Not only had venture capital in Ottawa collapsed following the tech bust, but the software company didn’t fit with metrics desired by VCs because YOU i Labs was already well-established and cash flow positive.
“They don’t want to measure you by your success, they want to measure you by your idea,” Mr. Flick said of traditional VCs. “We sell software to big companies. We don’t need a hundred million eyeballs on us to have success.”
But when Mr. Flick linked up with the Business Development Bank of Canada two years ago, he was granted subordinate funding – a hybrid of debt and equity funding. BDC assisted YOU i Labs in securing a line of credit from the Royal Bank of Canada, and with that influx of cash the company was able to access grants from the National Research Council’s Industrial Research Assistance Program and the popular SR&ED tax credit program.
Mr. Flick said that although it took the company four years to get where it would have been after only two years with VC funding, he wouldn’t change a thing.
Traditional VC funding only works for a small percentage of companies, and Mr. Flick said that few startups he knows even attempt to go the VC route anymore. After the crash in funding, many local companies have adopted a business model that doesn’t involve giving up equity of their companies.
“You don’t need a $5-million loan,” Mr. Flick said. “You can (create) a company for far less than you used to.”
For software companies, multiple rounds of financing aren’t usually necessary, Mr. Flick said, but they are often forced upon companies by VCs. Funding rounds that increase each time give VCs control over large parts of the company, forcing entrepreneurs to make enormous exits in order to become profitable, Mr. Flick said.
That’s why BDC was a much better option for YOU i Labs, he said.
“The places that get hit the hardest have to innovate the most aggressively,” he said. “We have a pile of (bootstrapped) gems, and it takes a little longer, but in a few years these companies are going to have equity and strength and strong balance sheets.”
SUBORDINATE FUNDING VS. VENTURE CAPITAL
Trevor Allibon, who is Mr. Flick’s BDC representative at the bank’s subordinate financing branch, said he’s also noticed the local transition to bootstrapping. While the VC segment of BDC gives funds to startups with disruptive technology, Mr. Allibon’s branch seeks out new companies that have ideally achieved between 18 to 24 months of positive cash flow. To align itself with strong companies, BDC might meet with firms many years prior to an opportunity or desire for funding, Mr. Allibon said.
BDC’s subordinate funding branch doesn’t offer its clients advice or an extensive contact list as a traditional VC would. Its funding is less expensive than VC but more so than debt financing, Mr. Allibon said.
There is also less risk involved in subordinate funding because companies are further along the development cycle and have a more favourable chance of success, Mr. Allibon said.
Repayment plans are flexible and generally range from a three- to seven-year timeline.
WHAT NEEDS TO CHANGE?
Although BDC is helping to fill the gap left by Ottawa’s barren VC landscape, more needs be done to ensure the success of local startups, Mr. Flick said.
Universities and colleges need to work more closely with those startups, he said, and some of the billions going into R&D at post-secondary educational institutions should go towards firms with feet on the ground.
“Startups are where wealth is created for Canada,” he said. “It’s those little companies that start with nothing and sell for $300 million,” pointing to Radian6, a high-tech company from New Brunswick that was purchased last year by Salesforce.com.
“Canada needs to have more of those.”
BDC IN OTTAWA:
- 1,000 clients in the National Capital Region
- Ottawa entrepreneurs accepted more than $130 million in loans from BDC Financing and Subordinated Financing in 2011
- Total loans committed to BDC clients in the region reached approximately $615 million at the end of 2011
Source: Johanne Bissonnette, BDC Public Relations
EXAMPLES OF OTTAWA COMPANIES USING BDC:
- Agrisoma Biosciences Inc.
- BelAir Networks (sold to Ericsson for an undisclosed sum)
- Benbria
- Blaze Software Inc. (sold to Akamai Technologies Inc. for an undisclosed sum)
- BlinQ Networks Inc.
- BTI Systems
- Cyrium Technologies Inc.
- Diablo Technologies Inc.
- Elliptic Technologies Inc.
- OneChip Photonics Inc.
- SiGe Semiconductor Inc. (sold to Skyworks Solutions Inc. for $210 million)
Source: Johanne Bissonnette, BDC Public Relations
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