Q&A On the PricewaterhouseCoopers (PwC) 2009 Report on Emerging Canadian Software Companies: The CEO Perspective

PwC Canada’s Emerging Company practice leader Peter Matutat discusses the recently released report

While the CEOs of emerging software companies in Canada acknowledge the weakness in the overall economy and have made some changes to their business plans, their belief in their companies and their ultimate success is not shaken. To provide further insight into the findings of PricewaterhouseCoopers (PwC) 2009 Report on Emerging Canadian Software Companies: The CEO Perspective, we sat down for a Q&A with PwC Canada's Emerging Company practice leader, Peter Matutat.

Why did you do this survey?

Peter Matutat: This is the sixth report on Emerging Canadian Software Companies: The CEO Perspective released by PwC. Each year, we provide insights to the industry on issues being faced by emerging Canadian software companies and their CEOs.

Our goal in 2009 was to continue with our research and provide critical information to software CEOs with respect to performance and strategy currently in operation and also to explore the challenges brought on by the current economic climate.

What is the profile of the respondents?

PM: The results of the survey were based on the responses, either online or in-person, from 145 CEOs. PwC identified a national cross-section of emerging Canadian software companies from publicly available lists, including the Branham 300, the Canadian Business Tech 100, the ROB 1000, Profit 100, Profit Hot 50 and others.

The majority of the respondents (50%) have revenues between $1 million and $10 million. This was followed by another 38% with revenues between less than $1 million or in the pre-revenue stage. Our respondents have an average of 41 employees and the CEO is typically also the founder of the company.

Fifty percent of the companies had enterprise applications as their primary area of business followed by application development at 39%.

We have a lot more details on their profiles in the report found at www.pwc.com/ca/cv2r.

What were some of the key findings from the survey?

PM: The impact of the economy was certainly a factor but our respondents are optimistic. In 2009, 57% of CEOs surveyed expect their sales to increase over 25%. It is refreshing that they still their business will grow in this environment. If there is one word that would define Canadian software companies, it is agility. Our report shows software CEOs are adapting well.

Are they doing anything different to achieve their goals?

PM: We asked the CEOs if they were doing anything different, given the current economic climate. While 44% of CEOs surveyed stated they were slowing down growth plans, 34% stated they were not doing anything different. It would seem that start-ups are confident that their long-term approach is the right one. Slowing growth is about staying the course, but adapting to the mood and pace of the market, not a radical rethink of the long-term objectives and goals of the company. By staying the course it appears that many CEOs believe that their product/service offering can carry the company despite the economic situation.

What are the biggest challenges they are facing?

PM: Forty-eight percent of CEOs surveyed said their most challenging issues over the next two years will be growing revenues and developing sales channel partnerships. Eighty percent of the sales of the companies surveyed continue to be through direct sales, consistent with the past year's results, although 70% of respondents are pursuing channel strategies.

In previous reports, PwC has continually promoted the idea of Canadian emerging software companies using partnerships in order to leverage their financial resources and increase sales. A typical emerging Canadian software company has limited access to external funds and does not have the financial resources to build a large direct sales force that can effectively sell to the US or the rest of the world.

Partners and distributors can help expand the reach and sales penetration of an emerging company. Of course, building effective sales channels is easier said than done. The CEOs surveyed have been largely unable to implement their channel strategies.

Are the respondents able to find funding in the current economy?

PM: Approximately 46% of CEOs surveyed did not attempt to raise capital in the past 24 months. The most common reason why is that they are able to make do with what they have. Over 73% of CEOs surveyed stated that they have sufficient current cash flow to cover operating expenses. Given the current funding climate in Canada, many emerging software companies will likely have to be able to make do with what they have for a while. Another 42% also said that they did not want to dilute ownership. This has increased from 14% in last year's survey and is a reflection of the high cost of financing in the current funding environment.

Those that did attempt to raise funding were once again relatively successful in their efforts. While only 54% attempted to raise capital in the past two years, 69% were successful, consistent with last year's results. This is a very positive result given the challenging fund-raising environment in Canada. Raising capital in 2008 for emerging Canadian software companies was certainly not easy, and 2009 is not going to get any easier.

Were they able to attract and retain the staff that they need?

PM: Over the course of conducting the annual survey there have been three consistent trends:

1. Turnover at emerging software companies is low — 49% of CEOs surveyed had turnover of less than 5% in 2008.
2. The CEOs do not believe that staff retention is a major challenge — 60% of respondents do not believe that staff retention is an issue.
3. The CEOs believe they need to improve their people skills.

While the current economy has certainly played a role in the ability of companies to retain staff, we believe that the CEOs surveyed understated their ability to create a positive and exciting work environment for their employees and this has contributed to reduced levels of turnover.

What does the future hold for the CEOs surveyed?

PM: The CEOs surveyed continue to believe strongly in their companies and their products. More than 80% believe their solutions are at least equal to their competition in terms of breadth and depth, services and best-in-class functionality.

The CEOs are confident they can survive and build their companies in this environment. The vast majority of CEOs believe they can increase revenues in 2009. And, while they face many challenges to achieving their ultimate goals of a lucrative exit, most believe their goals will only be delayed and will still be attained.