Despite lack of venture capital and U.S. economic woes, companies increased revenues in 2009 and are poised for more M&A activity
Surviving ahead of expectations from last year’s recession, CEOs of Canadian emerging software companies are very optimistic about the year ahead. This is according to a PricewaterhouseCoopers (PwC) 2010 report on Emerging Canadian Software Companies: The CEO Perspective, which shows that close to 60% of respondents are expecting at least 25% growth in 2010.
A majority of respondents (60%) have a positive view of the software industry in Canada this year, compared to 38% for last year.
“There is definitely a sense of optimism,” says Peter Matutat, PwC’s partner and national emerging company practice leader. “Companies in this sector weathered the recession well and even in 2009, CEOs found ways to continue to invest in their operations. We were surprised at how little downsizing and turnover there was despite a decline in exports last year and almost a third did not engage in any cost-cutting activities at all.”
The survey results indicate that in 2009:
– Forty percent of companies enjoyed revenue increases of more than 25%; 28% had revenues increase by 10-25%
– Share of total sales to U.S. markets declined from 40% in 2008 to 36% in 2009
– More than half (53%) of companies were profitable; another 29% expect to be profitable in 2010
– Thirty-seven percent described themselves as investing in their business
With respect to raising capital, companies basically had to do it themselves, or turn to family or angel investors, says Matutat. The report shows that venture capital activity reached all-time lows: only 21% of funds raised in 2009 came from venture capital versus 46% from angel investors. The good news is that of the 54% of respondents who tried to raise capital within the last two years, the majority (75%) were successful. The remaining 46% did not need to raise capital.
As a sign of growing maturity and confidence, more CEOs are looking at 2010 to expand through acquisitions as 42% of respondents with an M&A strategy are planning to acquire a competitor, says Matutat. Overall, 29% of respondents are pursuing growth opportunities and another 26% are open to growth opportunities.
However, exiting through M&As is still the main goal of respondents as 80% expect to be acquired within five years, which is consistent with prior years. The PwC report predicts that 2010 will be a very active year for M&As in this sector. Some of the reasons are that companies were holding off selling in 2009 for better valuations of their companies in 2010, certain industries (such as mobile, healthcare and infrastructure) are buying and many baby boomer CEOs are ready to cash in.
The report notes that software companies are in a good position to take advantage of a wide-range of government incentives – some of which were established to help emerging companies during the recession.
“We’ve been able to help a significant number of our own clients to choose among the broader array of programs and funding available and we encourage companies that think they may be eligible to seek out this assistance while the stimulus programs are still available,” says Matutat.
The number of companies seeking intellectual property protection outside of Canada is an area that decreased this year from 56% in 2009 to 39% in 2010. However, there has been a consistent increase since 2008 in the number of Canadian companies seeking IP protection in India and China which reflects the growing role that emerging countries are playing within an increasingly global software industry.
The survey also reports that 43% of CEO emerging software leaders believe that “cloud computing” is critical to their model, while 32% find the cloud provides no significant impact on the way they operate or their bottom line. In spite of this uncertainty, 52% of respondents are cloud users. Some 46% of survey participants are already developing cloud computing applications for their clients’ use, while another 8.6% are planning to do so.
The results of the survey were based on the responses from 130 CEOs, identified from a national cross-section of emerging Canadian software companies from publicity available lists. The full report includes additional commentary from John Beardwood and Mark Penner from Fasken Martineau on intellectual property, a global perspective on M&A activity from Bruce Lazenby of Corum Group Ltd. and an overview of government incentives from PwC’s Neal Madan and Elliot Edell.
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