Disruptors

Speaker 1 [00:00:02] Hi, is John here. Welcome to the inaugural edition of Disruptors, the 10 minute take. Every two weeks, Theresa and I will take a deep dove into the latest in technology innovation and economic buzz.

Speaker 2 [00:00:15] That’s right, and this week’s take is on the Big Tech sell off. What’s up with that and what does it mean for Canada startups and tech sector?

Speaker 1 [00:00:22] Who better to help us with that question than sit back at the head of RBC? Our BBC’s highly specialized tech and innovation banking team, which has a mission to help companies scale cities, are widely respected leader in the tech space, in fact. Before joining RBC, he was a managing partner at OMERS Ventures. Sid, welcome to the 10 minute take.

Speaker 3 [00:00:41] Thanks, John. Thanks for having me. Really, really happy to talk about this subject.

Speaker 1 [00:00:45] It’s great to have you on, Disruptors Sid. And I want to start with what’s going on out there in tech. We’ve seen some big sell offs, but some different movements in the private market where valuations continue to be very impressive. How are you thinking about that possible divergence?

Speaker 3 [00:01:01] Yeah. Listen, I mean, the tech markets have been extremely frothy with tons of IPOs, and in a lot of cases, some really, really solid tech companies have been out there. But then we’ve also got a lot of the, you know what I would classify as the ride the coattail IPO is as well, right? So, you know, a number of the companies don’t have the growth trajectory, they don’t have the long term business model, nor do they quite frankly have the management teams to excel long term in the public markets. And I think, you know, when you look at the public markets, you’re seeing retail investors starting to identify this. Quite frankly, I think what you’re seeing right now is just a lot of that crazy upside being taken off the table. And so when you look at the tech offerings that are out there in most cases are in a lot of cases, they’re trading in some cases, like two thirds to three quarters less than their initial IPO value. And that is something that again is pretty stark and leads a lot of folks to go, Oh my God, what’s happening right? Is this blowing up? But on the same token, when you look at the private markets, there’s a ton of capital in the system and this isn’t going away in the near term, right? Because remember, funds get created, they raise capital. That capital takes a number of years to deploy. And so these blips that you see in the public markets don’t necessarily translate into the private markets immediately. Right. And when you look at the private markets, you’re really coupling a hyper competitive tech sector with this abundance of capital in the system and you’re creating this perfect storm for increased valuations. And if this market correction continues to be more than just a blip, there’s absolutely going to be an impact on private company valuations as well. And every venture fund in the world leverages public company multiples as part of their valuation justification exercise. And so when public company multiples fall off for a sustained period of time, there’s certainly going to be an impact on the private market valuations as well.

Speaker 2 [00:02:50] What about the private later stage companies, the ones that were on the cusp of going public? Do you anticipate that this correction is going to slow down those potential IPOs?

Speaker 3 [00:02:59] Yeah, so it’s a great question. And then I think we just have to step back and go, What is an IPO, right? It’s really a financing event. And so when these organizations need capital, they’re either going to top the private markets or the public markets. It’s a hard thing to generalize across all companies, you know, in terms of say, Hey, you’re late stage, you’ve raised a lot of capital, you’ve now looking to the public markets because really it’s going to depend on, you know, obviously the profile of the company, do they have the ability to continue to top the private markets? In the case where they do, you are starting to see them put the IPO processes on hold and really look to go, OK, hold on. Let’s just look at the private company options again before we jump into the public markets. And that’s just because you’ve got this drop off on valuation. You know, you’re starting to see some of this value come out of the ecosystem. And so it’s going to be very specific company by company. But I think if you were to generalize, you know, certainly people are thinking about this,

Speaker 1 [00:03:59] said you’ve been through, I don’t want to get you on this show, but you’ve been through a few cycles. What are you telling entrepreneurs?

Speaker 3 [00:04:06] Yeah. So, you know, in terms of what we’re telling entrepreneurs, there’s probably not a lot yet that we’re starting to talk about. That’s going to be different from what we’ve been advising entrepreneurs all along. You know, maybe if I just step back for a moment when I look at the huge influx and the velocity of companies going from private to public, you know, if you step back like a decade, two decades ago, like it used to take companies between 18 and 24 months to become IPO ready. And what did that mean? That meant OK. Well, you know, there’s management team, you know, upscaling a whole bunch of things like that. There’s systems up scaling. There’s, you know, just really making yourself optimized for the public markets with the frothy ness of capital and the, you know, the openness of the public markets to bring on all of these tech issuances. You didn’t see the rigor around that sort of like beefing up management. And beefing up processes, and so I think what you’re going to see is, you know, again, we’ve been advising our companies to do this all along is take a little bit of time to do some of those things because ultimately down the road, it is going to pay massive, massive dividends for you. And I think certainly a lot of the companies that are on the public exchanges, they actually didn’t do a lot of those things, right? And so when a lot of us look at these things objectively, you go, OK, well, you don’t really have a public ready team as yet. Right? And so quite frankly, the you know, if it’s a blip or whether it’s sustained, who knows. But this this kind of taking some of the capital out of the out of the system and taking a little bit of air out of that balloon, I think is allowing organizations to have a little bit more time to think about those things in advance and quite frankly, prepare themselves to be really successful as a public company.

Speaker 2 [00:05:51] You mentioned earlier that we’re seeing the companies that have strong fundamentals and then the companies that are sort of riding on the coattails of general market sentiment. Is this almost like a clarifying moment in time where we can start to see, you know, the companies that have strong fundamentals rise to the top and it’s clear which companies are, you know, I don’t want to classify them starkly as good and bad companies, or maybe stronger and not so strong companies. But is this like a paradigm shift of a moment?

Speaker 3 [00:06:17] Not yet. And I think it’s really going to depend on will additional capital start coming back into the public markets from a valuation perspective, right? So we haven’t yet demonstrated this is a long term impact. But you’re right in the sense that there are different stages. There’s some really, really good tech public issuances. And you know, why did they decrease in value? Absolutely. Did they lose, you know, 75, 90 percent of their value? Absolutely not. And that’s because business fundamentals are strong. A team is strong, a whole bunch of things. And then you’ve got other companies which are struggling a little bit more with some of these things, right? Maybe their business model dynamics shifted. Maybe the market has shifted on them. And so certainly you’re going to start to see a bifurcation. The best companies will always get funding both in the private markets and in the public markets, and you’re probably going to see a little bit of separation when it comes to that particular issue.

Speaker 1 [00:07:09] As you noted, everyone’s talking about the war for talent. Is this having any bearing on companies ability to compete for, especially the world class talent that is such a differentiator in the tech sector?

Speaker 3 [00:07:21] That’s a great question, John. And you know, I haven’t actually thought about it that way. So just kind of, you know, in our discussion right now, I’m guessing that, you know, in some cases, it’s actually going to be really beneficial, right? Because who like, let’s say I’m in a public company that’s seen a 90 percent decrease in value as an example, I’m probably going to be a little bit more concerned about the long term viability of the organization. There’s going to be all kinds of internal pressures within that organization on me as an employee and a leader, et cetera. And I suspect you probably have a lot more of those people that are going to be a little bit more loose in the socket, so to speak, and more easily plucked out by organizations that maybe are doing better. Or maybe even perception wise, they’re doing better because they’re in private in the private market, and not everything is laid bare. So I suspect you may have that opportunity, right, where some of those organizations that again are getting hit disproportionate to their peers. But yeah, they’re probably, you know, it’s going to be a bit more of a struggle for them on the human capital retention side.

Speaker 2 [00:08:23] What are the lessons that companies can learn from this moment and use to positively position themselves to attract investors that maybe didn’t consider Canada in the past?

Speaker 3 [00:08:34] Yeah, I think, you know, really is a learning opportunity here is just, you know, focusing in on management teams and business fundamentals, right? And don’t be in a huge rush to go public. Definitely. There’s going to be a number of companies that have gone public that I suspect at some point in time. Boards of directors, et cetera, are going to start thinking about the going private route. And so I think just focusing in on those like, quite frankly, those long term sustainable business fundamentals, it’s going to be really well serving for, you know, whether you’re public or whether you’re private. And so I think if there is a learning moment here and again, I think we’re really early in this process, to be clear. Valuations are extremely frothy. Don’t get me wrong, and we’re seeing a little bit of a correction in the public markets that over time will reflect in the private if it if it continues to sustain. But, you know, make sure you’re ready for what it is you’re about to engage on. And from a public perspective, literally everything is public, right? And so you need to have things buttoned up. You need to be able to represent these things on a quarterly basis. You need to have the systems in place to allow you to do, you know, allow you even to do reporting and you know, your business shifts right to where you’re now, a quarterly report or an annual reporter. And that may not have been the case to the same rigor when you’re a private company. And so for the companies that may have jumped in a little bit too early. This could be a little bit of a warning signal, but again, we’re still pretty early in that process, so we’ll have to see how sustained this is and whether it’s just a little bit of profit taking that’s coming off the top. And then ultimately, we kind of come back to a natural equilibrium. We’ll have to wait and see. But if this does become more sustained and prolonged, then the learning opportunity here is get your house in order before you go public. For sure,

Speaker 1 [00:10:22] it’s going to be a great year or two to watch. Thanks for being on disrupters, John.

Speaker 3 [00:10:27] Theresa, thank you so much for having me.

Speaker 1 [00:10:29] That’s a wrap for our ten minute take. I’m John Stackhouse

Speaker 2 [00:10:32] and I’m Theresa Do. Join us next week for a regular episode where we’ll take a look at the green skills Canada’s workforce will need on our journey to a net zero economy. See you soon, disruptors.

Speaker 4 [00:10:45] The 10 minute take is created by the RBC Thought Leadership Group and does not constitute a recommendation for any organization, product or service. It’s produced and recorded by Jar Audio. For more disruptors content like or subscribe wherever you get your podcasts and visit our rbc.com slash disruptors.

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