The Canadian tech community braces for a potential downturn as stocks fall and inflation rises

TORONTO – When Jack Newton looks at the tech sector, he gets hurt.

Over the past two years, tech stocks have soared as investors pour money into startups offering pandemic-friendly products and services. But in recent months, the head of Burnaby Legal Software, a British Columbia-based company, has noticed the glut has faded, now some stock prices are down 50 percent from their COVID-19 highs, and companies have laid off staff or halted hiring.

“We went from a completely frothy job market and a frothy investment market — essentially zero interest, a free capital environment — to a market that looks very different, very, very quickly,” Newton said.

“This leads to feelings of anxiety.”

Members of Canada’s tech sector say concern is spreading across the industry as rising interest rates and rising inflation in 30 years take their toll on businesses, with some – Netflix, Klarna, Cameo and Bolt – among them – beginning to reduce their workforce.

At the very least, observers believe these conditions will contribute to a market correction, although some are predicting the worst: a recession.

Either way, incubators and venture capitalists are keen to ensure that no promising tech company is caught by surprise, thus urging startups to tighten spending, boost cash flow, and be wiser about hiring or even freezing it.

Chris Albinson, chief executive of Waterloo, Ont., said the warnings are the most compelling for young founders. Communitech Innovation Center.

“We are entering a downturn where a lot of founders and a lot of venture capitalists haven’t seen a downturn in their careers,” he said.

“I’m worried… are people taking this seriously enough fast enough?”

To help young founders understand the potential seriousness of the situation, Communitech has paired them with more experienced CEOs who can share how they weathered past recessions. Albinson also tells startups to raise enough cash to keep the company going for 18 months.

Abdullah Snobar, CEO of the Digital Media District incubator in Toronto, told startups to make longer commitments with partners and customers, bring in as much additional capital as possible, and cut spending on items that are “nice to have but can easily be.” He survived without him.”

Like Albinson, he believes the country will not see a repeat of the year 2000, when the stock market crashed when tech startups that raised massive amounts of money went public but then plummeted when investor capital dried up.

They view the current climate as part of a course correction, which most companies deal with at some point.

“We’ve seen tremendous growth over the past couple of years, and while we’re still in a position to continue our growth, we’d be naive if we thought it was going to be obvious,” Snobar said.

“There must be some hiccups and some turbulence along the way.”

If the situation turns out to be as bad as the last two economic downturns, the best way to prepare is to cut costs and extend your runway within the next 30 days to reach default alive, according to US startup accelerator Y Combinator, in a recent note to the founders. Alive default is when revenue covers expenses before cash runs out.

If you don’t have the runway to reach default and investors are making more money at the moment, the accelerator company that defended Airbnb, Dropbox and DoorDash said it’s considering taking it because venture capital (VC) may not keep flowing.

“I understand that the poor overall market performance of technology companies has a significant impact on venture capital investment,” the note reads. “Venture capitalists will have a more difficult time raising money and their limited partnerships will expect more discipline in investing.”

About $4.5 billion was invested across 196 deals in Canada during the first quarter of the year, the second-highest quarterly investment level for venture capital ever, the Canadian Venture Capital and Private Equity Association revealed in May.

However, the number of venture capital deals declined in the three months ended March 31 for the third consecutive quarter.

“People are becoming more cautious and defensive as investors, and the fear is driven because everyone is asking them to,” said James Lochry, managing partner at investment firm Thin Air Labs in Alberta.

He doesn’t see much evidence of a slowdown, but he did note a slowdown in investments and new businesses “getting rid of the fat you don’t necessarily need” by reducing the workforce by up to 20 percent and adding capital to balance sheets.

Lochry believes that companies that rely on advertising or are too small to have revenue yet will be hit hardest by the downturn, but that companies with good value propositions will survive regardless of the industry.

“There will almost certainly be some bloodletting in areas where there is a surplus, and that always happens in periods of market downturn,” he said.

“It’s like cleaning pipes, but great companies always succeed. Great entrepreneurs are always successful.”

2022-06-06 17:35:45

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