Razor Suleman strides into his office, exuberant and mustachioed. Back from lunch, the 34-year-old entrepreneur is pumped for the big task of the day: to persuade a pair of potential investors that his Toronto company, I Love Rewards, is a safe place to park several million dollars during the worst financing market in memory.
ILR is in the so-called web-based rewards and recognition business. When companies such as Rogers Communications and Marriott reward their employees with prizes or points toward purchases, ILR manages the plans online and sources the products. Its client roster has tripled from a year ago, but incoming cheques still aren't keeping up with expenses, and ILR needs to shore up its cash reserves for what's bound to be a nightmarish 2009.
Assured that everyone has been offered refreshments, Suleman leads his guests on a tour of the firm's 15,000-square-foot loft in the new-media hub of Liberty Village. The space dwarfs ILR's seven-person staff, but Suleman hastens to note that the lease costs no more than what he had been paying for a much smaller space. He shows off the To The Point meeting spot (site of brisk, standing, all-staff updates—"a nice burst of culture every day," he says), the business development area (with the likes of Microsoft and KPMG on the new-client board), the EatIn Centre (chuckles all around), and a wall adorned with four framed pages of his handwritten original master plan. (He does a new version every year: "I'm good at the what, not so much the how," he allows.) At each stage of the tour, Suleman neatly, but unmistakably, impresses key messages on the money men: We're dot-com-funky but not dot-com-extravagant; we're up on the HR game; our clients are in the big leagues; I know my limitations.
Mark Usher and Jason Nardari from Wellington Financial, a Bay Street venture investment firm, take it all in with friendly interest. They genuinely want to be persuaded—as Mark McQueen, Wellington's founder and CEO, puts it, "We're in the business of getting to yes"—but they have seen too many pretty pitches and fetching sales projections to lose sight of two fundamental issues: Can the business fly in this crazy economy? And, if we put money in, how do we get it out?
Which is why, back in the boardroom, as Suleman runs through slides boasting a young-entrepreneur-of-the-year award and arrows surging upward across charts, Usher breaks in to inquire whether ILR is, at heart, a software developer or a service provider. "What's the special sauce?" he asks. Suleman says that ILR wears both hats, but then wavers, stumbles and looks to his CFO, who jumps in with a bit of jargon about being an "SAS [software-as-a-service]play with product margin." Usher doesn't press, but makes a note.
Before Wellington makes a decision, however, the questions will become more pointed and possibly more awkward, because these days, professional investors have no room for error—and not just on account of the downturn. After years of disappointing returns, Canadian venture firms are struggling to raise money for their funds and, in turn, are putting less of it to work than at any time since the mid-1990s. The number of businesses that got VC funding in 2008 was roughly half of what it was five years ago. Meanwhile, U.S. firms, which in recent years grew to represent 41 per cent of all VC dollars plowed into Canadian companies, are in rapid retreat, dropping from $836 million invested in 2007 to around $370-million last year.
A key problem is that most of the methods that investors previously used to exit deals are now blocked. With the public-offerings market essentially frozen—there was just one venture-backed IPO in Canada in 2008—capital is mainly flowing to mergers and acquisitions, but even M&As plunged by one-third last year. One entrepreneur who did the rounds of VC firms in the fall says the message was the same everywhere: no money, no IPOs, no exits. Those companies that are still doling out cash are naturally getting more picky, and every pitch is being evaluated on the worst-case scenario: Is the business sustainable at much smaller revenues? Can the owners control their costs and maintain their gross margins? Are ILR's incentive programs, for instance, critical to boosting employee morale during layoffs, or would they be one of the first things to go when clients cinch their belts?