Today on the CIBC Innovation Banking Podcast.
Michael Hainsworth (00:17):
Rob Antoniades is the co-founder of Information Venture Partners and has been leading direct investment in the innovation economy since 2004. He rode that roller coaster of the 2008 financial crisis. So what lessons can successful startups apply today?
Rob Antoniades (00:33):
You always have to manage your cash and be conservative in your assumptions. Plan for the worst and hope for the best is something that we've told all of our portfolio companies to do and adjust appropriately. And so cash is king, make sure you have enough to ride out whatever uncertainty dislocation is happening here and adapt it appropriately with your messaging. There are going to be opportunities, if you have a good value proposition, you should be able to survive this. If you have the capital to get through.
Here is Michael Hainsworth.
Michael Hainsworth (01:08):
Rob, in 2008, the financial crisis was an internal economic shock affecting corporate liquidity. This one's an external force affecting everyone, right down to the consumer. Does that make startups more or less likely to recover this time around?
Rob Antoniades (01:23):
That's a great question, Michael, but I think it really depends on what the business that you're in is and what sectors you are serving. I think the shocks are equally impactful on young businesses like start-ups, but as I said, it depends on who you're selling to. And in 2008, it really impacted companies selling into financial services. In 2020, it's very different. It's impacting organizations that are selling into small and midsize businesses or selling into other verticals like travel or entertainment, hospitality, and those. And so the depth of the impact or the power of that force is really dependent on your customer and your business model.
Rob Antoniades (02:08):
And so I think it is very difficult for those that are impacted. And it's going to be a little bit easier for those that have either a broader, more diversified customer base or are selling into segments that are actually holding up reasonably well in this environment. Whether it's internal, external is a factor, but I think it's really more about the business model that you have.
Michael Hainsworth (02:30):
If the consumer ends up being the canary in the economic coal mine, does that mean then that businesses that are closer to the consumer are more likely to recover sooner than those that are a little further up the food chain or less likely?
Rob Antoniades (02:45):
If the health of the consumer improves, then it'll be I think a leading indicator. If the health of the consumer doesn't, and we don't know the answer to that yet, then I think it won't.
Michael Hainsworth (03:41):
Well, let's talk about the things that are being done right now, compared to what we saw in the 2008 financial crisis. What did tech start-ups leverage then to build up their business versus what they're leveraging now? Because we knew that interest rates went through the floor in the 2008 financial crisis. A ton of money was thrown at the system to create liquidity. This time around, all that money is being thrown at the consumer.
Rob Antoniades (04:07):
I think one of the things that is different about 2008 versus 2020 as it relates to the startup community is that, this is a well-capitalized community. In other words, there's been a surge of venture investing over the last five years and many startups have a good balance sheet and they've got the cash that can sustain them through the uncertainty. Add to that the programs that are being made available by the governments that help subsidize payroll. Add to that, at least in a Canadian context, the availability of SR&EDs are actually paying out SR&EDs faster than you would normally pay them out is providing additional capital to the startup communities to weather the storm.
Rob Antoniades (05:08):
We're doing things a little bit differently as a society, and I think that'll help mitigate the risks, but it doesn't last into perpetuity. So at some point, if the underlying business and demand for these startups doesn't recover, the cash will run out. And if it's a short-term impact and feels every day more and more like it's a short-term impact, I think then we're better able to weather the storm. But I think if we have a second correction here, I think it's going to be a little bit more difficult.
Michael Hainsworth (05:42):
William Gibson once said that the future is here, it's just not evenly distributed. I can imagine you could say the same about a well-capitalized startup community. Where within the startup community is that well-capitalized cohort? Who's got the bucks?
Rob Antoniades (06:01)
Who's got the bucks? Yeah, it depends on when you were lucky enough to fundraise. If you were lucky enough to fundraise in the last 12 months, you probably have the bucks. And so what were people investing in in the last 12 months? I think you've seen a lot of things that probably won't get the same investment today. Delivery services for restaurants, is an example, has been a huge investment category for the venture community. If you happen to be at play in e-commerce, if you happen to be at play in communication or collaboration, those are areas that are doing quite well today.
Rob Antoniades (07:02):
Security, cash management, and you will continue to access capital because COVID has actually validated the business model and accelerated development of these companies. So there's billions and billions of dollars of capital available on the sidelines to the right business models, people are just being a little more thoughtful as to how to release them. But it's been pretty generic in the previous 12 months. If you had an interesting business you were going to get capitalized. Let's hope you still have that cash on the balance sheet.
Michael Hainsworth (07:32):
Every crisis creates an opportunity. Does everybody have to become a contactless technology company?
Rob Antoniades (07:41):
No, you don't. There's lots of ideas, a lot of great companies are founded through crises. A lot of great companies are made through crises. So there are opportunities within today's environment that entrepreneurs are going to say, "Hey, we should do this because we've never been presented with this problem." And remember, entrepreneurs are problem solvers. So contactless payment is a great example of, "Hey, it's a big opportunity today," but banks have spent the last two months adjusting their business models to allow for contactless payments. And so has every other merchant acquirer and everything else out there. So is that an opportunity? No, but it's an example of where something great can be made. So there are two categories, people who see this current situation and find that there are real opportunities and chase those problems and build companies. And there's the other ones who kind of morph and say, "Hey, this has happened to us. We have a solution. We can actually accelerate the development of our company."
Rob Antoniades (08:44):
And I think contactless payment, great example, but so are other things, process automation. Think about all these enterprises that in the last three months have gone to remote workforce as well. What happens to their processes? You can no longer take a piece of paper from one desk to another. You don't have that same contact. You've had to create automation. You've had to create a whole new way of collaborating and communicating. And those are real opportunities. And I don't think as a world we're going to go back to exactly the way we were before. And we're going to adopt and adapt new technologies.
Michael Hainsworth (09:21):
Well, in what ways does our pandemic response become part of everyday startup life? Because there's so much talk about how COVID is going to change everything forever. And I'm a little reluctant to get on that bandwagon. I can imagine things are going to change in certain ways. What ways do you see them changing?
Rob Antoniades (09:39):
Every crisis has a new way of reacting, and I think that the pendulum swings to an extreme and then eventually comes back. I think people have realized that organizations can work fine in a remote environment. It may not be ideal, but they're working well. And so the need for things like office space is going to change, the need for communications networks has increased, the need for security in those networks is going to go through the roof. Yes, there are going to be permanent changes from COVID-19. New technologies, new ways of doing business, but it's not going to be as extreme as I think the worst case will we'll suggest. But is it permanent? I think it is going to be permanent.
Michael Hainsworth (11:09):
What of the job losses? They've been significant. Do you think the impact on the tech space is permanent? How does it compare to 2008, when we saw the flood of pink slips then?
Rob Antoniades (11:19):
We have adjusted as an industry extremely well. And as much as we hate the human element of having to let people go, it is a way to save a company during periods of uncertainty. Remember these companies that are not cashflow positive. Every dollar that goes out isn't necessarily met by a dollar coming in. And so we saw the wave in 2008, but we recovered, and we're going to see recovery in 2020 as well, because technology is here to stay. And if you remember 2001, the dot-com era, everybody talked about technology and wiping out all the other industries in this planet, and it didn't happen. And in 2008, we saw that it didn't happen then either.
Rob Antoniades (12:04):
What we in fact saw was a retraction of spending in technology. And I think in 2020, we understand from the last 10, 12 years how important technology is to everything that we do and how we as consumers have changed our behavior and how it's changed how we communicate and operate. And as enterprises, we know that in order to be competitive, we have to embrace technology. We have to use it, whether it's in manufacturing or white collar fields, it doesn't matter. And I think that's the beauty of technology. It's not something that will disappear forever. It's not a car manufacturing plant that you'll never reopen. There will always be the need for those skills, whether it's developers, whether it's QA, whatever it might be. So those jobs will come back and I think actually they'll come back even stronger because people will adopt technology more aggressively, and so will companies.
Michael Hainsworth (13:00):
At what pace though?
Rob Antoniades (13:02):
Quick. I think it's quick. And I'll tell you why I think it's quick. Because where there's a loser, there's also a winner. And if we use the S&P 500 as an example, and the proxy, and it's not a great proxy, but we've seen real levels come back to where they were pre-COVID or very close to it. And it's being driven by technology companies and specifically some technology leaders. And I think what happens if you have the skillset, you move roles. So one company that is laying off and conserving capital, those individuals will soon be redeployed by companies that have found their niche and are growing rapidly.. And so there are businesses, companies specifically that are making up for the losses in other companies. So I think in technology it's going to be reasonably quick.
Michael Hainsworth (14:07):
concerned about the idea that we're all going to get sick and tired of looking at each other eventually. And that we're going to see that pendulum, as you've sort of metaphorically referred to in the past, swing back the other way. how do we ensure that we don't swing our own corporate pendulums too far the other way?
Rob Antoniades (14:34):
You actually don't know where that end of the swing is. And so it's a bit of an experience set based decision. How far is too far? How far ahead of ourselves do we get? And I think the answer really is understanding your business and understanding the data that drives it.
Rob Antoniades (14:55):
So let's take a look at what's going on and understand the behaviors, what is sustainable and what isn't sustainable? It works both on the upside and on the downside. So have we seen a tremendous increase in leads in and opportunities to sell, and do we need to staff up to support that? Well, let's take a look at that. How many of those leads are actually turning into customers? And how many of those customers are actually turning on and what rate and what are the skillsets that we need? And so I think as a business, you have to be a data driven and you have to make decisions based on that and make quick adjustments. And so I think experienced teams will make those adjustments appropriately. I don't know what is too far, but there is a point where you can get too far and you'll have to adjust backwards.
Michael Hainsworth (15:46):
You mentioned the Scientific Research and Experimental Development tax credit program. SR&ED gives what, 35% tax credit up to the first 3 million in qualified expenses, and then 20% on additional costs. And we know that a Canada revenue agency accelerated or expedited the new audits of applications for the SR&ED program. And we're seeing that backlog drop dramatically and that's expected to pump a fair amount of money into the Canadian tech environment. What's the long-term implications? Follow the concentric circles outward as we go into the years of companies being able to take advantage of that extended program and that accelerator program.
Rob Antoniades (16:33):
Yeah. So I don't know if it's a permanent change. I think this has been a one-off directive from the government to provide liquidity to the technology community. And so I think things go back to normal in general next year or the year after whenever things normalize. And I think the level of auditing will go back, revert back to the level was before. I think people were just appreciative of the efforts made by the government to provide that liquidity.
Rob Antoniades (17:10):
When I think about the concentric circles, I think about it in the form of a timeline. So we've now gotten capital back quicker, that's helping us. I think there's going to be a gap between when it normalizes and if it normalizes next year. So the time between when we got the SR&ED credit this year and when we expect to get it next year will probably elongate, because it was brought in this year. And I think the year after that in normalizes. So I think it's a one-time initiative by the government to help the community. So I don't know if there's a lasting impact.
Michael Hainsworth (17:48):
What's your advice for startups as they try to bunker down here on a long-term basis to ride out COVID-19, when there's so much uncertainty and so much is out of their hands? What's your advice for startups trying to plan for survival?
Rob Antoniades (18:04):
So uncertainty also creates opportunity. So let's understand where the opportunities for your business are, and let's make sure you change the messaging of what you're trying to sell or what the problem you're trying to solve to adapted for COVID-19 purposes. Because I think there are opportunities. And I think one thing that we've learned in the past is, companies truly buy technologies, even during difficult times, that have quick time to value and ROI. And so the spend changes in prioritization, but they're still spending, they still have problems to solve. In fact, they may be new problems, and so there may be new opportunities for you.
Rob Antoniades (18:41):
But fundamentally, as well as doing that, I think you always have to manage your cash and be conservative in your assumptions. Plan for the worst and hope for the best is something that we've told all of our portfolio companies to do and adjust appropriately. And so cash is king, make sure you have enough to ride out whatever uncertainty dislocation is happening here and adapt appropriately with your messaging. There are going to be opportunities. If you have a good value proposition, you should be able to survive this if you have the capital to get through.
Michael Hainsworth (19:14):
Where in that whole arc of a startup story would you rather be in right now if you were running a startup?
Rob Antoniades (19:22):
Venture capital in a way is a startup, but I would love to ,be in a place where I actually had enough customers and whether that's a handful or a few dozen, to actually understand the value proposition that I have. Because then I could tune it to the changes in the marketplace. If I'm not certain, or if the value proposition isn't well-defined, then I think it's more of an iterative approach, and that's not one that works in this environment. Because you need capital to iterate, and you're not certain of having access to capital. But if I have customers, I know what my value proposition is, even if I'm focused on the wrong sector, I can probably take that value proposition and redirect it to a sector that is buying that type of technology and that value prop. So that's where I'd want to be.
Rob Antoniades (20:16):
And to the extent that I can translate that value proposition to the new vertical, a new sector and generate sales there, and I have the capital to do that, then I could probably raise capital if I've gotten it right. That's probably where I'd want to be. I think if you were in the ideation phase, that's okay. It doesn't cost you any capital. If you've just gotten started, you probably don't have enough proof points, and raising capital's going to be difficult. And if you are extremely well entrenched and you have a lot of customers who are now churning off because of economic reasons, you're fighting different challenges, you're dealing with different problems. And so I think that early revenues phase is where I'd love to be.
Michael Hainsworth (21:01):
Rob, great speaking with you. Thank you so much for your insight.
Rob Antoniades (21:04):
Thank you, Michael.
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