Telecom fading, wireless still strong, but overall growth down, according to Fast 50

Low levels of venture capital (VC) funding in the telecommunications and wireless sectors over the past several years have led to a steep decline in the overall growth levels, according to this year's Deloitte Technology Fast 50. It could signal the end of the hyper growth experienced by Canada's technology sector over the last number of years. On average, there was a drop of about 1,000% in five-year revenue growth figures in this year's edition compared to the 2007 Fast 50.The big winner this year taking the number one spot was Markham ON-based Nightingale Informatix Corp. with 23,078% five year revenue growth. It unseated Waterloo ON-based Sandvine which dropped to number seven on the list after total sales for this year fell to 3,510% over the previous five years. Last year, Sandvine ranked number one with five-year revenue growth of 42,120%.Duncan Stewart, director Deloitte Canada Research, likens the current situation to raising children where it takes years to see how they turn out. "That decline in venture capital funding is starting to make itself felt in the technology sector as a whole," he tells Tech Media Reports.Recent figures from the Canadian Venture Capital Association (CVCA) reveal the downward trend of VC investing. Overall VC financing was down 39% in the first half of 2008, with investments hitting $636 million, a drop from $1 billion in the first six months of 2007. These figures are off significantly from financings in 2000 and 2001. In 2000 alone, CVCA reported more than $6.3 billion. In the second quarter of 2001, $1.4 billion was disbursed to companies. The number of companies getting financed is also indicative of the significant drop over the years. In 2000, 1,440 companies received VC funding, while in the first half of 2008 only 105 companies got cash injections.The lack of VC funding has a direct impact on revenue growth potential, according to Stewart, and the Fast 50 clearly demonstrates that correlation. "If you're capital constrained...you don't have $5 million to pour into marketing and other product development," he says. "Instead you have to bootstrap yourself. What you end up doing is funding yourself through debt, maybe your own company cash flow. It's certainly a good way of growing but it doesn't usually produce hyper growth."Deloitte suggests there is a gap in terms of VC financing. For significant VC funding in the $100 million range, companies look outside of Canada, primarily to the US or Europe. At the low-end, angel investors are willing to chip in $50,000 to get an idea going. Stewart says the void is in the middle.The first $1 million or $2 million injection used to come from the Labour Sponsored Venture Capital Funds and other players in this space. In Ontario for example, the provincial tax credit combined with the federal one allowed people to invest in the VC funds, which in turn invested $1 million to $3 million in technology start ups. But Stewart says the money has dried up. Ten years ago, there were about 15 organizations handing out this kind of money. Now he says, there are perhaps two or three.Fixing the problem starts with filling the gap, says Stewart says. "Some form of retail venture capital is very important for the growth of the Canadian technology industry," he contends. "The industry won't go away if we don't do that it's just less likely to have world beating growth rates."Telecom fading, wireless strongAn analysis of the Fast 50 reveals that wireline telecommunications is on the downward trend, while wireless represents the future of growth. Stewart succinctly sums up the reason for the fading impact of wireline. "There still too many , and much more importantly, it is a lower growth market and there are new entrants from China who have dramatically altered the competitive landscape," he says.It doesn't appear likely Canada's telecom sector will rebound anytime soon. Just as the ocean levels rise and fall over millennia, sometimes allowing islands to appear as well submerging them, telecommunications in Canada is experiencing a similar ebb and flow."The Canadian telecom industry isn't quite in the ‘it isn't there anymore' but certainly the amount of land above water is much, much smaller," Stewart says.But as the hopes for telecom appear dim, those for wireless have a much brighter future. Four of the top 10 companies are directly involved in the wireless and mobile sector. A survey of technology company CEOs conducted as part of this year's Fast 50 indicates that many chief executives will be looking to wireless to drive growth. Nearly 60% of tech executives see wireless applications, services and solutions as becoming a larger part of their company's business in the future."What's more important is even companies that are not wireless or mobile are looking at trying to do more in that area. So not only is it the growing area today, even the CEOs of companies understand it will continue to be so," Stewart says.

Telecom fading, wireless still strong, but overall growth down, according to Fast 50

News | 09/25/2008 7:49 pm EDT

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