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Tech & Finance: 2007 will be all about 'closing the loop' for VCs

Entrepreneurs who spent 2006 pounding the pavement in a fruitless search for some early stage financing will probably have more of the same to look forward to this year.

Most technology observers feel that the local venture capital community will continue to support their maturing portfolio companies in anticipation of exit opportunities, while shying away from new, riskier investments until they achieve some good returns.

"Based on historical funding levels (other than the bubble or an anomalous Q2 2005), my expectation would be to see investment on the order of $200 million-$250 million in 2007," said Ottawa Capital Network manager Dave Scollon.

"I haven't seen any fundamental shift in momentum that would lead me expect otherwise."

The reasons for this reality are simple: There are a large number of five-, six- and seven-year-old companies in the city, which should be ripe to bring returns on investment for the venture capitalists.

So the VCs will concentrate their efforts on getting those companies created between 1999 and 2001 to an exit, whether that's an initial public offering, merger, or acquisition.

And if an IPO comes, it will probably be on London's AIM market rather than on the U.S. markets due to the more stringent reporting requirements dictated by Sarbanes-Oxley. Then again, going to the U.K. market may be a precursor to a North American listing, which happened with Waterloo, Ont.'s., Sandvine Corp.

Whereas IPOs may not be in the cards for every company, many technology executives in the city are undoubtedly feeling the pressure from investors to find profitable exits.

Although those deals will help generate the cash that goes to the next generation of companies, it means that 2007 will continue the difficulty many face as they try to access early stage funding.

There's also still a gap in the later stage as well because the VC firms in Canada don't have as deep pockets as they do in the U.S.

But it's also a bit of a Catch-22.

"It will be very beneficial for the local community to get some of those companies to an exit, because it is going to prime the pump," said Stephen Daze, executive director of OCRI's Entrepreneurship Centre.

"They are not going to refuel if they don't get any exits ? we need to close the loop."

By the end of the year, most observers feel that Ottawa should see about 20 deals mostly going to later stage companies. The lack of activity from the labour-sponsored funds will also continue to constrain available cash.

But it's not all bad news for earlier stage companies: A couple of venture capital funds have recently opened Ottawa offices and the Ontario government announced a commercialization initiative that includes an accelerator fund for early stage companies.

OCRI plans to hire three people early this year to assist early stage companies find opportunities in the commercialization network.

KEEP ON EYE ON WHAT'S 'DISRUPTIVE' IN 2007

While Ottawa's technology sector may be in for a "steady as she goes" kind of year in 2007, one area that deserves some attention is the life sciences.

When an independent, international jury of venture capitalists chose Canada's Top 10 Life Science Companies last November, half ? Agapharm, Jennerex Biotherapeutics ULC, Liponex Inc., Stempath Inc., and Variation Biotechnologies Inc. ? were based in Ottawa.

"There are some pretty exciting things going on and we're talking about big stuff: Cures for cancer or diabetes, which could be potentially huge," said Stephen Daze, executive director of OCRI's Entrepreneurship Centre.

"These are world changing technologies that are being worked on here and that's really encouraging."

While it might not be life changing, the growth in wireless should also continue to drive the need for more services and applications onto that platform, which should help push some Ottawa companies forward.

And the outfits providing software as a service should also continue to gain momentum, especially after big players such a Microsoft jumped on the bandwagon.

With evidence of further telecom deregulation coming in Canada, this sector will only strengthen, said Robert Ford, a partner with Gowlings Lafleur Henderson, who works in its Kanata technology law office.

"It's a good trend and I think it's going to be a good one generally, but it will also help some of the Ottawa software companies," he said.

"One that comes to mind is Trialstat Corp. (which can) service a number of clients from a central location."

With the infrastructure already in place, the area for revenue expansion for the telecom providers will be in services they can provide to the end user in a more cost-effective way.

For example, hosted services have reached the point where the way businesses do things will change completely and providing them will continue to be a growing revenue opportunity.

"The stuff has really matured. As people move forward we traditionally thought the only way to do business in the case of IT was to bring in servers, software and people, and that is going to change completely," said Liquid Computing chief executive Brian Hurley.

"The reliability of the broadband links and the software infrastructure on the service provider side has now gotten to the point where the cost for them to deliver it is lower than what I would pay to provide it internally. And the reliability is better."

Although that doesn't mean there won't be a few failures in 2007, the overall health of the Ottawa technology community continues to improve, which is party due to the harsh demands of the market that unfolded after the bubble burst.

And while the Ottawa technology sector seems to be morphing into a more niche-oriented market, some companies have emerged over the past year or two that are aiming higher.

"The companies we are getting out of Ottawa have me excited," Mr. Ford said.

"We are seeing companies that are emerging ? BelAir Networks and Liquid Computing ? that are doing big things again and something disruptive and I think that's good."

By Jeff Pappone

Special to the Ottawa Business Journal

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