Welcome to Reid Eddison Dispatches. We’re business advisors to technology companies, and Dispatches is our way of sharing our thoughts and insights. We’re celebrating 10 years in business this month–10 years of helping our clients chop their way through the jungle of obstacles blocking the path to success. We’re proud of our achievements, and of the achievements of the many companies with which we’ve worked.

See our website www.reideddison.com for more details, and read on…

New Workshop: “Preparing Key Minds for Strategic Thinking”

Crafting strategy is one of the most important functions of an executive job. You’ll find books galore on strategic planning, but how do you kick-start the underlying thought process? How can you develop a strategic mindset? Join us for an interactive workshop that unravels the mysteries of thinking strategically. Designed for the aspiring or new executive, this one-day workshop is led by Michelle Masson (http://www.reideddison.com/about/bios/mmasson/) and Peter Eddison (http://www.reideddison.com/about/bios/peddison/), and focuses on how to successfully jump the chasm from operational doing to business-level thinking.

Who should attend:

• Director-level professionals who participate in their organization’s strategic development
• Recently-promoted vice presidents

• What is strategic thinking?
• What gets in the way of doing it?
• How do I develop a strategic perspective?
• What are the Top 10 tips for strategic thinking?

For more information on this upcoming workshop, email us at info@reideddison.com

IN THE SPOTLIGHT

The New Face of Funding

It takes money to make money, but for fledgling companies, it also takes the right kind of money. And finding the right source of financing to fuel business development can be just as important as the financing itself.

We talked to a couple of people who know a lot about the current funding environment for technology companies – Debi Rosati and Michelle Van Tol – and asked them for their thoughts on the subject, and for things that emerging companies should keep in mind as they consider sources of funding.

Anyone who’s been in business in Ottawa knows that the sea of funding that washed over this city’s technology sector in the late 1990s and early 2000s (and dried up during the tech bust of 2001-02) has been replaced by a number of much smaller cash streams, meandering through specific sectors or stages of corporate development. But the face of funding has changed, and companies looking for investors need to understand the differences between the streams into which they dip.

Debi Rosati, who advises early-stage companies on investment strategies, estimates that one in 1000 business plans ever get to the stage where it attracts funding. The success depends not only on the viability but also the scalability of the business model—can the company be strategic in its growth, leveraging small successes, attracting the right people, and developing technology that will prove attractive to others? Can the company grow beyond the initial bootstrapping round of friends and family financing, and find the right outside investor?

Rosati is the founder of RosatiNet (http://www.rosatinet.com), a “venture catalyst” firm that works to bridge the gap between technology start-ups and venture capital firms. She says companies need to remember that the source of the financing is key. “There’s money and then there’s strategic money. The ideal financing comes from a source familiar with your market space and who can link you with market opportunities or complementary technology,” she says. Therefore, companies should be looking for an investor who is aligned with a key customer or technology partner, or who can bring strategic or geographic expertise.

Of course, just finding an investor—never mind the right investor—can be tough enough.
“Angels, venture capitalists, and government funds are still the main game,” says Michelle Van Tol, president of Cashia Consulting Corp. (www.cashia.ca), a corporate finance consulting company. “Deals are still getting done, but they’re taking a long time. Companies are jumping through a lot of hoops to get the money.”

There are fewer VCs looking at Ottawa companies now, and the ones who are present are typically coming in at a B-level of financing. The chronic gap in seed and series A funding persists. And labour-sponsored fund are not contributing to the extent they were during the tech boom.

Certainly, venture capital funding levels have never recovered from the bust in the telecommunications equipment sector. While other clusters have been sparked, nothing has been large enough to generate the investment heat that the telecom equipment companies generated.

But statistics are beginning to show a perceptible rise in the amount of funding available. In the United States, the venture capital investment industry in 2006 reported the most annual deal flow and capital investment since 2001, according to the latest Quarterly Venture Capital Report, published by Ernst & Young LLP and Dow Jones VentureOne. 2006’s total of 2,454 deals was slightly higher than those reported in 2005, and the value of capital investment reached US$25.8 billion, 8% more than the previous.

U.S. investment in 2006 was spurred by interest in web-based information services firms, the medical devices and equipment industry and the alternative energy industry. Stephen Harmston, Director of Global Research for VentureOne, was reported as saying “the data also shows that investors are recognizing the economic reality for start-ups today and are willing to sustain them with round sizes that are at the highest levels in six years.”

Will the uptick in VC funding that we’ve seen in the United States be echoed in Canada? “I am optimistic the positive trend will occur here as well,” says Rosati. “In the next year or two, we can hope the trend will be upward for Ottawa.”

Van Tol has also seen evidence of this trend. “We’re definitely seeing more activity now from U.S. VC firms. For a while there hadn’t been a lot.”

In Canada, total VC investment in 2006 amounted to $1.69 billion, virtually flat when compared to 2005’s $1.68 billion, according to the Canadian Venture Capital Association. The CVCA’s 2006 report showed three significant trends:

• A substantial regional shift away from Ontario and into Quebec and British Columbia;
• An increase in Canadian investment by foreign (mostly U.S.) venture funds; and
• A decline in the number of companies funded, with a corresponding increase in the amount invested per company.

Rosati says the one of the biggest impediments to early-stage company growth right now is the lack of angel investment, which is still significantly below the levels reported 7 or 8 years ago. “The circle of angels continues to get smaller in Ottawa,” Rosati notes, although angel investors from Toronto, Montreal and, occasionally, Boston still make forays into the Ottawa business scene.

Part of the problem, Van Tol says, is that angels come in to a company at an early stage, often see their stakes diluted in follow-on rounds, and sometimes end up waiting years for a return on their investment. “It’s not clear the rewards are going to be there to pay for their risk,” she notes. “In some cases, the local angels seem to be working to keep the tech sector alive as much as they are to make a return.”

Smart companies are using tax credit programs to leverage their bootstrapping efforts and the small amounts of angel money they can attract. All research-oriented firms in Ottawa should also be aware of the tax credits that are available to them, because these credits are often an invaluable way to stretch their start-up money, Rosati noted. A good example is the federal Scientific Research and Experimental Development (SR&ED) program, which offers an investment tax credit of 35% up to the first $2 million of qualified SR&ED spending that is carried out in Canada, and 20% on any excess amount. Companies can apply for SR&ED investment tax credits for wages, materials, machinery, equipment, some overhead, and SR&ED contracts.

The Ontario Interactive Digital Media Tax Credit, as well, will fund up to 30% of eligible labour, marketing, and distribution costs of producing certain interactive digital media products. And the National Research Council’s Industrial Research Assistance Program continues to provide much-needed financial help for local companies’ R and D activities, Van Tol notes.

One funding area that has virtually dried up is labour-sponsored venture capital. In 2005, the Ontario government eliminated its 15 per cent tax credit for investors in Labour Sponsored Investment Funds (LSIFs). At that time, Ontario’s venture capital market included more than 200 private sector venture capital funds, and almost 200 U.S. funds had invested in Ontario companies during the previous six years. Since then, the number of funds and their participation in the market has dwindled.

The few labour-sponsored funds that are still in play tend to look to later-stage investments or follow-on round financing of existing investees. “Many of them are tapped out in terms of their ability to finance new opportunities, so they’re using their reserves for follow-on rounds,” Rosati notes.

One new area of investment interest is in the TSX venture exchange, “since there has been a real push for the TSX to do more tech-related financings,” Rosati says. But this avenue is open only to companies that are generating revenues and that have solid traction with customers—and who plan to graduate to a full public listing in their future.

Debt financing is still an option, but companies need to have something to use as collateral—a chronic problem for intellectual property-rich, asset-poor technology firms. Rosati cautions debt financing has plenty of risk. “You can only be so creative. If you don’t have visibility and solid revenue streams, it’s hard to get interest. And it can be quite onerous if you don’t meet your repayment milestones. The need for cash availability to meet debt repayment can leave you in vulnerable position.”

Some companies are able to raise funds through firms such as MMV Financial, a firm that provides venture debt financing to earlier stage and high growth companies that would not ordinarily qualify for traditional bank financing, or that require additional growth capital beyond what is available. In a few cases, firms have been able to obtain government-backed loans under the Canada Small Business Financing Act. Under the program, the federal government guarantees up to 80 percent of the loan amount, which means banks are much more likely to extend financing to a small businessperson.

Rosati’s advice is to “be cautious and very aware of what funding alternatives are out there and weigh off what works for you and the tradeoffs on the way. Get to know your investors and their style and their expectations. The due diligence has to run two ways.”

In spite of the shortages and the risks to firms looking to dip into funding streams, Rosati sees no shortage of confidence and enthusiasm in Ottawa technology entrepreneurs. “It’s definitely a case of ‘survival of the fittest’. But companies keep getting started. We’re still generating a culture of entrepreneurship in Ottawa,” she says. “That’s why, in spite of the lack of funding, there are a lot of people who are optimistic about building and growing successful tech companies.”

Van Tol agrees the business community has gotten more optimistic – and more realistic. “There’s a sense that people are building companies for the longer term, not for the quick cash-out. People have gotten their heads around the idea that it’s going to take longer, and that they need to enjoy the work for the sake of the work. It’s a healthier environment.”

EXECUTIVE 2 EXECUTIVE
Michelle Masson on Common Failures

The April 23 edition of Ottawa Business Journal (http://www.ottawabusinessjournal.com/) celebrates Ottawa’s 10 fastest growing companies. For obvious reasons, this list is always of interest to REI. However, what really caught my attention was seeing this list in combination with an article in the same edition by Pat DiPietro, called “Crossing the chasm to market success.”

DiPietro points out that while it’s true that fewer venture-backed startups are getting going, the more distressing issue is that not many of our local companies get ‘completed.’ I thought “how true!” As I read on, I found myself agreeing with some of the issues cited regarding rounds of financing, and it got me thinking.

While these financing challenges clearly can be crippling to the early stage high tech company, REI observes that there are also other common points of failure for emerging businesses—the things that thwart the kind of “strong balanced growth” that places a company on the OBJ list.

One particular pitfall jumps to mind—the belief that, despite all statistics on high tech failure, “our company will somehow be different.” Of course this belief stems from the absolute optimism that is a necessary trait of the entrepreneur—no company would ever be born if not for this entrepreneurial spirit. But why do so many of us insist on making the same mistakes that so many others before have made? Why do we think that even if our approach has the same fundamental flaws as the others, we will somehow be the exception? Why can’t we learn from history?

Perhaps it is because we think that relying on our internal knowledge and energy will somehow be enough… that because we’ve got our company this far on our own, we can get it the rest of the way by ourselves as well. Unfortunately this just isn’t true. Sometimes we all need the help of an outsider.

It’s not a question of smarts. Just think of all the Ottawa tech companies that did NOT make the OBJ list. Every one of these companies would claim that their executive team is smart, hardworking, and dedicated; that they know how to examine issues, consider alternatives, and make tough choices; and that they sure know their business better than any outsider possibly could!

All true. At REI we don’t profess to know our clients’ business better than they do. And we sure don’t think we’re smarter than they are. But it’s not a question of smarts—it’s a question of perspective.

I know that when you spend all day driving the business forward, it is very hard to step back and ask yourself if you are driving in the right direction. And even harder to confront the possibility that not everyone on your team agrees with this direction. Over the past 10 years we’ve worked with almost 100 different growing organizations with senior management teams of all shapes, sizes, and talent mixes. We believe very strongly that, no matter how strong the team, there are certain times when the leaders of a business need to engage outsiders to help them refocus, reprioritize, and move forward.

Sometimes they are perplexed by the huge array of options available to them. Or they are too close to the issues, too emotionally attached to their past decisions, to be able to really evaluate new options effectively. Or they just want to ensure that key issues get examined from every point of view, and realize that if one of the team members is charged with moderating the session—usually the CEO or CFO—that individual cannot also fully participate in the discussion. In effect, they would be “losing” one of their most valuable voices. In any of these cases, they simply need someone who isn’t tied to the organization to help them explore all the options, identify the alternatives, achieve alignment, and push to a decision.

Halogen Software Inc. (http://www.halogensoftware.com/), named in the OBJ Top 10, is an example of an organization that gets it. CEO Paul Loucks and his leadership team understand that full participation by all the strategic leaders and alignment of the team’s ideas is key to success. In our work with the Halogen team, we were struck by their willingness to accept that they may not have all the answers and that there may be options they haven’t yet considered. When they meet to discuss strategy or to review business results, they want the whole team to be engaged.

The Halogen team knows that they will have to make the tough decisions—that no one else can do this for them, and that no one else can follow through to make it happen. But they also want to apply a proven process for examining the issues. They want guidance on how to best make their own choices. And they want guidance on how to best execute effectively.

I think this willingness to tap into outside expertise is one reason why Halogen is on that OBJ list. And one reason they are going to stay there.

What do you think? Drop me a line.

Why Good Planning Goes Bad

On April 12, Peter Eddison was in Toronto as the invited speaker for the York Technology Association’s CEO Peer Group, a monthly forum for CEOs to discuss issues they consider to be 5 key strategic planning mistakes....

The topic in April was strategic planning. Although almost every company’s planning process involves some form of annual “offsite strategic planning session”, many CEOs will privately admit that they are not sure they are getting real value from their strategic planning efforts. Peter was invited to share his thoughts on why, despite good intentions, many strategic planning sessions are ineffective, and to suggest steps that companies can take to help ensure that their planning efforts generate meaningful results.

Peter highlighted 5 key strategic mistakes that the Reid Eddison team have noted while working with technology companies across Canada:

For more details about Peter’s presentation, and about Reid Eddison’s approach to strategic planning, email us at info@reideddison.com.

Tribute to Doug Smeaton

We were saddened to learn of the death of Doug Smeaton, founder of Semiconductor Insights (http://www.semiconductor.com/about_si/management/doug-smeaton.asp). REI had the privilege of working with Doug over the past four years. All of us at REI extend our heartfelt sympathies to Doug’s family, friends, and colleagues.