Written by Laura Lenz, Partner, OMERS Ventures
As public market valuations plummeted, no new venture-backed tech IPOs were priced nor were the typically cash-flush public technology companies completing acquisitions during Q2, 2022.
It is notable that, while not recently backed by VC capital, BlueCat Group was sold (again) by Invictus Growth Partners to Audax Group for $700M. This is a good reminder to the Canadian tech ecosystem that great companies take a long time to build. All the best ‘overnight success stories’ are, in reality, built over decades — this is just one such example whereas part of this transaction, co-founders Michael Hyatt and Richard Hyatt sold their remaining founder shares.
Living through a market shock
For many, this is the first economic shock in their investing career or entrepreneurial journey as we’ve experienced a bull market for almost a decade. I’ve lived through the tech bubble burst of 2001, the credit crisis of 2008, and the short-term market contraction of Covid March 2020. I’m also the niece of Barrie Wigmore, author of The Crash and its Aftermath — so I was raised on dinner table discussions around market corrections. For better or worse, I tend to take an objective, data-driven view, because I know we will all come out the other side, eventually.
If you look at previous global shocks, starting with the bursting of the tech bubble in 2001, it took 21 months to recover. Markets took 9 months to recover from the effects of 9/11. And following the credit crisis of 2008, the market took 36 months to recover. According to SaaS Capital, the EV/Revenue multiples for Public SaaS companies fell off a cliff in 2008 dropping below 2x and only showed recovery in 2015 to just under 9x. The average EV/Revenue multiples for Public SaaS Companies that we’ve witnessed in 2021 are well over the historical mean of 6–8x revenue. Market recoveries do not happen overnight. But they are an integral part of the cycle.
What we thought was a market correction in March 2020 when Covid caused a global pandemic was very short-lived. It turned out to be under 3 months for the Nasdaq to recover its losses. This is because the Covid correction was not an underlying financial crisis, but a health crisis. As noted above, a financial crisis takes longer for correction to occur. What developed in the aftermath of the Covid market drop was a massive acceleration of adoption by both consumers and enterprises of tech solutions resulting in budget being shifted away from goods and into technology solutions.
In mid-March 2020, as the NASDAQ was hitting the low 6,860 mark, many VCs globally were talking about reneging or repricing term sheets. At OV, we took the view then and again in today’s market environment that as long-term investors, we would best serve our founders (and our returns) if we supported founders through this cycle. That isn’t true for all funds and unfortunately, some GPs don’t have the choice as their LPs (investors) are reviewing their portfolio allocation to technology in general and the venture asset class in particular. Some of these portfolio reviews are causing LPs to ask their GPs to slow down their capital deployment, and in some cases, defaulting on their capital calls to a fund.
With more than 500,000 members in the OMERS pension plan, we contribute to creating returns for real people — firefighters, paramedics and people who work in children’s aid societies, for example. Many of our members have been at the forefront in fighting the pandemic. They are always in the back of our minds when making decisions about our portfolio.
And because we are underpinned by a network of experts and culture of connection that can support our founders far beyond the capital we invest, we have leaned into supporting them and their management teams wherever possible.
Companies will still be funded
Our general advice to founders is that good companies get funded. Even in downturns. It may take longer, there may be more diligence, it will likely be at a contracted valuation multiple what you’ve experienced recently, but it will happen.
It’s important for founders to be extra diligent in their own research on VCs in this market too. Are you talking to someone that is known to pull term sheets? Is the investor introducing lots of non-founder friendly terms in the structuring of an investment that could be to your detriment in the longer term? My partner Shawn Chance talked about the importance of really getting to know your investors before you even attempt to raise money from them — and this is your time as a founder to really explore these relationships. Venture investing in ‘typical times’ is a 7–10 year relationship. Think long and hard before signing on the dotted line.
Look beyond the data
What you aren’t seeing in this quarter’s data, are the outliers, and that’s what venture is all about. In March 2020, when we all thought that the world was ending, the best companies, those with top-decile metrics, were still being funded. Venture is a long-term asset class where outliers are identified and created.
Unfortunately, the surplus of capital over the last two years resulted in many companies without outlier potential and non-sustainable business models, being funded. That said, identifying outliers at the earliest stage of their journey is an art and a science — I’ve always argued that its founder-led vision and execution reflected in sustainable business models that creates these outliers. But other investors may have a completely different view.
At OV, we are still deploying capital into great companies that we believe can become category creators in Canada, and abroad.
So what about IPOs?
Canada hasn’t historically had a lot of venture-back technology IPOs: there were 5 in the 2000’s and 6 in the 2010’s.
Over the last two years, however, there were more than 15 venture-backed technology companies went public in Canada. Unfortunately, based on current market conditions, all but a handful are trading under their IPO issue price. Obviously, company performance and ability to exceed street expectations is important. But equally important is institutional portfolio managers and trading desk support for technology names in Canada. For our ecosystem to continue to thrive — even through a downturn — we need to encourage deeper understanding of the venture market as a whole, and greater support for our Canadian success stories, even as some of them navigate these uncharted waters for the first time.
There is some silver lining on the horizon! Unlike the last economic downturn, Canadian founders have proven that Canada is a great place to build a globally recognized, significant company. And founders that have exited (like the Hyatt brothers, highlighted above), are giving back to the ecosystem, both in terms of investing in seed companies as well as mentorship. These companies that are pushing traditional boundaries are filled with talented people who now know what it takes to scale a company globally. They, and the founders, are passing those learnings on to the next generation of Canadian entrepreneurs. And we can’t wait to see the list of names on the next IPO cycle!
