Financing Global Gazelles

3. Industry Experts

This chapter provides insight from those who are knowledgeable of SME growth and dynamics, obtained through internet research and telephone interviews, on the unique nature and financial environment of global gazelles.

3.1 Main industries that attract global gazelles

Global gazelles are in a variety of businesses, the largest segments being IT-related business services, manufacturing "consumer goods" and software development. Bizzel notes that "the trend is now in high-end wireless telecommunication software and hardware".

Sectoral breakdown of Canada's 100 fastest growing companies

Business services:	31
Transportation and logistics	(1)
Telecom-related	(4)
Marketing-related	(3)
IT-related	(11)
HR-related	(4)
Other	(8)
Manufacturing:	26
Telecom-related	(3)
Consumer goods	(11)
Other	(12)
Software developers	12
Wholesale / distribution:	7
Consumer services	5
Financial services	4
Pharmaceutical manufacturing/services	3
Publishing	3
Retail	3
Construction	2
Real estate	2
Entertainment	1
Healthcare services	1
Total	100

Source: Profitguide.com, Profit 100 Overview: The Only Thing That Matters, Kim Shiftman, June 2005

According to Askew, the main industries that attract gazelles are:

• niche subsets of industries where there are no big competitors;
  
  
• new technologies – the risk profile has a skewed distribution that predicts a higher chance of failure, but a larger reward if successful; and
  
  
• global services in niche roles within alliances and affiliates.

3.2 Unique features of global gazelles

The unique features of global gazelles:

• Are internationally focused;
  
  
• Have the ability to leverage their global knowledge of business and use it for the services and/or goods they produce;
  
  
• know how to attract equity investment;
  
  
• expect to quickly realize growth potential;
  
  
• operate in their chosen niche market;
  
  
• have strong ties with foreign networks;
  
  
• have prior experience in business with other countries;
  
  
• are opportunists;
  
  
• are flexible in exploiting gaps; and
  
  
• change their business model as they go.

Entrepreneurs who start these global businesses:

• are usually middle 30 to 40 years of age;
  
  
• have a university education;
  
  
• are highly motivated;
  
  
• have excellent networking skills and connections;
  
  
• have the ability to assemble a strong management team;
  
  
• know the foreign culture and markets;
  
  
• have prior experience and contacts in the related industry;
  
  
• have past experience in starting a business;
  
  
• intend to start another business in the future;
  
  
• are risk takers; and
  
  
• have the ability to deal with ambiguity and financial risk.

Writing in Business Week, Hamm¹³ states that with competition more intense than ever, long-standing companies are angling to become "overnight sensations," creating new products and entire businesses almost instantly by using technology to seek out new markets, outsource services and cut the time from "idea" to "in stores now." This is a new phenomenon, resulting in a new corporate environment driven by a single principle – survival of the fleetest. Perry (an angel investor and owner of several global gazelles) states "the unique features of global gazelles are their ability to leverage their knowledge in a global market and their ability to change when one of their products matures in that market".

According to Askew, research has indicated that entrepreneurs who start global gazelles are individuals who feel psychologically close to the country they are internationally sourcing from and/or selling into (e.g. immigrants, second generation Canadians and highly internationalized Canadians). Actual geography is not important. A predisposition to internationalization and a familiarity/openness with the source and/or target countries is the key factor. Entrepreneurs with previous experience in multinationals who are familiar with global supply and distribution chains, and have sold goods and services internationally, would be able to identify business potential in such global value chains.

The opening up of global markets will increase as immigrants come into Canada, because they understand the culture, business practices and language of their previous homes.

3.3 Unique qualities of financing needs

The unique qualities of global gazelle financing are:

• the entrepreneur has a good credit history;
  
  
• needs start-up capital from angel investors or venture capitalists, because of the global risk in their business model;
  
  
• personally contributes financially in the business;
  
  
• willing and able to give up equity for additional financing;
  
  
• needs education on foreign currency management;
  
  
• constantly looking for strategic alliances or partnerships to support business development; and
  
  
• has low cash flows and needs long cash repayment cycles.

The growth rate of gazelles is often dependent on the willingness of the entrepreneur to give up an ownership percentage in exchange for early-stage financing.

Askew states that most of the highly successful entrepreneurs have bootstrapped their businesses into existence and collateralized their private assets to acquire equity and working capital to fulfill contracts. If they are doing international business, then payment terms, collections, invoice discrepancies and long cash cycles are likely a problem.

The table below shows the total venture capital investment activity by sector in 2005 compared with 2004. The total number of financings and the amount financed in each year were similar.

Venture Capital Investment Activity by Sector

Industry	2005 Financings		2004 Financings		2005 Amount		2004 Amount
	#	%	#	%	($ million)	%	($ million)	%
Biopharmaceuticals	65	10	84	15	344	19	346	19
Healthcare	6	1	5	1	14	1	9	1
Medical Devices and Equipment	20	3	21	4	77	4	92	4
Medical/Biotech Software and Info Services	10	2	10	1	11	1	20	1
Total Life Sciences	101	16%	120	20%	446	24%	467	25%
Communications and Networking	60	9	61	13	335	18	357	18
Electronics and Computer Hardware	38	6	46	8	123	7	80	7
Internet Focus	37	6	32	6	104	6	71	6
Other IT Services	16	3	6	2	26	1	24	1
Semiconductors	10	2	18	2	50	3	171	3
Software	102	16	105	18	286	16	252	16
Total IT	263	41%	268	44%	924	51%	955	52%
Energy and Environmental Technologies	31	5	36	4	65	4	71	4
Other Technologies	27	4	11	4	45	2	21	2
Total Other Technologies	58	9%	47	8%	110	6%	92	5%
Consumer and Business Services	59	9	34	6	101	6	70	6
Consumer Products	35	5	36	4	38	2	88	2
Manufacturing	68	11	52	7	139	8	106	8
Miscellaneous	55	9	47	5	69	4	55	4
Retailers	-	-	3	-			1	-
Total Traditional	217	34%	172	28%	347	19%	320	17%
Total	639	100%	607	100%	1,827	100%	1,834	100%

Source: Canadian Venture Capital and Private Equity Association (CVCA), Venture Capital Investment Activity by Sector (http://www.cvca.ca/files/News/Table3.pdf)

The table indicates that 41% of the number of venture capital financings was in the information technology sector in 2005.

3.4 Financing issues including sources of financing and lending decisions

The financing issues of global gazelles are similar to other high risk businesses with the start-up capital being the most difficult to raise. Start up capital is commonly raised through;

• personal line of credit;
• personal credit cards;
• leasing;
• love money from friends and families;
• government loans and grants;
• angel investors; and
• venture capitalists.

Not until a gazelle has an established business model and a proven track record will the traditional banks or funds display show interest in financing.

According to Askew, research has indicated that the international aspect of global gazelles can complicate financial analysis by lenders, more so than a traditional high growth venture. Creditworthiness is a major factor. Lenders are more comfortable when they see partnership with venture capital investors and/or traditional or governmental institutional support.

Webber states that gazelles usually have two rounds of financing. The first round is funded by angel investors and/or venture capitalists who are familiar with the gazelle's technology and the foreign market in which it is operating. The second round is after the gazelle has developed the product and/or service and financing is needed to commercialize.

3.5 Unique qualities of ownership and management

Global gazelle enterprises often distinguish themselves from other SMEs, having sold a portion of their business in exchange for start-up capital. The gazelles usually take the form of an incorporated company with a capital structure reflecting the early stage "sweat" equity provided by the founder, angel or venture capitalist, together with asset-backed debt from other more traditional sources. Regardless of their capital structure, their organizational structure almost always tends to be very flat, with the owner overseeing various departments instead of delegating and developing departments.

Hughes states that the unique organizational structure of a global gazelle is that the owners have difficulty finding skilled labour that meets their own standards, and as a result, they tend to perform multiple jobs. The organizational challenge of the gazelle, being horizontal, is the owner's ability to manage growth. As Rao further remarks, this is not necessarily a hindrance, as the gazelle's success often continues to depend on the intellectual capital of the original owner.

3.6 Key drivers of success

The key drivers of success in global gazelles are:

• ability to manage a rapidly growing business;
• ability to management risk;
• familiarity of target global market and foreign network;
• ability to take technical (intellectual property) and financial risks based on experience, analysis, market and contact knowledge, and intuitive belief.
• rapid development of leading edge technology;
• frequent access to new capital to finance rapid growth;
• vision to see globally; and
• ability to leverage resources globally.

Remillard states that the three most important factors for a global gazelle's success is management, management and management. He further relays a common saying in the venture capital world, "in this business you bet on the jockey, not on the horse."

3.7 Challenges to growth

The main challenge for a global gazelle to sustain growth is access to timely financing. As the global gazelle rapidly grows, it usually experiences a working capital deficit.

As already mentioned, the ability of the owner to let go of control is a challenge. In many global gazelle enterprises the value of the company is in its intellectual capital (frequently the knowledge held by the owner).

As in many business cases the growth of the business goes as far as the ability of the owner to transfer their intangible knowledge to other individuals, and to focus on the owner's personal skills in networking, product development, sales, etc.

Roa states that the main challenge for a global gazelle to sustain growth is ensuring that its products and/or services are aggressively competitive.

Other challenges to growth include the high cost and availability of insurance, exchange rate risk and lack of working capital sufficient to operate in foreign markets.

3.8 Value created by global gazelles

The predominant value created in global gazelles is intellectual property. Intellectual property is defined¹⁴ as any intangible asset that consists of human knowledge and ideas, such as patents, copyrights, trademarks and software. Such assets cannot be recognized on a balance sheet unless purchased. Intellectual property introduces to the marketplace new technology, improves products and streamlines processes. The creation of intellectual property challenges company insiders to think outside off the box when problem solving.

Remilliard notes that global gazelles bring their country of origin to the attention of foreign markets.

3.9 Current public policy and incentives

Most respondents indicated that they are unaware of any public policy and incentives offered in Canada to facilitate and stimulate growth of global gazelle.

Charbonneau¹⁵ points to EDC as a source of funds that is willing to invest in gazelles operating in typically riskier areas of the world. He believes there to be 15-20 different assistance programs offered by all three levels of government. The problem is that it is very difficult for entrepreneurs to stay abreast of the different options available to them. He suggests a "one-stop shop" that would be the first contact for an entrepreneur when financing their business.

According to the United Chinese Community Enrichment Services Society, they offer a new program "Business Links" which is designed for new immigrants and was originated by Western Economic Diversification Canada. The program links new entrepreneurs with experienced business advisors who provide advice on preparing a business plan and getting a loan approved. Out of the 271 clients served up to January 2006, the countries of origin were 62.6% Chinese, 23.8% Korean, and others 13.6%.¹⁶

3.10 Potential changes in public policy and incentives

Most of the respondents indicated that they are unaware of any new public policy and incentives that will be offered in Canada to facilitate and stimulate the growth of global gazelles.