Tech firms need to be hunters, not the hunted

By Michel Brûlé

Canadian companies are viewed as innovative technology suppliers to the US — or stated another way, we are seen as prey by American companies. Unfortunately, it's a view too many Canadian entrepreneurs and investors share as well. It is affecting business planning in a big way.

Instead of strategizing for long-term, sustainable growth, Canadian companies —from the get-go — are identifying potential suitors hungry for a start-up in a particular technology field. Selling the store for the highest price thus becomes the exit strategy of choice for both company founders and their investors.

Ernst & Young has found that the number of Canadian SME tech companies acquired by Americans jumped from 15 in Q4/10 to 27 in Q4/11. But there has been one notable change over the years. These suitors —or hunters — used to be mostly US companies. Today, they are more likely to be global.

This is not necessarily bad news. Firms are acquired across borders all the time. But what about the future? I believe there has never been a better time for Canadian companies to become the hunters. Today's generation of entrepreneurs are far better equipped than we were 20 years ago to take on this challenge.

An increasing number of entrepreneurs I meet have a Tier-1 profile. They have gone through the cycle of starting and later selling a company twice or more; are under 45 years old; and perhaps, most importantly, are still highly motivated. There are also a lot more Tier-2 and Tier-3 profiles in the pipeline who, with some strategic help, could become Tier-1 entrepreneurs.

All of my investment partners have identified potential "hunters" in their portfolios, simply by examining their end goals. An internal study by one of these partners revealed that 16% of the entrepreneurs in its portfolio were qualified as "champions".

entrepreneurial acumen required

While not all "champions" will become "hunters, we need to profile our entrepreneurs based on their potential to become hunters. What if we could find a way to move just 5% more of these potential hunters through the pipeline? Imagine the boost to Canada's economy over the medium- and long-term?

Of course, the big question is how do we increase the number of hunters capable of building leading companies through organic and market consolidation growth? Four issues need to be addressed.

Preparation: There is no one-strategy-fits-all approach when it comes to being the world's best in a niche market or, better yet, the world's largest in a major global sector. Each circumstance requires different strategies, skill sets and timeframes. It also requires entrepreneurship which is an art and a skill that need to be developed.

developing a hunter-making university

So what's the solution? First, I strongly believe that Canada needs a type of "hunter-making" university. Existing initiatives tend to focus on creating better business managers, as opposed to business owners intent on growth. We need a more advanced curriculum for those Tier 1, 2 and 3 entrepreneurs in the pipeline, and for investors as well. Some brilliant minds are already working on such a curriculum.

Risk: An entrepreneur is similar to a mount climber— but minus the harness, safety ropes or anchors.

Needless to say, investors want to minimize their risk, which is why they require entrepreneurs to put as much skin in the game as possible, and insist that all proceeds go towards the company's growth.

The scenario is an all too familiar one. Companies that reach the first or second base camp on that mountain have a choice: they can pocket the gold and start climbing down, or they can take a chance and head for the summit. Entrepreneurs that choose this riskier path need investors who can add value.

We need to incite motivated entrepreneurs to pursue growth through market consolidation — without betting all their gains. We can do this by encouraging systemic secondary transactions, which would create a private market for some of their stock. Such transactions do occur, but only in exceptional situations and very discreetly.

Do we need to find new investment directors willing to adopt this new approach? No. Should we educate them? Yes. Another potential student for the "Making of Hunters" University!

Long-Term Strategy: Limited partnership (LP)-based funds are bound by terms because the LPs are bound by return on investment and strict timelines. And, while we are seeing more efficient vertical integration taking place in our ecosystem, from angels to private equity, this pyramid is missing a top where all the knowledge, expertise and experience are consolidated.

What if there was a fund that specialized in hunting strategies? One that provides the "hunter" entrepreneur with all the financing tools and expertise they need to grow their company? Such a hunter fund would provide the harness, safety ropes and anchors to minimize the risk of growing through consolidation.

It would buy back the stock of early investors before they start pushing for a quick exit. Such a fund would also supply the networking connections and intelligence to complement a growth plan, and participate in — or lead — financing arrangements for a project.

Few LPs have the "buy & hold" profile to participate in a hunters' fund. It's time to get them back in the game with an instrument better suited to their profile.

Public Markets: This source of financing is usually highly supportive of growth plans based on acquisitions, even more so if a company's organic growth has proven successful. However, these same successful technology entrepreneurs — who are also highly independent — seem to have a genetic aversion to being publicly listed. They are not comfortable with either the operational constraints or the support costs. There's also the high volatility of technology stocks enslaving mid-term strategies to trimester performance.

When timing is favourable though, it is godsend cash to finance a hunting campaign. Some brilliant minds are working on ways to upgrade the reputation of and accessibility to this financing tool.

Michel Brûlé is an angel investor, former entrepreneur and board member of Investissement Québec. mm.invest@sympatico.ca