6 mins | 1,350 words
By: Megan Maltby
A few weeks ago, I shared insights from investors on how COVID-19 is set to impact the venture investing landscape. While it provided a great macro view into the world of venture capital, Ottawa’s ecosystem has unique advantages and disadvantages when it comes to funding. Knowing this, I connected with four local investors in the capital region to get their perspectives and advice for Ottawa-based startups and scale-ups.
- Jennifer Francis, Capital Angel Network
- Nolan Beanlands, Capital Angel Network
- Lance Laking, MaRS Investment Accelerator Fund (IAF)
- Pablo Srugo, Mistral Venture Partners
- Cory Michalyshyn, Celtic House Venture Partners
The setback
The reality is, now is not the best time to raise equity investment. Angels and VCs around the world are directing attention inward; they are performing triage on their existing portfolio and determining what support they can deploy to help these companies weather the storm.
Lance used a “life raft” analogy to describe the process every investor is currently undertaking. “There is a recognition that not everyone is going to make it through [the pandemic]. If there is only so much room on the life raft and you have limited oars and lifejackets, some are going to get thrown off the boat. The IAF, like most VCs, has gone through a detailed ranking and risk analysis of our current portfolio and their plans for recovery. We are fortunate to have a shorter list of companies that we know we must rescue, but this has distracted us from a ‘business as usual’ mantra of making new investments. That said, the IAF still approved one new investment in April.”
To put it simply: investor bandwidth is limited, and in the near-term, portfolio assistance and follow-on funding will take priority over new deal prospecting. Nolan noted a shift in how the Capital Angel Network’s membership was approaching portfolio support,
“Normally in our process, at every monthly member meeting we see three new companies and maybe one portfolio company [pitching for investment]. At April’s meeting, we saw three portfolio and one new deal. So, we are shifting our focus for now.”
The positive
On the flip side, this decrease in the pace of new deals will be temporary. There are massive amounts of capital available (global venture capital (VC) dry powder sat at $188.7 billion as of mid-year 2019), and VCs with funds to deploy will need to continue doing deals.
As Cory noted, “The greater macroeconomic opportunity in VC isn’t changing; it’s getting more valuable because a lot of investment opportunity comes out of these macroeconomic shifts. You’ve got a reset of business foundations, and you have a lot of newly unemployed people who might go build companies that they have always dreamed of starting.”
Jennifer added, “Some strong companies have come out of troubling times. In the past, we have seen companies go through a lot of money before finding the right product-market fit. Times like this help us get laser-focused on what matters, and the startups that come out of it will find they are in really strong shape as a business.”
Some sectors are well-positioned to thrive in today’s markets. The pandemic and resulting shutdowns have illuminated new pain points and accelerated the adoption of technology solutions. We are now adapting to virtual office work, at-home fitness, and online grocery shopping, and companies with solutions in these verticals are sure to reap the rewards of increased demand. We are also witnessing the shortcomings of existing infrastructure and being forced to invest in technology upgrades sooner than we might otherwise. Cybersecurity and telehealth are just two areas that will see more considerable attention in a post-COVID-19 world. As Nolan summed up, “Investors will be excited by companies which find that COVID-19 is an accelerant to something that would be inevitable regardless. Some companies will become a new essential piece of their customers’ operations moving forward.”
What this means for Ottawa startups
Ottawa is far from the epicentre of venture funding, like hubs in Silicon Valley, New York, or Toronto. In a way, Ottawa-based firms have always had to work a bit harder to raise funding rounds. In a COVID-19 world, this could prove to be an advantage.
Firstly, Ottawa-based companies and investors alike have always faced the added challenges of being physically separated from deal flow or access to capital. “We’ve always been a semi-remote company, with partners in Toronto and portfolio companies spread across the eastern seaboard. It hasn’t been a really hard shift for us,” said Cory.
“We are spending more time working from home, but this is not foreign to us. We have always had a remote relationship with people in VC markets such as Montreal, Toronto and New York.”
In other words, Ottawa investors and companies will continue to rely on building relationships (albeit virtually) outside of the capital region. COVID-19 may even become an equalizer in the near-term, as even startups in the Valley must turn to Zoom to get deals done, much like their Canadian counterparts.
Secondly, while many are bracing for a market reset on early-stage valuations, Ottawa companies may notice a minimal impact. “The Canadian market has always been labelled as being smaller, a little more conservative and slower to react to valuation’ froth.’ We haven’t gotten caught up in the hype as much as in the Silicon Valley ecosystem,” said Lance, “In some ways, that’s a credit to the Canadian market in a rebound situation.”
Pablo agreed,
“We have been very intentional about getting US investors in our portfolio companies. Most notably, many US investors see that the talent in Canada is top-notch and comes with less hype.”
In other words, valuations in Canada tend to be supported by real value propositions and traction, as opposed to the pricing battles present in more frothy markets like the Valley. Since Ottawa valuations have always been rooted in business fundamentals, we likely won’t see a dramatic drop in local prices even if a reset takes place at the macro level.
Finally, each investor I spoke with noted the support provided by the federal and provincial governments as an advantage for Canadian startups. Ottawa companies have the benefit of accessing critical stimulus packages and relief funding opportunities to weather the storm. As Pablo said, “I think the government has done a great job at responding quickly. I’m generally pleased with the speed at which they have reacted, the size and impact of the programs, and the way they have responded to feedback. This will have a genuine impact on the ecosystem.” For a rundown of the many resources available, visit Invest Ottawa’s COVID-19 Resources page.
How to modify your fundraising approach
So how should you modify your approach to fundraising moving forward? In addition to extending runway and accessing government funding, make sure your pitch is adapted accordingly. In an ideal situation, you can find a story that ties in with the current environment in a positive way. Pablo said, “I have seen examples of local companies trying to reposition, so their value proposition is more consistent with the times; Spartan Bioscience is a prime example. If you have signals from the market that you have a genuine opportunity due to COVID, it might be a good time to raise, and you can weave it into the pitch right up front.”
“It [pandemic response] has to become part of the overall narrative, especially if you are in an industry that has been hurt by the pandemic. Don’t ignore it or hide from it,” said Nolan.
“It’s not that investors expect companies to have a magic solution, but you should prepare a range of assumptions and address what your survival plan is under those assumptions,” added Jennifer. “If you are just pretending everything will be fine, you lack credibility because there is so much uncertainty right now.”
About the author
Megan Maltby is Invest Ottawa’s Senior Investment Analyst. Megan conducts research and provides investment data, analysis, coaching, and strategic recommendations for technology startups and scale-ups. She also builds and maintains relationships with angel investors, venture capitalists, and nondilutive funding providers.
Before joining Invest Ottawa in her current role, Megan spent time as an Investment Analyst at Innovacorp, an early-stage venture capital firm, and First Angel Network, Atlantic Canada’s organized angel investment group. In these roles, she was responsible for prospecting pre-seed and seed-stage companies, conducting investment analysis, managing the due diligence process for potential investment opportunities, and coordinating the portfolio review process. She also did a stint managing Innovacorp’s acceleration programs and nondilutive funding activities, building a pipeline for the firm’s venture capital fund.
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