Startups are struggling to find capital as the market slows

(Toronto) Entrepreneur Jonathan Hillis is looking for money.

Posted at 5:45 p.m

Tara Deschamps
The Canadian Press

In the coming months, the Toronto entrepreneur hopes to raise $1 million through a seed round for Payd, a student card app he founded. The operation will be followed by a seed round of between 3 and 4 million.

But the task will be neither quick nor easy.

While money has poured into “start-ups” in recent years, as tech stocks soared and people became interested in technology that made working from home easier in the wake of the COVID-19 pandemic, the The situation has changed and investors’ money is now circulating much less freely.

Big companies like Netflix and Twitter have laid off and investor enthusiasm is waning as tech companies look to hedge against a potential recession.

“Canadian investors have been pretty risk-averse to begin with, so in most cases it’s pretty difficult to shell out money in a downturn,” Hillis admitted.

“I think everyone is […] in this pattern of waiting, waiting for the dust to settle. »

Payd has closed 25% of its funding round, but recently questioned whether it would need to adjust its valuation based on the current climate.

Swedish fintech Klarna, for example, known for its buy-now-pay-later service, earlier this month raised $800 million for a $6.7 billion valuation, up from around 85% of its $46 billion valuation last year . She also cut about 10% of her workforce, citing the impact of inflation and the Russian war on Ukraine on the business climate.

Notwithstanding Payd’s valuation, Hillis anticipates that the funding process will be slower than usual given the current market environment.

Everyone kind of sits and waits hoping to get a better sense of where things are going over the next few weeks so investors can make more informed decisions about where to invest (their silver).

Jonathan Hillis

Sharp drop in investments

Data Company Briefed. In, Waterloo, Ontario revealed that Canadian tech companies received 107 investments totaling $1.9 billion in the second quarter of this year, compared to 167 transactions and $4.9 billion in the first quarter of the year and 184 investments and $4.7 billion in the second quarter of 2021.

Investments in businesses in Toronto alone fell 69% between the first and second quarters of this year and 61% year-to-date, while transaction volume fell 22% compared to last quarter and 40% compared to the second quarter. declined in 2021.

Investors have recently had to “stack one thing on top of the other,” illustrated John Stokes, co-founder and partner at venture capital firm Real Ventures, which has funded Clutch, Element AI, League and Mejuri. .

As soon as the number of COVID-19 cases fell, Russia’s war against Ukraine began, then the market “slowed down”, largely prompted by the highest annual inflation in 39 years and a rise in interest rates.

By now, most people in the industry have been going through “various stages of grief” over the downturn and are adjusting to “the new normal,” Stokes observed.

“People are starting to realize it’s going to be different, but […] none of them really know how it will be any different,” he added.

A downturn doesn’t significantly change Mr. Stokes’ investment process as he still follows the same due diligence process and advises the companies he invests in to keep an eye on their spending.

However, he expects start-ups to be hit the hardest, as they usually have more difficulty raising funds. These companies typically raise less money from institutional investors and more from private sources and money managers, whose shares have taken a beating in recent months.

More cautious investors

Brendan King, chief executive of Saskatoon-based software company Vendasta, said entrepreneurs raising money in this environment should expect investors to be even more cautious than they were a year ago.

“In the past, people had trouble making these investments,” he recalls.

“Now they have plenty of time, they will do their due diligence, they will look at all the economics. »

Vendasta raised 120 million private funds in May 2021. Although much of the money hasn’t been used, Mr. King is constantly speaking to investors, so when Vendasta needs more money, relationships are already in place.

Even as valuations fall, he feels investors still have cash to capitalize on the right opportunities.

Vipan Nikore sees the situation the same way. The doctor is in the early stages of his funding for Homecare Hub, a company he co-founded in 2019 to help seniors and their families find affordable, quality care.

Homecare Hub’s mission has always been important, he noted, but it has become clearer to others during the COVID-19 pandemic, and he hopes this will lead to increased investor interest even if current conditions persist .

He called the prospect of lower valuations a “good thing” because it signals a market correction and puts a damper on companies that are hoarding lots of money but not getting much out of it.

He added: “Even if it didn’t happen, it will eventually. […] though I would prefer that to be the case sooner rather than later. »

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