Ottawa companies hoping to hit the radar screens of U.S. venture capitalists might want to learn some advanced marketing and public relations skills.
While the Ottawa Centre for Research and Innovation (OCRI) asserts that the world knows and appreciates Ottawa's high-tech talents, prominent California venture capitalist Promod Haque admits he knows little about the capital's technology community.
"We don't hear a lot and it's not enough. It's only here and there and I agree with Terry Matthews that there isn't enough talk," he said.
"Maybe the reason I haven't seen most of these companies or heard from them is the proximity issue. Canadian companies in Vancouver are more likely to call on Silicon Valley and I guess companies in Ottawa go to Boston."
Serial entrepreneur and Ottawa high-tech guru Mr. Matthews has complained for years that the city's technology community suffers from a dearth of marketing talent.
Mr. Haque, a managing partner with Palo Alto, Calif.'s Norwest Venture Partners and 16-year veteran of Silicon Valley's high flying venture capital community, is in Ottawa tonight to speak at the National Arts Centre at the March meeting of TiE Ottawa.
TiE is a not-for-profit organization for entrepreneurs, which facilitates networking, creates mentoring opportunities, and helps members integrate into the mainstream technology community.
Mr. Haque's assertion of a lack of publicity from Ottawa companies contradicts OCRI's 2005 Report released last month, which painted a picture of global marketing success to the world.
The report cited rising inquiries from companies in a number of sectors looking to expand into the Ottawa market and pointed to the recently announced Dell customer contact centre as prime example of its achievements.
Ironically, the marketing may be working subconsciously. Mr. Haque agreed to speak in Ottawa so that he could also use the trip to find out more about possible partnership opportunities for some of his investments.
While companies that hone their PR skills will have a definite advantage over their competitors, Mr. Haque did say that he thinks Ottawa's telecom focused technology sector should benefit overall from the market's continued recovery.
Great marketing or not, Mr. Haque insisted companies need to focus on capital efficiency or forget attracting investors altogether.
As the markets tightened, venture capitalists began to evaluate companies based on a series of demanding benchmarks, which now guide their funding decisions.
"Exit valuations for venture backed companies have dropped in the marketplace, it's taking longer to take companies public, and there are very few venture backed companies that have gone public because a lot of them are sold in mergers and acquisitions," he said.
"The average price is in the $150 million (figures U.S. dollars) range for a good company versus five years ago when you would see $1 billion."
Software companies are expected to get to the cash flow break even point in five years with between $20 million and $25 million in investment. A telecom systems or semiconductor company requires about $35 million to $40 million to perform the same feat.
When exits were in the billion-dollar range five years ago, venture capitalists had no trouble pouring $200 million into a company as long as the returns came through. Forget that idea today, he stressed.
"That has changed the venture capital business and now we have what we call hybrid or micro-multinational companies where there's lot of outsourcing of product development and some of the other functions because you can't get to the cash break even point in five years with $25 million if you do everything," Mr. Haque said.
While these companies have their headquarters, top executives, technology leads, and sales force in their primary market, most of the rest of the company's development can be done elsewhere, such as Russia, India, and China, to make the dollars stretch.
While many investors see the IPO as the golden egg, Mr. Haque also urges his companies to explore acquisitions as a viable exit strategy, even if the returns are lower. He argues that a venture capitalist could conceivably see three or four companies grow and be acquired in the same time it takes for one to reach an IPO.
With the revenue bar for an initial public offering being much higher than before, Mr. Haque feels that there is a very narrow slice of companies that have the right stuff for the public markets. In many cases, it can be a six- or seven-year process, which keeps investors waiting for their return, and also involves spending millions of dollars on compliance issues due to Sarbanes-Oxley regulations.
Today, a company considering an IPO needs to post revenues of more than $100 million and be profitable before it becomes feasible. Many can't get critical analyst coverage if they don't have a $500-million market cap.
"All these 'blockers' makes it more difficult for venture backed companies to go public, so mergers and acquisitions become much more attractive," Mr. Haque said.
"When you think about it, Sarbanes-Oxley is a $1.5-million expense per year just to get going and then it's at least a $1 million annual recurring expense. It makes it very difficult for small companies to go public."
By Jeff Pappone
Special to the Ottawa Business Journal
