The story of Canada's fastest growing technology companies shows that subtle changes are gradually redefining the heavily scarred industry.
Entrepreneurs are shifting their attention from traditional projects, such as business software, to developing new products and services around converged telecommunications, new media and alternative energy. They are expanding beyond the well-worn tech patch defined by Montreal, Ottawa, Toronto and Kitchener-Waterloo, putting stakes down in Calgary and Vancouver.
Canada's emerging tech companies are also reaching far beyond North America for their customers, they are funded by private partners more than the traditional venture capitalist, and they are run by the best-seasoned executive teams the industry has seen in years.
These are some of the observations made by the consultants behind Deloitte's ninth annual Technology Fast 50 ranking, which counted seven new arrivals in the top 10.
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One of the most salient features of the list is that more than half of the companies are self-funded, receiving no venture capital support, says Chris Chapman, national business development leader of Deloitte's technology, media and telecom practice.
Venture capital (VC) firms have had trouble raising new pools of cash since the tech bust, and most are still holding investments made in the boom days.
"The VCs who pumped money into the industry between 1999 and 2001 probably didn't invest well," says John Ruffolo, national leader of Deloitte's technology, media and telecom practice.
The good news is that firms are starting to go public again and merger and acquisition activity is heating up, which should allow VCs to free up their cash and begin redeploying it into a new generation of startups soon. There are more IPOs in the wings than at any time since 2001, including four of the top five ranked firms, Mr. Ruffolo says.
DragonWave Inc. (No. 5) is considering an offering soon, possibly on the London Stock Exchange's junior AIM market. But a lot depends on how market conditions fare, a variable the company cannot control, says Peter Allen, president and chief executive officer of the Ottawa-based firm.
"A lot of companies used to go to Nasdaq, but the requirements have become so extreme that the operating costs of going to these markets is much, much higher," he says. "This has created a vacuum that is largely being filled by London."
Overseas markets, specifically AIM, offer a better opportunity for early stage companies, says Mr. Allen, whose company makes equipment for wireless broadband networks.
Deloitte's findings are supported by some leading venture capitalists, including David Ferguson, managing general partner of VenGrowth Private Equity Partners Inc., which has investments of $1.2-billion.
"As a nation, Canada is under-funded from a VC perspective, and it's exacerbated by the tech downturn," he says.
The level of Canadian VC investment today is down 75 per cent from the boom days of 2000, to about $1.7-billion from $5-billion. These conditions make it a great time to be investing from a value perspective but very difficult from the entrepreneur's end. VenGrowth has been investing steadily in tech since 2002, he says.
It's definitely become harder for early stage companies to find VC financing, agrees Minhas Mohamed, CEO of MMV Financial, but he says there's plenty available for later stage businesses. The Toronto-based VC firm has between $70-million (U.S.) and $80-million invested and put money into 30 companies last year, including Elluminate Inc. (No. 10), a Calgary software startup.
A shortage of funding has forced technology firms to manage what they have better. The Fast 50 tend to spend carefully and are managing their research and development budgets wisely, Mr. Ruffolo says.
One factor that is helping is a more seasoned and stable set of managers running firms than existed during the tech heydays. The average executive in the Deloitte survey has about 15 years of experience, compared with an industry norm of about 5 years in 2000, he says.
"You're not seeing people jump around from company to company as much any more," he says.
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