A report on emerging technology companies released today by PwC shows that for the second straight year, angel investors have taken over as the primary funding source for these companies, with venture capitalist fundraising at a 16-year low. Angels typically invest their own funds, unlike venture capitalists, who manage the pooled money of others in a professionally-managed fund.
Overall, 53% of respondents to its survey who raised money last year received their funding from angels, compared to 8% who received funding from venture capitalists. This presents a challenge that limits Canadian technology businesses from competing in the global market, the report says.
“Fundraising trends are an important predictor of innovation and growth in this sector,” says Peter Matutat, Partner and National Emerging Company Practice Leader at PwC. “Our report shows that companies who successfully raised capital in 2010 were 3.5 times more likely to adopt an aggressive approach to business reinvestment compared to businesses that were unsuccessful. One of the problems in our market is that Canadian companies receive only 39% of the dollars that go to their US competitors ($3.2 million vs. $8.2 million on average in 2010).”
The 50-page report polled over 160 CEOs of emerging Canadian software companies on a variety of topics including growth, marketing, raising capital, research, talent recruitment and mergers. Overall, revenues in this sector are increasing and forecasts are back at pre-recession levels. Overall revenue growth was approximately 32% in 2010, just slightly behind the survey’s historic average of 35%.
Other findings from the report include:
- Over 60% of CEOs expect revenues to increase at least 25% in 2011
- 73% expect their companies will be acquired in the next 5 years
- 84% are using cloud computing in some form
- More than 80% are taking a more aggressive approach to business planning
“One of the more dramatic surprises from our report this year is the extent to which the war for talent is heating up – 44% list recruiting as their biggest talent management issue. This is the first time in eight years that access to human resources has emerged as a significant challenge,” says Matutat. “The report shows that while turnover is low, the availability of new staff is an issue and the supply of new software developers and management talent is no longer keeping up with demand. As the economy continues to improve, and the workforce ages, this will only continue to be a significant problem for CEOs,” he says.
According to the report, fewer respondents are actively pursuing acquisitions as an avenue for growth this year, compared to 2009. One reason for the trend: the economy is improving, and businesses may think there are fewer opportunistic deals available in the market. This is coupled with the fact that emerging software companies found it difficult to access acquisition financing.
Of those who are planning an M&A exit, approximately 25% expect to do so within two years and a further 50% within four years. The report notes that there were 30 Canadian venture-backed M&A exits in 2010, compared to a single IPO. This mirrors the 2009 results of 24 M&A exits and another lone IPO. After an uptick in M&A activity in 2010, deal volumes and valuations are persisting well into 2011 with many companies exiting at healthy multiples. The first quarter of 2011 showed a significant increase in overall deal value and transaction volume compared to the first quarter of 2010.
More companies are using non-traditional marketing avenues such as online media, search engines and social media (54%), jumping on this increasingly necessary bandwagon to interact with customers, the report says. LinkedIn (61%), Twitter (57%) and blogs (50%) are the top choices for CEOs when it comes to social media. The adoption of social media is allowing smaller companies to more easily compete in the same arena as some of the bigger players through creating relationships and engaging with customers.
The report says that Canadian software companies continue to be focused almost exclusively on the North American market with 89% of 2010 revenues from Canada and the US, the same level as 2009. CEOs also continue to rely heavily on direct sales channels with over 80% of 2010 sales coming from direct sales.