Riding Out the Storm

Swim fast and watch out for sharks

Its not news that venture capitalists are watching their checkbooks like a mother guarding her firstborn. Yet, while some executives recognize the dangers of investing, they also see the opportunity.

Take Gerry Smith, founder and chief executive of Toronto software maker Changepoint. He knows of companies that raised $40 million from leading venture capitalists and have a product and a business, but have been told to close their doors by those financial backers. "They told them to divvy up the remaining capital, because they dont believe it is going to be successful, and to continue would be just a waste of the money," Smith says.

As much as he may feel for his fellow entrepreneurs, Smith knows that winnowing out weaker players and companies driven more by financial fads than a serious business plan has benefits for Changepoint. "If you have a fundamentally good company and a business model that makes sense, you are better able to compete," he says.

Changepoint scrapped plans for an initial public offering (IPO) last year when the market soured on technology stocks. It raised $25 million in May, which Smith says is enough for now. The best plan is to raise the money the company needs at the moment, and not to "bump the price so high that you cant meet expectation."

Canadian venture capitalists tend to prefer all common stock deals, while Americans lean toward preferred stock and give higher valuations — 20 percent on average, Smith says.

Changepoint competes in the professional service automation software market. Aberdeen Group projects that market will grow to $3 billion by 2004 because the software helps organizations plan, sell, deliver and support services more efficiently. Aberdeen lists 30 companies in its report, including Oracle and PeopleSoft, and smaller players such as Changepoint, Niku and Novient.

Smith says Changepoints sales grew 100 percent last year for the second year in a row, and that the company added 40 new customers last quarter to bring its total to 250. Does Smith need an IPO to cash out? No. "Some CEOs have to hit the ball out of the park or go bankrupt trying," he says. "If I sold the company, I still walk away with multiple millions [of dollars]. It is my stock."