Hold on to your hat: A lamentfor dying SMEs and for what it’s worth…

I just got done reading the latest issue of Progress magazine. I really like it – the only tinsy flaw is that it tends to be a bit Pollyannish about the business community in Atlantic Canada. But maybe after all the raw, realism I get punched in the nose with on a frequent basis (you know all the stats), a little lah tee dah – tiptoeing barefoot through the tulips – metaphorically speaking – of the Atlantic economy has its place.

So in the latest issue of Neville’s brainchild is a cover story about FatKat – the Miramichi-based animation studio.

I was revved up to write a long and windy blog about how this is exactly the kind of company we need and heap congratulatory praise on the entrepreneur behind the company but as I was cracking the knuckles to put pen to paper – so to speak – I had a ‘senior’s moment’ – a flashback – and names just started pouring out: Provinent, Learnstream, e-Com, BKM, Romulin, CyberDesign, JOT – on and on – dozens of ‘FatKat’s that I have intersected with over the past 15 years – all relegated to the business boneyard of the Atlantic economy.

In fact, statistically speaking, the chances of FatKat lasting 7-8 more years at all are very slim. If you had a list of the top ‘IT’ firms in New Brunswick from ten years ago 1997 – you would find that very few are in business today.

Between 8-9 out of 10 new start up businesses fail within 5 years.

So, I started to give this some thought and here are a few observations/thoughts – for what they are worth:

96% of New Brunswick-based firms generate less than $2 million per year in annual sales. 96%. After 15 years studying this stuff, I have concluded that it is relatively easy to build up a business with a million bucks or so in sales but to take it to $5 million or $10 million is virtually impossible. This is a statistical fact – not just my opinion. Further, and this is more opinion-based, to take an IT firm based in New Brunswick to $10 million in sales is almost impossible. There may be a handful – one hand – of IT firms in New Brunswick that are not either currently or historically affiliated with NBTel that are still in business and generating $10 million + in sales.

What’s the problem?

1. Capital. I think they call it ‘death valley’ that period between start up and serious growth (let’s say $1 million or so in sales and $10 million or so in sales) in which it is very hard to find growth capital. In New Brunswick, in my experience, we have a little additional problem and that is that many entrepreneurs don’t want to get up any ‘equity’ to get financing. This is changing a bit with the young Turks but just ask the NBSC how many New Brunswick firms have external equity financing.

2. Management. It is – take it from me – relatively easy to build a lifestyle business of a million bucks or so with the entrepreneur and a couple of buddies. But building a real business with a serious business model that has long term potential takes a serious management team. In many cases you can’t fund this management team out of cash flow so issue #1 comes back on the table. Build a serious management team. VP – Sales (with US experience if that’s your target market), VP – Finance, VP Operations, legal, etc.

3. Humility. I have witnessed so many small IT flameouts that I am jaded but I hear the speeches in my head “I’d like to thank the academy” and all the “little people” that made this happen. Arrogance is the curse of entrepreneurs. You want to be arrogant? Wait until you are Wes Armour and have an empire – one of the largest firms in your sector in Canada with over 1,000 employees. Then you can take the time to be arrogant. Funny thing, though. Wes Armour still doesn’t come across as arrogant. Humility is a key virtue of long term, successful entrepreneurs. Even old Bill Gates stepped aside when his time came.

4. Be in the markets you need to be. Let’s face it. It is very hard to build a national or international business from New Brunswick. We can either ignore this reality or face up to it. New Brunswick is a wonderful place to have back office, production studio, support centre and, yes, for some even a head office or a regional office. But if your clients are based in Boston or New York or Dublin, find a way to be in those markets. All this hullaboo about using Web Conferencing is much ado about nothing. And that, of course, comes back to point #1.

5. Finally, get really good at something. Use this nugget of opportunity you have been given to get really good at something. One of the top reasons all these IT firms went under was at the end of the day the majority of them were pushing lower cost of production or some other ephemeral value proposition that will always be outdone somewhere. Why are some of the top animation studios in the world located in downtown San Francisco (I walked by a few last week)? Certainly not because of cheaper costs. Costs are certainly key but if they are the only reason you are getting business – for most IT sectors – you are on shaky ground indeed.

Back to FatKat. I don’t presume to serve up advise to that or any specific firm. Each case is too unique. Some new firms are funded out of RRSP withdrawals and others from a large silent partner in Toronto. Some have long established business relationships while others hammer away just trying to get lucky.

But the bottom line is that we (NB) need companies like FatKat to suceed. Think of the 20 or so e-Learning firms that have gone out of business in this province alone. e-Learning was supposed to be the next call centre. Thousands of jobs right here in New Brunswick generating content and technology for global markets. And now kaputsky.

So from a public policy perspective, I hope BNB has had a long hard look at the new 35% tax credit for digtal media production.