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Razor Suleman (Peter Power)
Razor Suleman (Peter Power)

Venture capital

Deep pockets still available despite downturn Add to ...

Razor Suleman, CEO of I Love Rewards, has heard about the plight of small- and medium-sized business owners struggling to finance the growth of their firms in this perilous economic climate.

While he surely sympathizes, he can't quite relate to their capital-craving conundrum.

In May, his Toronto firm, which specializes in Web-based employee rewards programs designed to boost staff retention and engagement, secured $5.7-million (U.S.) in funding from an investment group led by Wellesley, Mass.-based venture capital firm GrandBanks Capital.

That cash infusion came on the heels of an investment drive that netted the company $4.7-million last year. Both moves were pro-active, designed to fuel the company's growth into the United States with the aim of grabbing a piece of the estimated $47-billion rewards and recognition market south of the border.

"My vision is to build the most successful Web-based rewards company in the world ... and capital is the fuel to grow," Mr. Suleman explains.

Survey data released this month by the Canadian Federation of Independent Business demonstrates that venture capitalists, angel investors, banks, government agencies and other traditional go-to financiers may finally be loosening their purse strings as the recession wanes. It found that 68 per cent of the 4,200 Canadian small- and medium-business owners polled reported having access to most or all of the capital they needed to grow their firms, while only 32 per cent reported limited or no access to capital funding.

Growth capital, although harder to acquire, is still available - and despite a difficult economic climate, many of the time-honoured tactics for securing it still apply.

"Acquiring funding for SMEs is a relationship business," says W. Daniel Mothersill, president of the Toronto-based National Angel Capital Organization. "You need to cultivate your network for sales, for attracting employees, and for attracting financing."

Having already completed that series "A" round of venture capital funding, I Love Rewards, which boasts annualized revenue of $12-million and is predicting revenue growth of at least 200 per cent over the next two years, leveraged the contact list of those initial investors and used a networking opportunity in New York to cast a wider venture capital net.

"There's credibility in who you take money from and that opens up a lot of doors," Mr. Suleman says. "I got in front of V.C. [venture capital]firms that most Canadian entrepreneurs will never get the opportunity to present to."

Mr. Mothersill says that many CEOs acquire funding in part by networking through venture capital or angel investment associations, industry organizations, reaching out to customers or suppliers, or even lawyers or accountants - many of whom know deep-pocketed investors eager for new opportunities.

But no matter how well-heeled the list of contacts, a strong business strategy is crucial for converting those networking opportunities into closed financing deals, says Catarina von Maydell, director of the investor network at the Markham, Ont.-based Innovation Synergy Centre in Markham.

She suggests first targeting the right financier to suit your firm's growth strategy - venture capitalists, for example, typically invest in companies that can demonstrate annual revenue in excess of $2-million and will often claim a controlling interest in the company.

Case in point, after accepting the series 'B' round of financing in May, Mr. Suleman now owns only about a third of I Love Rewards. Once a firm has targeted the right financier, Ms. von Maydell recommends preparing a concise strategic plan detailing how much capital is necessary to build the company (and, in some cases, steer it to profitability), while also outlining how the current management team can achieve those goals.

Having proven financial results to support that strategy is also critical, says Mark R. McQueen, president and CEO of Toronto-based venture debt fund Wellington Financial LP. "Seeing a potential investor six months before you have the trailing financial results that suggest the deal is a good idea is just not very fruitful," he points out. In I Love Rewards' case, Mr. Suleman was able to present a clear growth strategy to his U.S. investors that included a plan for a major push south of the border, as well as a cash-flow-positive balance sheet.

The 35-person firm's client list also played a large role in luring investor attention. "We were able to sit down and say, 'Here is our list of 65 customers, and it includes Price Waterhouse Coopers, KPMG, Rogers, Bell, Marriott and Cara," says CFO David Brennan. In turn, GrandBanks was able to check references and assess the value of the online rewards program before signing on the dotted line.

Despite no longer being the majority owner of his company, Mr. Suleman has no regrets about the decision to pro-actively seek growth financing - he's just pleased that his company was in a position to attract investor attention in the first place.

"When we raised our 'A' financing, you make the decision that if you're going to go, you have to go all the way," he says. "There's no point in being a small, boutique company."



Growth strategy

The Markham, Ont.-based not-for-profit Innovation Synergy Centre in Markham offers free financial consultation through its investment network. The ISCM helps small- and medium-sized business owners from across Canada find and approach investors and procure financing by first helping them define their growth strategy. For more information, visit http://www.iscm.ca

Provincial help

Andrew Patricio, co-founder of the business start-up consultancy firm Bizlaunch.ca, recommends free financial consulting services provided by provincial agencies such as Ontario's Ministry of Economic Development and Trade. Although services vary widely, Mr. Patricio says each province has departments dedicated to small business growth which usually provide helpful services at no charge. Ontario residents, visit http://www.investinontario.com

Free financial consulting

The Canadian Federation of Independent Business also provides free financial consulting services for its members, helping them find the right financing to build their companies. For more information, visit http://www.cfib.ca

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