Tech startups turn to angels

If you're hoping to fund a tech startup, your best bet these days is to approach angels—not venture capitalists.

A new survey from PricewaterhouseCoopers, which polled the CEOs of more than 160 Canadian software startups, reveals that 74% of respondents who tried to raise money in 2010 were successful. And for the second consecutive year, angel investors were the primary source of funding, bankrolling the ventures of 55% of respondents, up from 46% in 2009. By contrast, 6% of the firms surveyed received funding from venture capitalists—a 16-year low, and down from 21% in 2009.

While angel funding is on the rise, it tends to come in smaller volumes: 80% of 2010 financings totaled less than $2 million, well below the $3.2 million average from venture capitalists. That, in turn, is significantly lower than the $8.2 million average from VCs in the U.S. "This VC funding gap continues to present a challenge that limits Canadian technology businesses from competing in the global market," the report states.

But despite the uncertain financing landscape, the survey found signs of cautious optimism in these firms. More than 60% expect revenue to grow by at least 25% in 2011. Some 73% expect their companies to be acquired within the next five years. And more than 80% claim to be taking a "more aggressive" approach to business planning.

Unsurprisingly, the surveyed firms are aggressively adopting new technologies. A total of 54% are using social media to interact with customers, with LinkedIn, Twitter and blogs the favoured platforms. A full 84% are using cloud computing in some form, most often software as a service—up sharply from 52% in 2009.

When it comes to top business challenges, 44% of CEOs said that recruiting new, qualified staff—particularly at the management level—is their top talent-management concern. "It seems the supply of new software developers and management talent is no longer keeping up with demand," the report states. "This talent shortage will only persist as the economy continues to improve, the workforce ages and Millennials usher in."

The full survey—which is titled Emerging Canadian Software Companies: The CEO perspective—can be downloaded at http://www.pwc.com/ca/cv2r