Software CEOs resilient: PwC survey

In tough economy, most companies are holding steady and not switching gears

TORONTO, May 12, 2009 — 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. Key highlights from the PricewaterhouseCoopers (PwC) 2009 Report on Emerging Canadian Software Companies: The CEO Perspective include:

• In 2009, 57% expect their sales to increase more than 25%
• While 44% of CEOs surveyed are slowing down their growth plans in response to current economic conditions, another 34% said they have made no changes to their operations.
• 59% of companies surveyed are profitable

"Now is the first time our CEOs are facing a serious recession," says Peter Matutat, partner and Emerging Company Practice leader in Canada. "Yet, it is refreshing that they still believe their business will succeed in this environment. If there is one word that defines Canadian software companies, it is agility. Our report shows software CEOs are adapting well. They are growing the top line, pursuing channel partnerships, managing staff and costs, and raising money where they can."

Indeed, according to the PwC survey, when asked 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 through the current economic situation," says Matutat.

Adding to this is the fact that the survey found that respondents continue to have relatively few staffing challenges. Forty-nine percent of respondents had less than 5% turnover in 2008. Furthermore, 31% said that attracting/retaining sales/marketing employees is not a challenge, 34% said attracting/retaining technical employees is not a challenge and 47% said attracting/retaining top level management is not a challenge.

However, when it comes to building effective sales channels, it is easier said than done. The CEOs surveyed have been largely unable to implement their channel strategies. Approximately half of the CEOs surveyed manage all of their sales through direct channels and 63% have at least 90% of their sales generated through direct channels. While more than 70% are actively pursuing channel partnerships, only 51% have had any sales through them to date. This is a decline from the 70% of companies that were actively using sales channels in 2005.

The survey also found that 37% of CEOs surveyed successfully raised capital in the last two years, representing 70% of CEOs surveyed who attempted to raise capital. 40% of the funding came from angels and 51% from venture capitals. 54% expect to need additional outside funding in the next 18 to 24 months. Matutat notes, "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."

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. More than 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," comments Matutat. "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."

Exit plans are being deferred and delayed. Eighty-one percent of CEOs surveyed expect to be acquired, down from 95% last year. Twenty-five percent expect their exit to take at least five years. In last year's survey, almost all respondents expected their exit to be completed within four years.

Other highlights in this year's report include comments from:

• David Nyland, CEO of Blueprint, Software Systems on building sales channel strategies
• Albert Behr, of Behr & Associates Inc. on alternative approaches to software business models
• Bruce Lazenby, head of the Ottawa software cluster and is the regional director for Corum Group on M&A
• John Beardwood and Mark D. Penner of Fasken Martineau on Intellectual property

For a copy of the survey and more information, please visit www.pwc.com/ca/cv2r.

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