But in recent months, the head of Burnaby, BC-based legal software company Clio, has noticed that exuberance has subsided and some stocks are down 50% relative to stock prices. In addition, companies laid off employees or stopped hiring.
“We’ve gone from an absolutely frenetic job market and a frenetic investment market, basically interest-free, free capital environment, to an environment that looks very different, very, very quickly,” said Jack Newton.
“It starts to generate a feeling of anxiety. »
Insiders in Canada’s tech industry say anxiety is being felt across the industry as rising interest rates and 30-year highs in inflation weigh on companies, some of which include Netflix, Klarna, Cameo and Bolt are starting to downsize.
At the very least, these observers think these conditions will contribute to a market correction, although some are predicting worse: a recession.
In any case, incubators and venture capitalists want to ensure that no up-and-coming tech companies are taken by surprise, and so they are asking startups to cut expenses, increase cash flow, and be more cautious or even freeze hiring.
The caveats are most urgent for young founders, said Chris Albinson, chief executive of the Communitech innovation center in the city of Waterloo, Ontario.
“We are entering a down cycle when many founders and many venture capitalists have never seen a down cycle in their professional careers,” he explained.
“I worry (…) will people take this seriously enough (and react) fast enough? »
Advice from more experienced executives
To help young founders understand the potential gravity of the situation, Communitech paired them with more experienced executives who can share how they weathered past recessions. Chris Albinson also recommends that startups raise enough money to keep the business running for 18 months.
Abdullah Snobar, managing director of the DMZ incubator in Toronto, told companies to make long-term commitments to partners and customers, bring in as much additional capital as possible, and reduce spending on items that are “nice to have but not essential to business survival”.
Like Chris Albinson, he believes the country will not experience a repeat of 2000, when the stock market crashed as public tech companies, which had raised large sums of money, retreated as investor capital dried up.
They see the current climate as part of a change in direction most companies face at some point.
“We have grown tremendously over the past two years and while we are still positioned to continue growing, it would be naive to think that everything will go well,” insisted Abdullah Snobar.
“There should be some hiccups and turmoil along the way. »
If the situation gets as bad as the last two economic downturns, the best way to prepare is to cut costs and prepare in the next 30 days to get to the point of survival, US startup accelerator Y Combinator said in a recent note. to the founders. This point occurs when income is sufficient to pay expenses before cash runs out.
If there is no path to that point and investors are offering more money right now, the accelerator, which has cited Airbnb, Dropbox and DoorDash as examples, recommends considering taking it, as venture capital could end up drying up.
“It should be understood that the poor performance of technology companies in public markets has a significant impact on venture capital investment,” the note states. Venture capital firms will find it much more difficult to raise funds and their limited partnerships will expect more investment discipline. »
About $4.5 billion was invested in 196 businesses in Canada during the first quarter of the year, the second highest level of quarterly venture capital investment on record, the Canadian Venture Capital Association calculated and invested in May.
However, the number of venture capital deals in the three months ended March 31 fell for the third straight quarter.
“People are becoming more cautious and defensive as investors, and that’s driven by fear, because everyone tells them to be,” said James Lochrie, managing partner at Alberta investment firm Thin Air Labs.
He doesn’t see much evidence of a slowdown, but he has noted a slowdown in new investment and businesses “cutting the fat they don’t necessarily need.” In particular, they are reducing their workforce by as much as 20% and adding capital to their balance sheets.
James Lochrie thinks companies that rely on advertising or are so young that they still don’t have revenue are likely to be the hardest hit by a recession, but companies that have good value propositions should survive, regardless of industry.
“There will almost certainly be bloodshed in areas where there is excess, and that always happens during a market downturn,” he said.
“It’s like cleaning pipes, but big companies always do it. Great entrepreneurs are always successful. »