Robert Lane, president of a Centretown-based interactive media company, says that those who want to tap into available investment money must have a solid business plan to succeed.
Venture capital investments for Ottawa businesses are continuing to drop, making it difficult for start-ups to obtain the funds they need to grow.
The city’s disclosed venture capital investments fell from $265 million in 2006 to $185 million in 2007 – a drop of 31 per cent, the Ottawa Centre for Research and Innovation reported in a recent news release.
“Firms are continuing to invest in companies they’ve already made their bets on,” said Jeffrey Dale, the centre’s president. “That’s bad news if you’re a startup because there are no new funds being generated.”
The number of deals dropped to 14 last year from 19 in 2006, but the average value of investments rose to about $13 million from $12.4 million in 2005.
Many entrepreneurs are opting to build their enterprises without the help of external investors, said Dale. This “bootstrapping” has led to more conservative business plans and backers aren’t seeing the immediate high profit they’re used to, he said.
Despite the scarce funds, Overlay.tv received $4.6 million in the last quarter and launched its product on Feb. 14. Overlay.tv’s technology allows Internet video authors to “tag” streaming video with hyperlinks to advertising affiliates such as Amazon.com. The idea came about when one of the founders’ wives was watching Sex and the City and grew frustrated because she didn’t know where to shop for the shoes, clothes and designer bags she saw on the program, said Robert Lane, president of the Aberdeen Street company. He said doesn’t think it’s any harder to secure money today than it was five years ago, but companies need to support an idea with a solid business plan and a team that will appeal to investors.
“There’s money out there looking for good ideas,” he said. “But those ideas need to show they can scale to $100 million a year.”
“The bar is set really high,” said Ian Graham, a certified management consultant with Klondike Consulting. Graham helps early-stage companies draft business plans to pitch to investors.
He said he thinks Ottawa entrepreneurs are correct in saying there isn’t enough available seed funding – that is, the investment dollars which help develop an idea into a viable prototype. One view he receives from investors is that there aren’t many good proposals worth backing from mature startups looking to develop and market their products for commercial sales.
“The problem is both perspectives refer to different stages of funding,” said Graham.
He likens what he calls a “funding paradox” to hockey. There are many companies playing in the house league (seed level) who lack the funds to move to the competitive league (mature startup). As a result, fewer business plans are being brought to the table for investors, said Graham.
Kareem Sultan, president of RaceDV, said it takes time to make a financial model investors want to see. The service captures in-car video and performance data for motor sports. He said the company wants to expand its market across North America and Europe but its focus is divided between searching for new customers and preparing a proposal to attract venture capital.
“Negotiating with investors can take months to get money in the bank,” Sultan said. “We keep getting sidetracked with customers who can help us pay our bills today.”
Another factor is startups might underestimate how much money they need to meet milestones such as product development, said Larry Perron, partner at Skypoint Capital, an Ottawa-based venture capital firm. The entrepreneurs focus then has to shift to securing more venture capital instead of generating revenue.
“With the tight money market, those who did invest in (early-stage businesses) that didn’t meet the milestones got crushed,” said Perron.
At this point, many financers are continuing to put money into companies they’ve already supported.
“It’s too risky to go out and place lots of small bets because you need the money to follow on those investments,” said Perron.
Dale said there’s a concern entrepreneurs might leave Ottawa to seek foreign investors.
“If this isn’t corrected soon, it’s not just a matter of losing talent, but losing the potential to create new jobs,” he said.