It is the worst of times and the best of times for startups in Alberta In the bear market and the post-Sept. 11 world, it is the worst of times and the best of times for startup and fledgling technology companies in Alberta. The supply of venture capital for people with little more than a good idea has vanished, the players and analysts say.
But there is still plenty of money being invested, either in startups with the right product and business model or in “lean and mean” young companies.
“There are still as many great ideas out there as there was pre-dot-bomb or pre- Sept. 11,” says John Masters, president and chief executive of Calgary Technologies Inc., a one-year old, community-based incubator for entrepreneurs and startups. “The appetite by the investment community, though, is clearly more cautionary.”
Oscar Jofre, chief executive of IO-TEK in Edmonton, says he’s seen greater demand for his company’s product since Sept. 11. The 18-month-old firm links its software with certified language translators, to provide businesses with culturally sensitive translations of their information for clients and customers.
“After what happened on Sept. 11 . . . every government, every organization, every corporation around the world wants to make sure that its message is clear and culturally correct,” Jofre says.
Even before the terrorist attacks, the bear tech market had raked its claws over early-stage startups, says Byron Osing, chief executive of tech venture capital fund Launchworks Inc.
Financiers now want to invest either in new companies that are already generating revenue, or are looking for a syndicated deal involving more than one investor to reduce their risk, he says.
“There is still money out there,” Osing adds. “We’re still looking at deals. Of course, in this market, everyone is more selective.”
No one, however, should think startups have folded their tents and retreated from risk until the bear market goes back into hibernation.
As proof, about 400 people showed up at this fall’s second annual Banff Venture Forum, presented by the Information, Communications and Electronics Technologies Alliance. The crowd included numerous tech startups searching for money, as well as institutional and individual investors looking to open their wallets.
The market also hasn’t stopped Edmonton startup YottaYotta from raising a total of about $75 million since its launch less than two years ago – including $40 million last month from international and Canadian institutional investors and venture capital firms.
The company, which showcased its product at the first Banff Venture Forum, is developing Internet technology that allows fast and secure access to massive amounts of stored data in servers in different locations.
Demand for distributed storage systems is expected to rise in the wake of Sept. 11, as companies seek more sophisticated disaster recovery plans.
Calgary firm Guest-Tek also made well-received pitches.
“Everybody has this money and they’re sitting on it,” says Arnon Levy, the company’s executive vice-president and founder. “They just don’t know at what point the market’s going to turn around . . . and who’s going to be a winner.”
Four-year-old Guest-Tek has developed software that resides on a network’s server and allows visiting laptops or mobile computers (including handhelds) to seamlessly access that network. At the same time, the product allows the network administrator to control the extent of the visitor’s access.
“We saw our industry after Sept. 11 being hit very, very hard because it’s part of the hospitality-travel industry,” Levy says. Hotels saw occupancy rates plunge from 90 per cent to 20 per cent.
“But now they’ve been watching occupancy levels go back up slowly . . . people are starting to breathe again,” Levy says.
Control F-1 is another fledgling company that’s doing well despite market conditions and worldwide dread over when the terrorists might strike again. The two-year-old Calgary firm just closed a major round of financing that included investors from Hong Kong, the U.S. and Canada.
Chris Niles, chief operating officer for Control F-1, says he can’t disclose the amount of financing. “But for a Calgary-based company in the technology sector, it was very substantial for a company that’s just past startup.”
Control F-1’s product, which enables the delivery of technical support via the Internet, is designed to increase productivity while reducing costs.
People with a good idea who are just starting out have to realistically ask themselves one question, Niles advises. “Is this product a ‘gotta have’ or a ‘nice to have?’ If it’s a nice to have, don’t waste your time. If it’s a ‘gotta have’, you can get it funded.”
Companies that are just beyond the startup gate are fundamentally changing the way they do business, especially in controlling costs and staffing levels, Niles says. “Anybody who wasn’t lean is either going to get lean damn quick or they’re going to be out of business.”
Launchworks’ Osing points out that even blue-chip tech companies are down by 80 per cent in the face of the bear market. Startup entrepreneurs should expect the value of their product and potential investment to be similarly devalued. “We’re looking at a couple of quarters of nastiness out there, just because of the uncertainty created by this terrorist event,” Osing says.
In Alberta, the entrepreneurial spirit is still very much alive, Calgary Technologies’ Masters says. The not-for-profit incubator recently graduated its first “class” of entrepreneurs from its Concept-to-Capital program, and easily filled its second class from more than 250 entrepreneurs who walk in the door in a year. “The objective of this (program) is to try to assist emerging entrepreneurs and startup companies to build a viable business plan to raise capital,” Masters says.
About 23 “students” enrolled in the first round, with eight making it through to pitch to qualified investors. So far, two of those eight startups have landed capital. “Two out of eight is tremendous odds,” Master says.