Tony Barkett, RBCx’s Head of Banking, on how to get through the the current startup landscape
Hear that? That’s the sound of tech bubbles bursting all over the place. After years of phenomenal growth whereby VCs clamoured to invest, startup valuations exploded and IPOs were plentiful, the startup ecosystem has hit a rough patch.
For a sense of how the current economic climate is affecting Canada’s startup scene, consider these Canadian Venture Capital & Private Equity Association (CVCA) findings:
- The first quarter of 2023 saw VC investment totaling $1.1 billion—a 56 per cent drop from the $2.5 billion raised in the previous quarter.
- The IPO market remains anaemic; not a single company has gone public since 2021.
- Only five M&A exits have come together this year, representing just 30 per cent of the average quarterly deal size over last.
With so much market uncertainty (not to mention noise), how can entrepreneurs know what’s most crucial to focus on over the next period? Tony Barkett, Head of Banking at RBCx, shared his thoughts in his recent keynote speech at the Atlantic Venture Forum titled ‘Staying Afloat in 2023: What Founders Should Focus On’. He took a packed Halifax crowd through the patterns and learnings of past downturns, the future of funding, and what it means for your startup. Read on for a recap including the four actionable steps entrepreneurs can take to sustain themselves through the slump.
What’s happening in the market
“Concerning.” That’s how Tony describes the startup state of play. “The number of companies being funded is down, the amount being funded is down and the time it takes to close is taking longer,” he says. “The potential bigger issue is that if you go back as far as 2015, the number of tech companies being incorporated has decreased year over year, so when VC activity rebounds there will be fewer companies to fund and drive innovation in Canada.”
“The number of tech companies being incorporated has decreased since 2015, so when VC activity rebounds there will be fewer companies to fund and drive innovation in Canada.”
Beyond the decline in investment dollars, Tony breaks down his key observations and challenges:
- The founder-funder disconnect: There is a fundamental mismatch between founders’ valuation expectations and investors’ pricing for initial and follow-on funding rounds. “Founders and entrepreneurs may still be looking at 2021 and 2022 valuations, but investors have already course-corrected and are looking at where they can go into today,” says Tony.
- Convertible notes are the new follow-on rounds: This form of short-term financing (whereby the loan translates into equity instead of a cash repayment) is more popular than ever. But, Tony stresses, it also poses a challenge for venture debt funding. “Venture debt is good for growth stories where there’s fresh new capital at a higher valuation than the last round, but if companies raise convertible notes, it’s really hard to fund off of that as they’re kicking the can down the road on setting a valuation,” he says.
- Hesitancy and VC follow-on signaling: Soaring inflation continues to cause a wave of uncertainty to wash over the startup ecosystem. VC firms are wary of investing which has led some angel investors to shift their money to guaranteed investment certificates (GICs) for a near-term return. Moreover, early-stage investors are signaling their own uncertainties when it comes to securing future rounds: “They’re not necessarily confident that the later-stage investor will swoop in and really help their company scale,” he explains. “So they’ve become more reluctant to make those investments and fewer rounds are getting done as a result.”
- Concentration of investment: A small number of startups are raising a significant portion of the investment capital, leading to a divide between businesses that secure funding and those that struggle. “Of the $1.1 billion raised in the first quarter, 40 per cent came from Canada’s top 10 companies, so it is a bit of a have and have-not situation,” says Tony.
- Artificial intelligence excitement: Speaking of substantial investments, the AI sector is feeling the fizz. “So many dollars are going to AI but what makes it bubbly is that more rounds are being done for companies earlier and earlier with far less traction,” he says. “Eventually, AI might just rule the world.”
Actionable steps to take today
1. Communicate
Whether it’s talking to your investors about their expectations and where you rank in terms of priority in their portfolio, or connecting with your legal team to figure out options if you’re heading towards a shutdown, effective communication with key partners is crucial. That said, don’t discount good old fashioned networking with industry professionals. “It’s a great community in Canada so there’s a lot of good best practices,” he advises. “Talk to as many peers as you can and collectively try to get yourselves out of this thing.”
2. Define your target list
Now, more than ever, companies need to be laser-focused on targeting the right customers to drum up sales, as well as the right investors that can help you grow and offer guidance and access to industry connections. “I know it’s cash but you’re looking for an investor and a partner, not just for a cheque,” he says.
3. Extend your runway
Whether it’s sales, marketing, people, or across the board, you’re going to have to pull back expenses to stay alive but, Tony cautions, make sure you’re approaching it strategically. “Focus on initiatives that will get you to the next round or to profitability and make cuts accordingly,” he advises. “Try not to cut into the bone because it’s really hard to pivot when things turn around.”
4. Focus on efficiencies
For many fledgling tech founders, survival is the only metric that matters. Until conditions improve, Tony emphasizes the importance of shifting toward a more efficient business model. “You need to focus on two things: bring in investment and bring in sales,” he declares. “Every deal is getting a little more scrutinized so make the KPIs that matter your north star.”
“Tech founders need to focus on two things: bring in investment and bring in sales. Every deal is more scrutinized so make the KPIs that matter your north star.”
As bleak as the economic picture may look right now, it’s important to keep in mind that this rough patch is temporary. “I lived through 2000. I lived through 2008. It doesn’t last forever. There’s going to be a time where we’re going to pivot out,” Tony insists. “So what you want to do is get yourself to, at least, the end of next year in the best position possible so that you’re ready to scale when everything comes back.”
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