HOT 50 Overview: Canada's hottest startups

As an entrepreneur, you’ve heard first-hand the dire warnings issued to aspiring business owners: most new businesses quickly go broke, and if you’re lucky enough to survive your first year or two, don’t expect to achieve more than a modest living as you dodge the pitfalls on the hard road from startup to sustained success.

The PROFIT HOT 50 have a message for the nabobs of negativity.

Together, the 50 firms on PROFIT’s 7th annual ranking of Canada’s Emerging Growth Companies have not only survived their startup phase, but thrived. The proof: over the past two years alone, these young guns have achieved average revenue growth of 946%. Savvy beyond their years, the PROFIT HOT 50 show how smart execution, combined with innovation and a willingness to seek opportunities abroad, is a recipe for business success, no matter which sector you’re in or how long you’ve been in it.

Indeed, the HOT 50 demonstrate that you can build a growth star in just about any industry. Carmen Creek Gourmet Meats (No. 5 on the 2006 list) spotted the potential to market top-quality bison meat as the healthful alternative to other red meats. Devhaus Corp. (No. 17) developed a proprietary model of education-focused child care that it’s now licensing overseas. Ontario Property Management Group Inc. (No. 21) is bringing private-sector expertise in property management to public and co-op housing projects. Eclipse Automation Inc. (No. 30) is designing the affordable, one-of-a-kind production equipment that Canada’s hard-pressed small and mid-sized manufacturers so badly need. RIFCO Inc. (No. 40) has signed a series of deals with retailers such as Mister Transmission to offer auto-repair loans right where the repairs are done. And Paragon Pharmacies Ltd. (No. 42) is using acquisitions to build a regional drugstore chain that combines the economies of scale of a $27-million operation with the friendly face of a community pharmacist.

If any of these sound like unlikely areas of growth, you’ll be delighted to discover that every company on the HOT 50 at least doubled its revenue in its past two fiscal years. Fully nine of the firms recorded growth rates of 1,000% or more — and not one of them is in nanotech, biotech or even oil or gas. Consider just the top three companies on the ranking: Holey Soles Holdings Ltd. (6,568% growth) produces colourful and comfortable foam footwear; FinTaxi LP (6,268%) is a specialty lender to cab drivers who need money to purchase their taxi permits; and Swiss Medica Inc. (5,130%) is a producer of herbal remedies.

The extraordinary performance of the PROFIT HOT 50 goes beyond the top line. Fully 68% of them were already in the black in 2005, in just their third or fourth year of business. This feat is especially noteworthy, given the high upfront costs and stiff competition that greet most startups, and the shock of the fastest run-up ever of the Canadian dollar. And many honorees weren’t just in the black but comfortably so, with 22% boasting net income of more than 10% of revenue.

What’s the formula for startup success? Not every strategy will work for every firm, but you’ll find many proven ways to build your business — young or old — throughout this year’s coverage of the HOT 50. However, Canada’s Emerging Growth Companies suggest you can — and should — develop your business with foreign markets in mind. By 2003, while still in their first or second year, 42% of them were selling beyond our borders. Two years later, that share had leapt to 66%. The HOT 50’s exports totalled $61.2 million in 2005, and accounted for 43% of the revenue of the exporting firms.

Despite their remarkable diversity, the PROFIT HOT 50 share a number of qualities. Most important: their ability to overcome the challenges familiar to all SMEs, such as finding startup and growth capital, and hiring and retaining the right people.

Clearly, the HOT 50 found most of the money they needed to launch. Which bring us to Lesson No. 1 of startup financing: you need to have your own skin in the game. An overwhelming 96% of the HOT 50 financed their launch in whole or part with their founders’ own capital, making that by far the most popular source of capital for the firms on this year’s ranking. A distant second: bank financing, at a relatively paltry 36%. Friends and relatives ranked third, at 28%, followed by credit cards and leasing. If you think most startup stars are born with the aid of equity investors, you’re wrong: angel investors were involved in the launch of just 1 in 10 HOT 50 companies, while venture capitalists supported barely 1 in 20.

However, as the HOT 50 moved beyond the startup period — and proved themselves worthy of loans and investments — they turned to a wider array of capital sources. Founders still played a huge role, with 70% financing the growth stage of their firms. Not surprising, banks (46%) played a more significant role as these companies matured, while dependence on credit cards dropped by half, to 10%. Some turned to credit unions (10%), others to the public markets (6%), and a few even to their customers (4%) and employees (4%).

In the battle to find and retain the human capital every company needs to succeed, the HOT 50 deployed an impressive array of sophisticated HR tools, from psychological testing to group RRSPs. At the same time, HR topped the list of the external barriers that held them back from even faster growth, with 56% citing a shortage of qualified workers. Other key barriers included difficulties raising bank financing (38%), high taxes (30%) and the high loonie (22%). And many CEOs admit there are things they’d do differently if they were launching again. Asked to complete the sentence “When I started my business, I wish that I’d___,” 34% said “had more money” and 16% said “started sooner.”

When it came to what they did right, huge majorities of CEOs cited character traits such as personal persistence (96%), a positive personal attitude (96%) and the ability to overcome unforeseen challenges (94%). Three other factors were deemed by 88% as “very important or critical” to their success: attracting good staff, retaining good staff and successful sales and marketing. And when asked to specify the key things they’d done right in their company’s first year, the most common answer was a two-parter: having a good business plan and — equally important — sticking to it.

How we found the HOT 50

Entries were solicited through a self-nominating entry form in PROFIT’s May and June issues, online at PROFITguide.com and in our e-newsletters PROFIT-Xtra and PROFIT Xchange. The nomination drive was also promoted through Canadian Business, Maclean’s and MoneySense magazines and their websites, by business organizations across Canada and through direct mailings to qualifying companies. Entrants were ranked by two-year revenue growth, with revenue and net income verified through financial statements.

Special thanks to our researcher, Laura Pratt, for her excellence in interviewing the CEOs of this year’s HOT 50.