADVICE
Finding cash after the gold rush — tips from the experts:
* Ensure you have a technology or service that addresses a real need that people will pay for and see value in. It has to be something that will help your potential customers lower costs or increase revenues;
* Focus on business fundamentals like experienced management, a solid business plan and seasoned advisers;
* Show in your business plan that you have a realistic, attainable timeline to achieve sales revenue and profitability;
* Address your competition in your plan, detail the things that make your product or service stand apart from theirs;
* Knock on the doors of venture capital houses, but don’t neglect other potential investors, including suppliers, manufacturers, customers — anybody with whom you could form a strategic alliance;
* Be incredibly, incredibly persistent.
