It’s no secret the economic downturn has had a large impact on Canadian VCs and, by extension, startups. Quantitative easing (QE), implemented by the Bank of Canada (BoC) and the Federal Reserve in response to the pandemic, contributed to unnatural inflation in tech asset values. But what goes up, must come down – and VCs and founders face a very different economic landscape today than they did just a year ago..
How are VCs and founders adapting? What do today’s investors look for in a founder and startup? And how can founders ultimately thrive over the long-term?
RBCx recently hosted a VC Fireside Chat to answer these questions, led by Anthony Mouchantaf, Head of RBCx Capital and Janet Bannister, Founder of Staircase Ventures.
Anthony leads the RBCx Capital team, which manages fund and direct investments across the portfolio, and the fund finance team, which issues and manages credit to venture capital and growth equity firms. Prior to RBC, Anthony was a venture capital investor at OMERS Ventures where he focused on DeepTech and Enterprise SaaS businesses.
Janet is the Founder and Managing Partner of Staircase Ventures. Prior to launching Staircase Ventures, Janet was Managing Partner at Real Ventures and was the founder of Kijiji.ca. Today, she is co-chair of C100 and on the boards of Communitech in Waterloo, Vector Institute in Toronto, and Ivey Business School.
Speaking to more than 50 virtual clients, Janet and Anthony offered valuable guidance — both tactical and big picture — for startups navigating this economic environment. It was a lively discussion packed with deep financial knowledge and inspiring anecdotes to deliver behind-the-scenes insights and best practices. Here are the key takeaways from the discussion:
Resilience is key to navigating the downturn and beyond
Venture capital and startups are extremely susceptible to macroeconomic shifts in terms of the spectrum of asset classes. Today’s economic downturn – an emanation of the pandemic – disproportionately affects technology companies.
“Essentially, in reaction to the pandemic, central bankers around the world put too much liquidity into the market, and that elevated venture capital,” says Anthony. This pushed a lot of money into asset bubbles, of which startups were primary beneficiaries. However, as the economy reverts back to the mean, startups are among the hardest hit.
“When you’re very high up and you go back to equilibrium, it’s a long fall. That’s what is happening now,” says Anthony. Companies are perhaps realizing that although nothing has changed fundamentally about their business, it’s valued very differently today than it was previously. In 2021, it could have been valued at 50 times its revenue; but today is valued at 10 times its revenue, even as revenue doubled.”
“In this market you see who’s resilient,” he continues. “Who’s working on things that are long-term and sustainable versus who was a beneficiary of momentum investing.”
Janet agrees, citing tenacity, focus and acting quickly will help companies persevere through this difficult period. In fact, she believes it’s an ideal time to be an initial investor for seed stage companies.
“The valuations are way down and the type of founder launching a business now is a different type of founder than two or three years ago,” says Janet. “Everyone thinks being an entrepreneur will be easy. There’s nothing like some hard times to show who’s really in this and knows there will be tough times, but moves forward anyways.”
“Everyone thinks being an entrepreneur will be easy. There’s nothing like some hard times to show who’s really in this and knows there will be tough times, but moves forward anyways.”
Changing investor behaviour and expectations
Today’s investors are very risk averse. “Gone is the FOMO (fear of missing out) mentality,” says Janet. “They’d rather sit on the sidelines.” She’s also seen more investors back out of deals at the very last minute.
“I know two companies that had term sheets signed and all the diligence was 100 per cent, yet the day or two days before getting the word, they said we’re not going ahead with it.” To succeed, she advises early-stage founders surround themselves with people who believe in their business, and to always consider what could go wrong – and how to prevent it.
“There’s a lot going wrong in the market now in terms of financing being pulled, so have a contingency plan. Expect things to go awry and plan for it.”
Today’s investors are focused on company quality and founder quality. There is currency in this market for founders who have the stamina and endurance to get through tough times, according to Anthony. They also have an eye out for those with longer-term experience that bring “deep operational chops to navigate this environment.”
Investors want to know where your business is going
Janet and Anthony both offer perspectives on what investors look for in a startup, and how founders can best illustrate the value of their business.
Early-stage investors don’t invest in what you’re doing today, but rather what your business will be 10 years from now. What are you building? Is it a high gross margin business? Is it capital efficient? Can you leverage the capitals raised efficiently? Can you acquire customers cheaply? Do they stay with you for a long time? All of these considerations are important to investors, says Anthony.
Startups need strong unit economics. While a lot of founders use LTV ( lifetime value) of a customer as their metric, Janet recommends using the months to payback metric, instead. How many months does it take before your gross profit exceeds the costs that you spend to acquire that customer? “If you can pay back the cost of acquiring a customer in two months versus another company that takes 12 months –particularly in a high interest environment where it’s difficult to raise capital — that ability to earn back your acquisition cost very quickly is important.”
Your business needs to solve a burning problem. Companies are scaling back these days and not buying a lot. “So, if you want to sell, for example, your software to a company, it had better solve a burning problem or you better position it that way so they will prioritize it,” advises Janet.
Key differentiating founder traits investors value
Every founder tends to share a common set of characteristics, such as high integrity, hard work, smart, and unique insights. However, Janet emphasizes a few crucial traits that differentiate founders, beyond the usual list.
Having a growth mindset such that you’re continually learning and growing professionally and personally.
The ability to articulate a clear vision to attract people better than yourself. “The reality is, no company was ever built by a single person, so if CEOs cannot attract, motivate, and retain people who are better than themselves, they won’t ever grow the company.”
The ability to take ownership of your results, especially when things don’t go as planned. “Is this the type of person who blames external factors for the problem they have, or do they look internally and ask, what can I learn?” says Janet. “How can I be better?”
“Is this the type of person who blames external factors for the problem they have, or do they look internally and ask, what can I learn?”
A founder needs to be mission-driven. Investors make a bet on founders as much as the company. Anthony cites a famous quote by King Louis XIV of France: “L’état c’est moi.”
“The King of France was saying, I am the state,” he says. “This is also accurate when you refer to early-stage founders because they are the company.” Investors want to know: Is this individual going to be able to get the business through this challenging climate?
Pitfalls to avoid when first engaging with investors
As a startup founder you need to present yourself as the expert. Investors want confidence in your ability to navigate the business through the ups and downs of its lifecycle. Anthony believes some founders flounder here by relying too heavily on VCs for operational guidance. Investors have a horizontal business and know a little bit about a lot: “They’re really good at meta stuff, know what smells good, what smells rotten, and they know what to look for in founders.”
However, founders play a vertical game. “Your job is to be really deep on whatever it is you’re doing,” says Anthony. “Be the expert on it.”
He believes some founders miss that important distinction. They think VCs have deeper expertise in their area than they do and, hence, may rely too heavily on VCs for guidance. Ultimately, the relationship between the founder and investor is symbiotic. A founder relies on VCs for a horizontal outlook and support to scale the business; VCs rely on founders for vertical (deep) knowledge to navigate all the craziness of running the business.
Ultimately, the relationship between the founder and investor is symbiotic. A founder relies on VCs for a horizontal outlook and support to scale the business; VCs rely on founders for vertical knowledge to navigate all the craziness of running the business.
Janet offers a few easy-to-implement tactical tips to founders for when they first engage with a VC:
When you follow up with an investor by phone or email, be sure to re-introduce yourself. Always provide context, such as when you met, who introduced you, or any other pertinent details, to help the investor recall your previous interaction.
If you reach out by email, include an informative subject line. It’s common to be introduced via email, and then respond using that same thread. The problem, says Janet, is when the subject line is not updated at the same time. “I end up with all these introduction title emails! Change it to your company name.”
Another simple tactic Janet recommends is to not talk too much. Too often, she gets on a call with a founder who talks non-stop and provides her no opportunity to ask questions or clarify points. “You have to pause to make sure the person at the other end of the line is following you, and can ask questions.”
Of course, of utmost importance, is the ability to succinctly state your big visiont. “It’s more compelling to say I’m building this business. I’m starting here, and here is my traction, rather than saying I have this little business and I want to grow it.” Let the VCs know where you’re going.
Gain more valuable insights from RBCx
Huge thanks goes out to our esteemed experts for their invaluable insights, as well as our engaged attendees who helped spark lively discussion with thought-provoking questions. If you missed this webinar, be sure to sign up for our next RBCx Academy event. With 150+ years of institutional knowledge, we’re dedicated to sharing our deep expertise to help our clients succeed at every step of their entrepreneurial journey.
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