Financing Global Gazelles

4. Global Gazelle Companies

Interviews were conducted with entrepreneurs whose company fits the global gazelle definition of any high growth SME, or divisional enterprise within a larger entrepreneurial firm, that is dependent on at least 50% of its revenues and/or goods purchased in a foreign market or markets.

The companies were chosen from internet listings by PROFITguide.com¹⁷ and BC Business Magazine¹⁸ of the fastest growing companies in Canada. The companies are involved in industries including manufacturing, pharmaceuticals, and technology. Six entrepreneurs whose company is experiencing high growth in a global market were interviewed.

4.1 Company backgrounds

Of those interviewed, five out of the six of the companies are now listed on the stock market resulting in their shares being widely owned. One company is privately owned by a small number of individuals.

The commonality among the companies is that they were started by one or more individuals who had experience in the industry, and saw some form of a global opportunity in a niche sector of the industry.

4.2 Key motives for starting the company

The key motives for starting the company were essentially the same as for the traditional SMEs. The University Certificate in New Business Enterprise by e-Learning¹⁹ states that the top motives for starting a company are:

• freedom in approach to work;
  
  
• make more money than before;
  
  
• be your own boss;
  
  
• personal challenge to make an idea happen; and
  
  
• better position in society.

In recent years, advancements in communications technologies enable global businesses to become more agile and faster to compete and survive. Global outsourcing is now possible through a vast network of suppliers around the world ready and willing to do business, such as in manufacturing products or providing expert professional services. Global outsourcing helps companies create supply chains that are faster, more flexible, and more efficient than ever before.

This new business environment creates motive for employees to leave their existing job, start a global company, capitalize on global opportunities, and experience the greater scope of being an entrepreneur (far more exciting than being just an employee).

4.3 Background of the shareholders

Gazelle respondents indicated that the founding shareholders had previously been involved in similar industries and were middle-aged at the time.

In June 2005, the Boston Consulting Group released a study, The New Agenda for Minority Business Development, which concluded that many minority-owned businesses don't evolve into high-growth ventures, typically because their owners rely on personal debt and family loans, rather than tapping into other capital sources, such as bank loans and equity markets.

4.4 Growth record

The gazelle respondents indicated that their company had been started between seven and 13 years ago, and that they had maintained high growth in each year. The rate of growth changed over time – generally, in the early years the respondent companies experienced rapid growth until they reached a maturity stage, then the growth slowed (except when new products, services or acquisitions were added to the mix).

The respondents experienced a revenue growth record in the range of 354% to 1,206% over five years – the growth being due to acquisitions, expanding the product line and developing new markets.

Research has indicated that the fastest growing companies in Canada have averaged fiveyear sales growth of 1,609%, earning 41% of their 2004 revenue abroad ($2 billion), up from 25% in 1999 ($118 million).²⁰

4.5 Countries involved

The gazelle respondents import or export goods and/or services from/to: Australia, China, India, Korea, Taiwan, France, United Kingdom, throughout other parts of the European Union, and the United States.

The table below indicates that 72 out of the top 100 profitable companies in Canada engage in the exporting of goods and/or services – exports contribute 57% to these companies' total sales. The top three export markets are the United States, United Kingdom and Western Europe.

Number of PROFIT 100 exporters	72
Their average exports as a % of sales	57%
Total 2004 exports	$1.99 billion
No. of companies that export to:
U.S.	68
U.K.	43
Western Europe	43
Mexico	23
Japan	23
Australia	23
Pacific Rim	21
Middle East	18
Africa	16
Eastern Europe	16
China	15
Central America	16
South America	14
Brazil	13
India	12
Russia	10
Central Asia	9

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

4.6 Partner organizations

The gazelle respondents indicated that a foreign organization had partnered with them. The organizations were in France and the United Kingdom.

Examples of partnerships found elsewhere in research show that:

• electronics retailer Best Buy Co. is checking with venture capitalists to find out what their start-ups are working on.
  
  
• Procter & Gamble Co. uses online networks to get in touch with thousands of experts worldwide, helping the company to produce 100 new products in the past two years.

4.7 Sources of start-up capital

The gazelle respondents indicated that they had obtained start-up capital from different sources. One company had financed their start-up from a personal line of credit, another from private investors, and another made an initial public offering.

4.8 Sources of current financing

The gazelle respondents indicated that the sources of current financing are from traditional lending institutions, such as the HSBC and the Royal Bank. All the respondents indicated that they have no current needs for financing their high growth business.

According to 2000 data from the U.K., high growth companies used the following formal and informal types of financing:

Formal types of financing in 2000

• 50% used commercial loans and lines of credits
  
  
• 32% used commercial credit cards
  
  
• 20% used leasing

Informal types of financing in 2000

• 47% used trade credit to suppliers
  
  
• 37% used the personal credit cards of the owners
  
  
• 35% used the personal savings of the owners
  
  
• 13% used loans from friends and relatives of the owners²¹

The chart below indicates that the financing of high growth enterprise in Canada has changed from traditional commercial banks in 2000 to financing from the owners of the enterprises.

Where PROFIT 100 CEOs found the capital they crave (in the past five years)

Owners	82
Chartered banks	76
Leasing	56
Friends and relatives	34
Public stock issues	25
BDC	23
Credit cards	21
Private investors other than angels	20
Venture capitalists	20
Angels	15
Foreign banks	12
Employees	9
Suppliers	9
Other financial institutions	8
Other government	7
Barter	6
Asset-based lending	6
Credit unions	5
Customers	4
Bond issues	2
Factoring	2

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

4.9 Use of funds at key points in time

The gazelle respondents indicated that key points of financing were to finance growth into new markets or to maintain product development.

The table below shows an analysis of total venture capital investment activity in Canada (number of financings and total dollars), by stage of development, in 2005, compared with 2004 and 2003.

Total Venture Capital Investment Activity in Canada by Stage of development

Stage	2005 Financings	Amount ($ million)	2004 Financings	Amount ($ million)	2003 Financings	Amount ($ million)
Early stage	319	901	339	919	376	851
Expansion	284	858	212	783	281	760
Acquisition / buyout	11	17	25	101	13	23
Turnaround	8	15	22	18	20	18
Other	17	38	9	14	15	22

Source: Canadian Venture Capital and Private Equity Association (CVCA), Venture Capital Investment Activity by Stage (http://www.cvca.ca/files/News/Table2.pdf)

4.10 Future growth plans and potential funding needs

The respondents indicated that future use of funds will be to develop new growth markets and finance new and/or existing technologies or processes.

The majority of high growth small firms regarded themselves as prospectors, rather than defenders, analysers or reactors.²²

According to Dent of Angio Tech Pharmaceuticals, their future plans to maintain high revenue and earnings growth will be through acquisition of complementary products and/or technologies.

Winbald²³ states that venture capitalists look for companies (which can be of significant size), that have strong growth potential, a track record, plans and ingenuity.

4.11 Biggest problems

The biggest problems reported by the gazelle respondents are:

• the management of foreign exchange;
  
  
• the high Canadian dollar;
  
  
• time management;
  
  
• focusing on marketing;
  
  
• developing new strategies; and
  
  
• building out the operation.

This response is consistent with the comments made by industry experts – the biggest problems in a high growth global business being access to new financing, management of people, foreign currency and developing new products and/or services.

Ramsdale²⁴ states that the biggest challenge is spending time on new marketing and not getting distracted by the day to day activities required to run a business. There needs to be more time spent on new strategies and developing new marketing.

According to Charbonneau, research has indicated that the top barriers to internationalising in Canada (internationalising being defined as all constraints that hinder a firm's ability to initiate, develop, or sustain business operations in overseas markets) are:

• excessive transportation/insurance costs;
  
  
• foreign currency exchange risks;
  
  
• inadequate returns;
  
  
• difficulty in supplying inventory abroad;
  
  
• lack of personnel experienced in internationalisation;
  
  
• unfamiliar foreign business practices;
  
  
• product not exportable;
  
  
• corporate organization-related barriers; and
  
  
• developing new products for foreign markets (product development capacities).

4.12 What would stimulate additional growth and profitability

The gazelle respondents indicated that for stimulation of additional growth and profitability to occur, they will need access to more capital to finance sales growth and partnerships to enable the development of new technologies.

According to Dent, for additional growth to occur, new technological advancement needs to occur. In the earlier stages, strategic partnerships with companies such as Boston Scientific, Baxter and Polymed significantly contributed to the high growth of their business.

4.13 Friendliness of the Canadian business and government compared with other countries

Only one gazelle respondent (Perry) could comment on whether Canadian business and government are more or less friendly than other countries.

Other countries celebrate, educate and promote the entrepreneur more than in Canada. Perry states that Canada does not promote the entrepreneur compared to other countries such as in Asia and the United States, where they are viewed as celebrities. Canada needs to change the education system as early as high school to promote starting a new business.

4.14 Advantages / disadvantages of company situation compared with others

The gazelle respondents are not aware of any current or potential public policy and incentives that would be an advantage or disadvantage compared with others.