Tech start-ups get funding boost from Ontario gov’t

Getting over that last hurdle between product development and market launch can be a make-or-break journey for start-ups. And a timely infusion of cash can make this road a little less arduous.

Despite a tight credit environment, eight fledgling IT firms recently received a much-needed capital boost.

Their not-so-secret Santa was the Ontario government, specifically the province’s Investment Accelerator Fund (IAF).

A company that can help businesses save millions by locating hydro pipe leaks, and another that’s developed a tool that boosts audio, video and file delivery speeds for Internet Protocol (IP) systems lead the pack of
Ontario-based start-ups that received $500,000 from the province’s IAF.

The fund is one component of the Ministry of Research and Innovations $46 million Market Readiness Program.

“The funding will help these eight promising companies develop their technology and get to the global market first,” said John Wilkinson, Minister of Research and Innovation.

Companies that received the bridge capital were:

  • IPeak Networks, a Kanata-based IP network provider based;
  • Echologics Engineering Inc., an acoustics signal processing firm in Toronto;
  • C2C Link Corp, an optical chip maker in Hamilton;
  •  Toronto company, Kneebone Inc., a maker marketing performance- measurement software;
  • Nulogy Inc., a supply chain management software developer;
  • Regen Energy Inc, a developer of a wireless electrical energy demand controller; Skymeter Corp., developers of a GPS-based vehicle monitor; and,
  •  Sysomos Inc., makers of a software that can monitor online social media sites and ad campaigns.

Company owners who put everything they have into developing a product, and are short of cash to get that product to market, “are in a most vulnerable position,” says Shabbir Yussuf, vice-president of Echologics.

His company spent several years developing a tool that can detect leaks in hydro pipes with a new acoustic signal processing method.

Previous tools only worked best with metal pipes. But Echologic’s system can detect leaks in PVC pipes used in most modern buildings.

The product is among the few systems that can detect leaks in larger 96-inch-diametre pipes used by most public utilities. With studies indicating that water loss in the U.S. alone amounts to 23 million cubic meters per day (roughly equivalent to 9,200 Olympic-sized swimming pools), Yussuf says the product has a huge potential market.

“But because we are just a start up, it’s very hard for us to get the bridge funding to take us to the next level – getting our product to market.”

As a company grows, it needs a continuous source of capital to finance operational expenses until it’s product starts bringing in money, according to Scott Hendry, vice-president of sales and marketing for IPeak Networks.

The company has spent the past four years developing a hardware and software system that reduces packet signal loss and speeds up online delivery of various files. The system will be useful for smoothing out audio quality and improving reliability of voice over IP calls, video transmissions, and increasing realism for online games.

It was only this year that the company finally launched the product.

“One of the biggest challenges for any start-up is to sustain itself in the early stages. It’s sort of a Catch-22 situation – you need cash to obtain longevity, but you cannot borrow unless you can prove longevity,” Hendry noted.

Convincing investors to back them up is a common problem among IT start ups and one that didn’t just crop up recently with the tough economic times, says Yussuf. “The venture capital industry in Canada has been down even before the recession.”

This concern is echoed by a recent poor Canadian showing in last year’s North American Technology Fast 500, the annual awards program by Deloitte LLP., which ranks the fastest growing U.S. and Canadian tech firms.

“Canadian presence in the fast 500 was down nearly 50 per cent,” said John Ruffolo, national leader of the technology, media and telecommunications group at Deloitte. Canadian firms, he said, also exhibited a drastically reduced growth rate of 2,457 per cent for 2008 down from the previous year’s 3,732 per cent.

“This growth rate decline suggests that in future years, Canadian representation could decline further unless we begin to remedy Canada’s venture capital crisis,” Ruffolo said.

“Venture capital activity in Canada is very low,” says Jevon MacDonald, principal at Startup North, a business advisory firm in Toronto. He said effects of the tech industry bubble in 2003 reduced venture capital investments by nearly 50 per cent and the recent economic slump could further turn off more investors.

So how can tech start-ups access vital funding even when funds wellspring is drying up?

Recent Investment Accelerator Fund recipients and business advisors offer the following tips:

  • Be able to demonstrate viability – It’s not just about the technology, according to Hendry of IPeak Networks. “One thing we learned, it’s that investors are not interested so much in the product as they are with its market viability.

 So having a great idea is not enough. You need to prove the idea has a market – one which will provide your investors with the return on investment they want. So apart from putting in time and effort in product research and development, entrepreneurs need to invest in market research as well.

You have to be able to sell the business possibilities not just the technology.

  • Get the right team – Make sure your company is backed up by competent people, who can convince investors that you are the team who can pull the plan off, says Robert Koturbash, managing director of Maple Leafs Angels, a group of private investors based in Toronto. “Investors are putting their money into your company, and want to be sure the people running it will not put their dollars to waste.”

Investors also want a degree of control over their investment. Be prepared for demands to place some individuals picked by the investor on your board. But negotiate control. It’s your call, but often it’s the owners that are open to power sharing that get the money, according to experts.

  • Get incubated – In times like these when credit is tight and not every venture capital firm is itching to throw away money, start-up firms can look to government and industry-based organizations for much needed nurturing, according to Yussuf of Echologics.

 “Organizations such as MaRS Discovery District in Toronto, are great business incubators, where entrepreneurs and inventors can network, exchange ideas and information and even get connected to investors and funding sources.”

Another source of funding, information and networking is the Innovations Synergy Centre (ICSM)  in Markham, Ont. ISCM hosts various entrepreneur education programs and links business owners with investors.

Yussuf, also suggests joining industry competitions that feature venture capital funding, products, or even real estate use as prices. “The competitions are often covered by the media and attended by investors. Joining can provide you with a much needed profile boost.”

  •   Don’t sell your soul – Sure you need the money, but probably not at the expense of losing your business. It’s important that entrepreneurs take steps to protect their interest, according to Arshia Tabrizi, principal of Tabrizi Law Office, a Toronto-based legal firm.

Tabrizi says owners must pay special attention to the terms put down in a term sheet or contract. Make sure the document represents exactly what you want for yourself and your business.

Owners must get a reputable lawyer specializing in the field to advice them before moving forward with a deal. Pay close attention to board structure and compensation, valuation and exclusivity clauses.

“The important thing is that the owner does not give away full control of the company,” he said.

Related stories:

Microsoft BizSpark offers start ups “affordable access” to tech resources

Ontario tech startups badly need financing info

Start-ups look to Microsoft for venture capital

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