Canada’s technology sector is preparing for a potential downturn

Canada’s tech industry says the industry is worried as rising interest rates and a 30-year high in inflation put pressure on businesses, some of which – Netflix, Klarna, Cameo and Bolt – are starting to shrink. (Photo: The Canadian Press)

Toronto – When Jack Newton takes a look at the technology industry, he is shocked.

Over the past two years, technology stocks have risen as investors have invested in startups that offer pandemic-friendly products and services.

But in recent months, the head of Clio’s legal software company based in Burnaby, British Columbia, has noticed that the riot has subsided and prices for some stocks have fallen by 50% from the heights reached during the COVID-19 pandemic. In addition, companies have laid off staff or stopped hiring.

“We have gone from a completely crazy labor market and a crazy investment market – essentially zero percent, a free capital environment – to an environment that looks very, very fast,” Newton said.

“It’s starting to cause anxiety.”

Canada’s tech industry says the industry is worried as rising interest rates and a 30-year high in inflation put pressure on businesses, some of which – Netflix, Klarna, Cameo and Bolt – are starting to shrink.

At the very least, these observers believe that these conditions will help correct the market, although some predict a worse recession.

In any case, incubators and venture capitalists want to make sure no promising technology company is caught unawares, so startups are urged to cut costs, increase cash flow and be more cautious or even freeze hiring.

The warnings are most relevant to young founders, said Chris Albinson, executive director of Communitech’s Innovation Center in Waterloo, Ontario.

“We are entering a bear cycle when many founders and many venture capitalists have never seen a bear cycle in their professional careers,” he explained.

“I’m worried (…) whether people will take it seriously enough (and react) quickly enough?”

Tips from more experienced executives

To help young founders understand the potential seriousness of the situation, Communitech has teamed them up with more experienced executives who can talk about how they have survived past recessions. Albinson also recommends that beginners raise enough cash to support the business for 18 months.

Abdullah Snobar, managing director of the DMZ incubator in Toronto, told companies to commit to long-term commitments with partners and customers, raise as much additional capital as possible and reduce costs for goods that are “pleasant but not important for business survival.”

Like Mr. Albinson, he believes the country will not repeat the year 2000, when the stock market collapsed, as public technology companies raised huge sums of money and then retreated when investment capital dried up.

They see the current climate as part of the change in direction that most companies face at some point.

“We have grown tremendously over the last two years, and although we still have a chance to continue to grow, we would be naive to think that everything will go smoothly,” Snobar insisted.

“There will probably be some disruptions and turbulence along the way.”

If the situation becomes as bad as the last two economic downturns, the best way to prepare is to cut costs and prepare for the next 30 days to reach a survival point, US startup accelerator Y Combinator said in a recent publication. help to the founders. This moment comes when the income is enough to pay the expenses before the cash is exhausted.

If there is no way to go now, and investors are offering more money right now, the accelerator, which cites Airbnb, Dropbox and DoorDash as examples, recommends thinking about this, as venture capital may eventually dry up.

“It should be understood that the low performance of technology companies in public markets has a significant impact on venture capital,” the statement said. “Venture companies will find it much harder to raise funds, and their limited liability companies will expect more investment discipline.”

About $ 4.5 billion was invested in 196 deals in Canada during the first quarter of the year, the second-highest quarterly venture capital investment in history, according to the Canadian Venture Capital Association, and investment in May.

However, the number of venture capital transactions for the three months ended March 31 decreased for the third consecutive quarter.

“People are becoming more cautious and protective as investors, and it’s driven by fear because everyone tells them to,” said James Lohri, managing partner at Alberta Thin Air Labs.

He sees no significant evidence of a slowdown, but has noticed a slowdown in new investment and a business that “cuts fat that they don’t necessarily need.” In particular, they reduce their workforce to 20% and add capital to their balance sheets.

Lohri believes that businesses that rely on advertising or are so young that they are not yet profitable are likely to suffer the most from the recession, but businesses with good value for money must survive. , regardless of sector.

“There will almost certainly be bloodshed in areas where there is a surplus, and this always happens during a market downturn,” he said.

“It’s like cleaning pipes, but big companies always do it. Big entrepreneurs always achieve this. “