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Who doesn't love seeing all of the amazing innovation happening in Canada's Startup world? We connect with Canada's best startups to learn about their business and the amazing people behind it. Follow along and hear some of the most interesting ideas and top elevator pitches from across Canada!
00:01.30
mike_flywheel
Welcome back, everybody to the pitch please podcast Mike Tibito here and today I'm joined by Matthew Lombardy the managing director from one hundred Eleven I'm excited to talk about our topic Today. We're going to be talking about navigating the vc ecosystem with a double click specifically on the canadian market. For founders out here up north in Canada welcome to the show. Matthew now I introduced you as the managing director of one eleven maybe give us a quick background on what one eleven is but.
00:24.34
Matthew Lombardi
Thanks for having me Mike excited to be here.
00:37.58
mike_flywheel
Um, while you're going through it I couldn't help but notice your impressive background of things that have brought you to where you are today. So maybe touch on a bit of those experiences and how they got you into your current role as managing director at 111 okay
00:50.89
Matthew Lombardi
Sure, um, so one eleven for those who don't know us we are a fifty five Thousand Square Foot accelerator for venture backed canadian startups. We're located in the middle of dentown toronto at the corner of ah front and bluejay and we have a portfolio of 40venture-backedcanadian-foundedsoftwarecompanieswhoaremembersof 111 and they have collectively raised over $800000000 and follow on ah funding most of which is venture backing so a really exciting group of you know the the next canadian shopifys as it were. Ah, some of our alumni include some companies that that a lot of your listeners will be familiar with companies like wealth simple maple coho borrowwell so one eleven is really at the center of the canadian tech ecosystem. It's a really exciting space and I know you and you and your team might have been there and you know we're we're always excited to to have different folks. Who are looking to learn about the ecosystem roll through and and see what we can do to help support them on their entrepreneur's journey as well.
01:55.28
mike_flywheel
Those are definitely some impressive names and inspiration to all other canadian builders and founders and innovators. So I'm glad to see that they haven't fallen from too too far from home just around the corner of blue jayway close to an area that we're always around. Um. And that you are helping inspire and and prop up so many more of them. So maybe talk about you know that background of yours and how you even got to the role of a managing director and why we're even you know, credibly able to go talk about the vc space or venture capital space today for.
02:28.87
Matthew Lombardi
Yeah, so I mean it. It. It was sort of by accident. Um, you know 111 has been around since 2013 and at the beginning of covid and this was before my involvement with 111 you know I think we were. So one eleven unfortunately shut down due to covid um permanently or it was supposed to be permanently in in April of 2020 and its closure sort of fell a little bit under the radar because if you recall those early days of covid you know March April Twenty Twenty you know you were reading it. A news story seemingly every hour about some institution that that was shutting its doors due to covid and so um, at that time I wasn't involved in in either one eleven or in the tech space at all I was a management consultant that Deloitte. Um. I was very happily ensconced. There. Um and a funny thing happened. Um I got a call from my next door neighbor who was a medical who is a medical worker. He's ah he's an emergency room doctor and he says. And he says to me at around around the third week of March he says you know I can't get ah I can't get groceries and I said well what do you mean? You can't get groceries and he said well um, all the grocery delivery services are oversubscribed and you know instacart has a two week wait um and and at the time. Um.
03:54.64
Matthew Lombardi
You know you have to put yourself in that mind in that mindf frame like um March of 2020 April of 2020 even really into the summer we just didn't know anything about covid right? if you recall this was a time when people were wiping down their groceries with lysol wipes. Um. This was before masks were even recommended to a large degree this was before the vaccine, the vaccine rollout and so nobody really knew how covid spread and so I said to my doctor friend. Well why don't you just go to the grocery store like everybody else and he says no, you don't understand he says. I'm working 14 hour or 16 hour shifts in the hospital because it's all hands on deck and I don't want to walk out of the hospital and risk walking into a public place like a grocery store and infecting others so he couldn't get a delivery didn't want to walk into a grocery store. And so I said okay I I think I can help you solve this problem. So so I phoned my brother and my brother at the time was the market manager for Canada for instacart and instacart at that time had toronto as its first city outside of the us and. I said to my brother look my my neighbor who's a doctor is having this problem can you help solve it and he said you know we absolutely can't he's like it's sensible. We can validate medical workers. We bump them to the front of the line. No big deal. You know it's it's a win for public health. It's a win for instacart the next day my brother calls me back and he says well.
05:20.43
Matthew Lombardi
You know we can't really do it and and you know eventually I surmise that it's not that instacart couldn't do it. It's that they wouldn't do it because it wasn't worth it for them to build this custom solution that was only relevant to Toronto Toronto it wasn't relevant to any of their american markets where they were a much more developed and sophisticated service and they didn't have. These delivery backlogs and so I took I took that as a queue that you know so time of crisis. Someone's going to solve this so me and 4 of my friends all of whom were working with me at Deloitte at the time decided that we'd solve it on our own so we started our own startup. We called it grocery hero. It was a not-for-profit marketplace the concept was you know if you Mike Tibido you know live in red deer alberta let's say and you know you've got a vehicle and you sign up, you tell us your postal code. We will match you with the nearest frontline medical worker who needs a grocery delivery within 24 hours and the concept Mike took off like wildfire. Ended up matching 8000 pairs of medical workers coast to coast with a neighbor. Ah who wanted to help them get a grocery delivery and you know I sort of never looked back. Um, you know we ran grocery hero for about eight months up until the grocery delivery services caught up and then we were very happy to to just shut it down and.
06:19.28
mike_flywheel
Wow.
06:37.30
Matthew Lombardi
Thank all the volunteers who helped sort of patch that hole in the grocery delivery space for medical workers. Ah, but for me, the takeaway was you know when when in times of crisis. You need a good homegrown ecosystem of local companies who understand your local needs and so. Around August of 2020 so several months after 111 had shut down and right around the time that you know grocery hero was sort of hitting its peak and then we saw the volume decline as grocery delivery services caught up thankfully um, someone tapped me on the shoulder and said look I don't know if you heard but one eleven shut down. Early in covid and you know if you're really interested in what you say you're interested in. You know, sort of put your money where your mouth is you know one eleven as a piece of infrastructure. Its mandate has always been exactly what you're talking about that is helping great canadian companies scale to meet our local problems and so. The rest is kind of history. But that that is how I how I ended up going from management consultant with no particular tech background to managing director of 111 and you know I was lucky enough to be tapped on the shoulder and and given the responsibility of leading one eleven s reboot to where it is today.
07:51.98
mike_flywheel
That's amazing and I love that there's so many similarities that you know we we worked together and I had no idea you share even just before the mission of what one eleven does but that same passion. Um. For shining a spotlight on the canadian ecosystem because while there's so much amazing opportunity and um, you know addressable market just south of the border in the United States sometimes um because of where the canadian market sits. There's. A lot of differences and I know we'll talk about some of that today and I think it's as a canadian ourselves. It's it's sort of nice to put a spotlight on that and try to help the ecosystem here. Um grow. So let's let's talk about venture capital and you you know you said one Eleven is for venture.
08:41.82
Matthew Lombardi
Are.
08:41.91
mike_flywheel
Backed startups. So maybe we just dive into like what is venture capital and what is a Vc and how does that differ from the other types of of funding that startups might receive in this space for.
12:22.59
Matthew Lombardi
Absolutely so so maybe I'll go up to thirty Thousand feet here Mike because I think there's a lot of misconceptions around what is Vc especially since it's been so so hot and so frothy over the last call it call it 15 years but particularly. Ah, the last 5 maybe absent the last twelve months. Um, and you know people will watch shows like Silicon Valley on Hbo or they'll see a news story about $100000000 funding round from a soft bank and and I just I really want to go up thirty Thousand feet and and talk about what is venture capital as an asset class. So.
12:59.55
Matthew Lombardi
Fundamentally vc is a form of private equity right? It's it's a type of financing where investors are providing to very early companies oftentimes companies that don't have product market fit or don't yet sometimes at the earlier stages even have sales but they're providing these startup companies with. Ah, with financing because they believe they have long-term extremely high growth potential and and so it's generally coming from a pool of well-off investors we call those people lps limited partners who will pool their money in what's called a venture fund. And that venter fund is deployed by very smart investment managers who are the people that we call vcs they are the general partners of that fund and they're the ones who make decisions about which startups to allocate capital to so. Oftentimes you know Vc is going to be allocated, especially earlier stage vc to companies that are very small and again not necessarily companies with sales traction yet, but the fundamental thing that ties it all together is venture capital is deployed to companies. That vcs believe have exceptional growth potential not just growth potential of you know, doubling or tripling but exceptional growth potential generally venture capital because it's a riskier asset class in this in the sense that it's investing in companies with less less traction than.
14:09.19
mike_flywheel
Got it. So if I'm talking about a risk free rateer return maybe let's start there is that like seed steed bank. Yeah like where does that fit in and then where does vc like how should someone think about hey I'm ready to start pitching a Vc as. Probably the thing most people are thinking in their heads is.
14:28.61
Matthew Lombardi
Ah, normal, investible business because it's a riskier asset class higher risk demands higher rewards so venture capital generally aims to return 2 to 3 times what the market will call the risk free rate of return.
14:50.61
Matthew Lombardi
So risk free rate very simply. Yeah.
15:02.76
Matthew Lombardi
Sure well look key characteristic. so so riskf freee rate when I say riskf freee rate you know what is a 2 wo-year us treasury bill yield right now probably somewhere a shade under 5 % so that is considered the riskfree rate. So if I want my money to sit in the market. If I'm a wealthy investor who who who would otherwise consider being a limited partner in a venture fund right? providing capital to that fund if I want my money to appreciate at a risk- freee rate to track inflation as it were and and to not be eaten away at I would put it in a us treasury bill right.
15:36.39
mike_flywheel
They just got it and are venture Capital venture capitalists are they generally investing. Um, you know you talked about they might not have.
15:39.53
Matthew Lombardi
Or in Canada you might put it in in a giicc a guaranteed a guaranteed income product that that the big banks offer ah but people who are wanting to invest in venture capital as an asset class are looking for 2 to 3 times that risk-free rate and so in order to get 2 to 3 times at risky rate they're investing in riskier assets.
15:46.97
mike_flywheel
Customers or revenue or product market fit. So do they invest in ideas or do things need to be a little bit further along like when do they usually jump in and when do people need to turn to other sources of funding first in this journey around venture capital. So.
15:59.35
Matthew Lombardi
In this case, startup companies small businesses that don't necessarily have the proven traction to go out and get capital from a regular bank loan or other types of financing.
16:32.42
Matthew Lombardi
Sure. So so so you can sure so you I think you can segment venture capital as an asset class by stage of growth so generally at the ideation stage of a company. You know if a company is raising in and around a quarter million dollars let's say right? You might be looking at you know, bootstrapping that being self-funded taking on money from family and friends. Um I like to call it ff f family friends and fools. Um, but. You know, right around that ideation precede stage around a quarter million maybe even up to a million dollars that's the first sort of stage of venture capital where you you know you don't necessarily have much beyond an idea you have an early minimum viable product. And you're looking for the riskiest possible capital and and the smallest amount on the on the investment stage of typical Vc now when you read in the news about you know larger Venture Capital Growth Equity investors you know organizations ah that are maybe a bit more famous like a Softbank Usually they're looking at series b and series c deals. So it goes preseed seed series a series b series c and those series c deals are usually in excess of tens of millions of dollars. Those are the big ones from institutional.
17:44.18
mike_flywheel
Got it so they need multiples of return if your business is going to drive revenue and be a steady growing company. It's amazing, but it might not be what's right for Venture Capital investment is what you're saying.
17:59.43
Matthew Lombardi
Ah, vcs and growth equity and growth vcs that you read about in the news but at a much earlier stage you're investing in companies with a lot less traction at smaller amounts. But again the thing that ties it all together is these are investors who are seeking above average returns returns. Above the risk-free rate and so they're willing to invest in riskier businesses.
18:32.59
Matthew Lombardi
Absolutely so look the key characteristic of venture capital is that returns are based on what's called a power law distribution. So the basic math component here is that ah you know of all the startups that receive venture capital about. Ah, about 95% of them if not more right? excuse me but 0.04 are going to drive 95% of the value for a given Vc fund think about that. So what that means fundamentally is that venture capital is not. Ah, homerun business venture capital is a grand slam business venture capital means that as a fund a fund is intending to invest in in you know, a wide array of very risky businesses and again as we said at the beginning high risk high reward. So the vast majority of those businesses will never generate a return but the one that does right? That's 0.04 that's going to drive 95% of the returns for the fund in that power law distribution. So it's it's a. Ah, for lack of a better term a spray and prayer approach now spray spray and prayy within a thesis right? Every fund has an investing thesis. You know are they are they looking at a certain type of company enterprise saas etc. But it's a spray and pray approach within the within the band of companies that are risky enough.
19:57.54
Matthew Lombardi
But high potential enough to have just one of them generate that Facebook level or that Google level return for the fund so to your question Mike just to skip back to actually answering it if that's the imperative and how a venture capital fund is structured in a high risk high reward manner. It's absolutely true. What you've asked which is is venture capital right for every business. Absolutely not right? I say I say to folks who are interested in entrepreneurship all the time if your goal is to build a business where you personally get you know as a founder a $10000000 exit if a $10000000 exit is going to make you happy. Then you are by definition not a venture backable business because if you back out the math on that for a founder to exit with $10000000 which again not knocking that. That's an extraordinary amount of money for almost everyone. Um, but for a founder to exit with $10000000.
20:39.58
mike_flywheel
And that makes a lot of sense and so when you were talking about. You know you mentioned ideation seed series a bc are these like 4 fixed.
20:55.19
Matthew Lombardi
You back out the math on that and that by definition has not generated the return that the fund itself would need to make it an investable business venture capital is again. It's a grand slam business they're looking for billion dollar
20:55.46
mike_flywheel
Numbers that are generally similar across Markets Canada us and elsewhere that make you you know ideation pre-seed seed or there like general rules of thumb as you go through these stages.
21:12.22
Matthew Lombardi
Potential companies not $100000000 potential companies.
21:18.23
mike_flywheel
And that's that's generally where vcs get involved or do they get involved at ideation as well. Just so I can kind of like map that out mentally.
21:41.91
Matthew Lombardi
so so I'll speak to the canadian market. So ideation you're looking at something under 250 k preseed call it 250 k to about a million dollars see grant.
22:02.22
Matthew Lombardi
Yeah, so I think vcs of the institutional variety. Ah formal funds like a ah panachsh ventures. Let's say they'll get involved at preeed at the ideation stage. You're really looking at friends and family angel individual Angel investors then precede you're looking at.
22:15.42
mike_flywheel
You got it and so generally when venture capitalists are investing um and you know you talked about the $10000000 cash out for a founder. Ah generally they're looking for companies when you're saying you know they want the billion dollar valuations they are really looking for people that are.
22:19.82
Matthew Lombardi
At um, institutional vcs like a panache ventures. That's the 250 k to 1000000 the next round of seed a million to 3 or 4000000 call it. You're looking at investors like golden ventures investors like version 1 and then you look at you start to look at the series. A you know.
22:33.20
mike_flywheel
That are striving for Ipo or some massive significant acquisition.
22:39.25
Matthew Lombardi
Larger size institutional vcs like an anovia capital. That's that's around 5000000 to somewhere around 10000000 and then so on and so forth.
23:12.61
Matthew Lombardi
Absolutely and and and I and I tell people all the time. Um, it is okay if you just want your $10000000 exit and it is okay if um, you know Jim Ball silly calls this the moskoka home run. Jimbbo silly founder a blackberry who who built you know a globally dominant kind of company out of Canada he calls it. The muskoka homerun. He says that you know there are too many entrepreneurs who only want the $10000000 exit so that they can buy a cottage in cottage country and they'll be happy with that now I think that's okay.
23:30.76
mike_flywheel
You got it. So it's a different type of investment if you're looking to build a lifestyle business or a business that still could make millions and have a decent valuation but it's not that billion dollar um rocket ship
23:45.82
Matthew Lombardi
If you want to do that. But if you want to do that. You just have to know that you're not building a venture-backable business What you're building is a lifestyle business. It's going to be ah you know in the Grand scheme of.
23:53.20
mike_flywheel
It makes makes so much sense now when you were talking about the venture Capital Firm's thesis I think you referred to it as what is the.
23:58.63
Matthew Lombardi
Financing. It's going to be a small business. It's going to be interesting to a certain class of investors but not venture Capital investors.
24:05.73
mike_flywheel
Thesis is that related to industry is it like what they're looking for. Is it the types of companies a mix of all of that. Can you explain like the thesis because I imagine that has some effect on when startups and entrepreneurs are looking to match themselves with a venture capital fund.
24:14.80
Matthew Lombardi
Absolutely it can make a few million dollars and but it but it won't make enough money to justify venture capital investment under again. This power law distribution right? high risk demands extraordinary rewards.
24:23.80
mike_flywheel
I Assume that has something to do with the thesis of those venture firms that they might want to match with right? yeah.
25:05.50
Matthew Lombardi
Absolutely so ah, venture capital you can you can generally plot venture capital ah funding sources on a 2 by 2 and that 2 by 2 would look look at two factors. Stage of growth so certain funds only invest in preceded other funds like to invest between series a through series b so on and so forth so stage growth and the other piece of that 2 by 2 is industry vertical so there are funds that you know only invest in fintech companies. There are funds that only invest in b two b companies. There are funds that only invest in enterprise saas so on and so forth. So you know a fund is generally going to have a thesis based on both stage of scale where they believe they can add the most value and what type of company.
25:50.50
mike_flywheel
Got it so they have obviously depending on the background of the people's money that the fund makes up and the experience is there. They may have multiple industries or multiple things that they're looking for so it is probably super important to read up I imagine they publish their thesis.
25:56.69
Matthew Lombardi
Is actually being built because again funds want to add value in ways such as you know there's a gp there who's a former operator who really understands and is an expert in call it fintech and so they want to invest in fintech companies because one that's what they understand and where they can add value.
26:09.71
mike_flywheel
Of how they invest and that is an important thing to be mindful of as a is a founder pitching for venture funding right.
26:15.43
Matthew Lombardi
And 2 that's where they can actually lean in with the founders to both compete for deals and also help them grow the business once once they've actually made an investment.
26:42.67
Matthew Lombardi
Absolutely.
26:51.64
Matthew Lombardi
Absolutely you know every venture fund is you know, extremely clear on what they look for at a high level and you know they they do deploy a network of associates and fun scouts all over the country. At things like pitch competitions and oh you and I were at 1 together just just last week Mike where where we met about 30 you know, high potential startups founded by.
27:13.38
mike_flywheel
In your opinion. Are there questions that founders and entrepreneurs should also be asking to venture funders or angel investors when they're looking for things because it it shouldn't just be about the money if you're doing it right? correct.
27:19.93
Matthew Lombardi
Ah, smart smart young folks over at the Microsoft office and you know that room is also filled with scouts on behalf of different venture funds. So you know it's it's a little bit of research on the ah on the founder side but it's also you know it's also incumbent upon these funds right? They're out there competing for deals trying to find alpha trying to find the best deal. And so they're out there actively seeking out you know the next great idea and they're also going to help you know ah help coach entrepreneurs to to become investment ready in many cases.
28:07.25
Matthew Lombardi
Absolutely so um, you know 1 you want to understand. Um, you know what? what the fund is going to bring once they're on your cap table right? So the cap table is very simply ah, you know. I take money. So so say I I run a company you Mike Thbado want to be an investor want to provide venture capital to to my company. Ah, you know we come to and an arrangement on a safe or a convertible note or whatever instrument you're investing in now you're on my cap table meaning you you have a stake in in the company. But I want to know from you is a couple of things 1 um, what are you actually looking for as a return ah and and there are very specific growth metrics that that we'd have to talk about in terms of what are your expectations. Um. And you know I'm probably already thinking about a follow on round right? What's the next round that I want to raise you know? are you going to want to participate in what other sources of capital can you help bring to the table. Um, you know how are you going to help us meet our growth targets whether that be through you know. Marketing support sales support growth coaching you know there, there's a gamut of what's called platform services that vcs offer to their portfolio companies to compete for deals and show that they're the best value added investor and and and you know, most importantly, I'm going to want to understand. Ah you know.
29:31.18
mike_flywheel
Got it and those elements that you are talking about. Is it worth explaining those maybe for people that are newer to the concepts of venture-backed and so you talked about you know, basically the exchange of what a venture fund.
29:31.80
Matthew Lombardi
How you're going to be a partner and in my growth and so you know you can't be prescriptive on that again every venture capital fund is fiercely competitive right? These are organizations seeking. You know the biggest returns in the world and so they're fiercely competitive on the ways in which they believe that they can offer value and.
29:47.80
mike_flywheel
Or any investor gets in exchange for their money in so there's some expectation around evaluation in return and they take things like convertible nodes. Can you talk about those examples of how that works and generally how much money or.
29:51.41
Matthew Lombardi
And the resources that they'll bring in the expertise. They'll bring to the table for their portfolio companies. So really, it's understanding Fundamentally how are you going to help me grow if if you're on my cap table. Um and everything is sort of ah a sub-bul from that question.
30:03.43
mike_flywheel
Percentages and how how that's sort of the frameworks that are used for investors and startups.
30:44.37
Matthew Lombardi
Sure so so at a really high level. Um, you know, ah, there's something called a safe so a safe stands for and it's an acronym simple agreement for future equity and this was introduced by y combinator almost a decade ago now. Prior to the safe startups would raise funds using simple equity rounds. So a priced round which has the advantage of of you know, very certain terms. Um and and the other instrument that startups would use to raise funds were called convertible notes. So so that's sort of. You know? Ah yeah, you're you're agreeing that with a convertible note you will quite literally convert in terms of valuation in terms at a future date so they were a form of debt and and that comes with its with its own sort of risks and drawbacks. The goal of the safe again. Simple agreement for future equity which is now the industry's standard and in in early venture capital um, that was again introduced at Ycombinator about a decade ago was basically standardized fundraising documents for early stage startups in a way that reduces overall cost. And again really simplifies it clarity for both the founders and ah and the and the venture providers the capital providers in terms of scenarios likely to occur. Um, and that's that's basically the the most standard instrument now for raising funds.
32:11.20
Matthew Lombardi
For for an early stage company now again when when you read about the you know the Softbank $100000000 rounds um those are not done by safes those are equity rounds that are done again with companies that are a little bit later stage. They have product market fit. They have sales traction.
32:11.84
mike_flywheel
Got it so safe Standard agreement simple agreement for future equity.
32:29.99
Matthew Lombardi
So on and so forth right? But the safe is for generally for early financing rounds. Um and and and generally for the seed financing round specifically and the safe is again. Ah you know the most standard tool that almost all startups are raising with right now.
32:41.24
mike_flywheel
Got you now speaking of events. Um, you know we're here breaking our way into 2023 we started the conversation off with how you got into this space and started talking a little bit around a market.
32:55.52
Matthew Lombardi
Absolutely simple agreement for for future equity. So an investment contract between the startup and the investor and it just gives the investor the right to receive equity of the company on certain triggering events. Um such as you know a future equity financing that's led by an institutional Vc.
32:57.88
mike_flywheel
Dynamic that was very different so sort of like the 20192020 to 2021 timing what what has changed since that timing or what happened during that timing and what has changed now and then I'd love to like start to maybe start to understand Canada versus us. But.
33:12.88
Matthew Lombardi
Or a sale of the company so on and so forth.
33:16.60
mike_flywheel
Before we do that I think it'd be really interesting to understand what happened and what is the current state that we're in when we think about raising and and financing.
33:59.41
Matthew Lombardi
Sure so very simply what happened is interest rates went up right? So if the cost to capital is going to go up as much as it has in the past twelve thirteen months I think in Canada interest rates have gone up. You you know from from memory 450 basis points in twelve months um that's going to change what we talked about you know, very early in this podcast right? We talked about you know how the cost of capital impacts. You know what is the risk-free rate of return. Well if the riskf free rate of return. So so again in in a. Basically 0 interest rate environment if venture capital as an asset class needs to return 2 to 3 times the risk-free rate in a 0% interest rate environment or close to it which is what we had about thirteen months ago you know venture capital is almost a commodity venture capital is a very attractive asset class. When you're trying to return 2 to 3 times a risk-free rate that's around 0 right? with interest rates around 0 with interest rates now hovering where they are and and looking like they're going to stay there for for at least the foreseeable immediate future of the next six to twelve months um the cost of capital has gone up.
35:02.26
mike_flywheel
Um, now does that mean that um now startups need to produce higher outcomes for the money being invested. Does it mean that venture capitalists are being a little bit more deliberate with where and when they invest in looking for some things that are different or does it mean that maybe venture capitalists are okay to have slightly lower returns but have different.
35:14.88
Matthew Lombardi
And that means that ah you know the risk-free rate has changed materially right? And so the the short answer here is interest rates have changed the cost capital has gone up and that has meant that you know there's been a lot of stress on valuations of companies that raised money.
35:30.55
mike_flywheel
Stability Criteria that they're looking for or some mix of those What what is sort of the implications of that other than the fact that it's more expensive to borrow. So you're looking for a different type of return. But what are the implications of how that's manifesting in the ecosystem. So.
35:33.46
Matthew Lombardi
Ah, near the tail end of very low interest rates.
36:20.15
Matthew Lombardi
Sure so look I think we've all seen the statistics in terms of you know the last ah couple of quarters have been difficult. Not just in Canada but in the us and and you know in in in Europe and pretty much in any market that that venture capital is is ah. Is an active asset class. Um, you know it's been ah, it's been ah, a realignment or readjustment. Um I think you know vcs have really so put a pause in a lot of ways. Um on the volume of deal flow. Ah, that we saw in 202021? Um, you know a lot of startups. You know, really focused on cutting expenses extending their runway. You know there are a lot of companies that you know. Have revenue not quite product market fit they're growing but maybe not fast enough to grow into those frothy valuations that they raised at in in say 2021? Um, so I think a lot of vcs have just focused on supporting their existing portfolio companies. You know you read a lot about.
37:18.20
mike_flywheel
I got it so is drypadter sort of like a little bit of like a life raft or like a flotation device for existing investment companies that like like invest existing companies that the firm has invested in.
37:29.86
Matthew Lombardi
Dry powder accumulating dry powder because the deal flow has really the volume of dealflow has slowed down well a lot of that quote unquote dry powder is being saved for existing portfolio companies to make sure that you know they're able to get a cash infusion if they need 1
37:33.10
mike_flywheel
That are on their way but obviously because of dynamics since they've invested I've changed to help them kind of get that little extra push is that sort of what that dry powder concept is yeah.
37:46.24
Matthew Lombardi
Ah, in order to actually grow into the valuations that they raised at at at the sort of height of valuations and in late Twenty Twenty one
37:49.30
mike_flywheel
So you talked about canada and the Us. Um, obviously we share a border. There's a lot of other things we share culturally. But obviously we differ in so many ways when you think about venture capital. Are we more similar more different. What what is the difference between the 2 markets canada versus versus the us and how should be people that are canadian-based founders which is generally the people that listen to this podcast. What should they be thinking about or aware of that might be different if if there is differences. So.
38:15.52
Matthew Lombardi
I think that's a reasonable way to characterize it for for for a lot of a lot of the Vc landscape. Absolutely.
38:47.13
Matthew Lombardi
Um, yeah.
38:56.97
Matthew Lombardi
Sure so a couple things. Um, first of all, there are some amazing venture capital firms in Canada right? Like we talked a little bit already about golden ventures panachsh and Novia you know ah um real ventures you know what
39:14.19
Matthew Lombardi
Too many to name. We have some really great investors in Canada the problem is there's just not enough of them. Ah, we need more capital to support the amount of amazing entrepreneurial talent in this country. So um, that is the number one difference between Canada and the United States is the united states venture capital ecosystem is just it's a bit older. It's a bit more mature and developed and advanced and there's just more capital more capital not just more raw capital but more capital on a per entrepreneur call it basis in canada our venture capital ecosystem has a handful of really great players. Ah, but we need more we need double. We need triple. So um, number one difference us ecosystem is just a lot bigger. Um, so you know your options for financing are are just a lot wider and you know in the us it's impossible to know. Ah, you know every every venture firm or fund that has a fund say bigger than $50000000 in Canada you actually can know every venture fund over $50000000 because they're just you know you just have a smaller ecosystem. Um, but I would argue that.
40:18.40
mike_flywheel
That that's crazy like that actually blows my mind as you say that's sta. It's crazy to think fifteen years ago that there wasn't a tech ecosystem. It was crazy.
40:22.86
Matthew Lombardi
Ah, you know there's room in our ecosystem for a lot more capital because of the amount of ah talent in this country. The amount of entrepreneurs in this country. Um, you know I think it's really early innings in the development of the Canadian venture ecosystem and our startup ecosystem writ large.
40:37.98
mike_flywheel
Wow.
40:41.90
Matthew Lombardi
If you look at the deal flow if you look at the amount of dollars invested in venture capital in Canada over the last decade you know Toronto basically didn't have a tech ecosystem fifteen years ago basically didn't happen now we have ah.
40:57.73
Matthew Lombardi
And my mind.
41:03.28
Matthew Lombardi
There there was really it was really niche There was very little to speak of today we have ah arguably the second largest tech ecosystem in the world outside of Silicon Valley so um the chart. As it were the chart is up into the right Mike in in Canada in terms of the growth and development of our venture and startup ecosystem and and it's still early innings right? So I'm really excited about the growth. Um, we won't be sitting here complaining in 5 years that you know there's not not enough sources of capital.
41:35.16
mike_flywheel
It's a good point you bring up too around like success fuel success. So as we see more Canadian startups become successful many people from them. Will come back and reinvest in the Canadian ecosystem. Um, as they go forward now. All of the venture funds that you've mentioned are those.
41:36.97
Matthew Lombardi
Ah, we need more. It's going to happen. It's coming and it's and it's coming because we have that network effect that virtuous flywheel of you know people who had early exits from big companies like shopify who are now going on to start their own angel funds right? that is happening we are seeing it but it's just a function of time.
41:52.40
mike_flywheel
Canadian entities and um, obviously we love you know Canada but are there areas where us firms are investing specifically in Canadian Portfolios is that a thing.
41:57.21
Matthew Lombardi
But it is still early innings. Um, you know I would say the correction that's taken place in the past you know, 12 to sixteen months that is going to be a blip on the chart that is up and to the right.
42:19.99
Matthew Lombardi
Absolutely.
42:40.53
Matthew Lombardi
Absolutely so there's a number of Us funds that invest both as funds of funds in canadian venture funds and do direct investing into Canada um I'd I'd encourage listeners to look at the cvca canadian venture capital association. Annual report which talks about you know the the full landscape of american and foreign funds that do invest into canadian startups which is really exciting and that's another chart that's again up and to the right? Um, you know that that number grows year over year and I expect the last eighteen months will just be a blip. Um, but. That chart again will continue to be up and to the right because this is a growing healthy ecosystem. That's adding Jobs year over year in tech um and is and is producing more great founders every single year and and I am so lucky in my role that I get to see so many of them so frequently. Um, the other difference the number 2 big difference between Canada and the us is I think it always has and this partially a function of availability of capital but ah, it's partially I think a function of ah. Type of entrepreneur and this goes back to something I said earlier about Jim Belilli's comment about the muskoka home run. It has always been more difficult to raise capital in Canada and that is because I think canadian investors investors have always focused a little bit more on unit economics a little bit more on profitability.
44:01.11
mike_flywheel
And.
44:06.20
Matthew Lombardi
And less on I think um, what american investors have have I think always been a bit more interested in which is that uber for x model of growth at all costs and we'll we'll figure out the business model later. So I think in in the context of the current downturn that sort of small c. Conservatism that extra caution that we see amongst I think canadian investors and sometimes entrepreneurs has actually been a bit helpful to us. It's made the valuation correction a little bit less painful than it has been in the us because again you know Canadian investors have always pushed.
44:39.26
mike_flywheel
So well and it sounds like based on what you're saying as time goes on. We're going to see a lot more of that anyway because you'll see more venture capital firms in the market. You'll see more money in the market. You'll see more innovation and more people going for that bigger piece. But obviously the ecosystem. Um.
44:43.45
Matthew Lombardi
Startups here to focus more on unit economics from day one and a pathway to profitability from day one and less less focus on growth at all costs which again requires a lot of financing rounds. Um, but again, those are 2 2 sides of the same coin right? You're getting better protection in a down market but you know.
44:55.92
mike_flywheel
Is is a little bit different and when we think of say say I'm an entrepreneur I've listened I've learned a ton right now 45 minutes in or so um I now know what a safe is I've got my eyes on the prize I've got my fff friends family and fools investment.
45:02.52
Matthew Lombardi
Are we thinking big enough as an ecosystem to sort of hit that Grand Slam to be venture backable to some of the bigger us firms right? Are we thinking Beyond the muskokka home run.
45:14.86
mike_flywheel
I'm I'm I'm ready to start talking preseed with Angel investors and vcs. Um, what are your tips for someone trying to raise in our current Market. What are the things they need to be preparing What do they need ready and what are some some pro tips. Ah, for anyone in that phase right now whether it's you know seed all the way up to series B I'm sure it differs a little bit but what are what are some of the pro tips for what you're seeing right now for.
46:05.85
Matthew Lombardi
Um, of that.
46:17.53
Matthew Lombardi
Sure so I think at ah at a really high level. Um, remember the north star right? Get into the mind of a Vc are you telling a bigger and a big enough story to be a venture backable business and if you're not that's okay, you're building a lifestyle business seek financing elsewhere right. But if you want to be a venture backable business. You have to be able to convince a Vc who have again these power law distribution imperatives as part of their fund that you are going to be a globally competitive billion dollar company and you're going to build it out of Canada. So be prepared to really believe that and and to paint that picture so that's number 1 number 2 build a process for yourself seek warm introductions right? It's it's almost like job hunting you want to seek warm introductions wherever you can. It's been statistically proven that people who get warm introductions via contact to a Vc. You know they're going to be looked at a little bit differently at the early intake and you know they'll have a little bit more luck getting through the the process of vetting and getting to due diligence and and finally getting. Ah, hopefully that handshake and a check number 3 um I really want to caution people in this environment resist the urge to chase the latest zeitgeist. Um, and when I say zeitgeist I want to take you back to to two thousand and eighteen nineteen when you know.
47:44.46
Matthew Lombardi
Blockchain was all the rage and so you saw these startups adding blockchain to the end of their name I think there was even an ice t company that was publicly traded if I recall correctly that they they named themselves long island ice t dot blockchain or something crazy and suddenly their valuation doubled overnight right? like. So so what are the Zeitgeist now. Well obviously ai with the emergence of of ah chat Gpu and Bart and all these llms I would really encourage entrepreneurs unless you have proprietary Ai unless you have ip that's defensible. Do not add ai to the end of your company's name to try to juice the valuation right? do not just um, put a wrapper over chat gbt with nothing proprietary under the hood and claim to be an Ai company. Don't do that you will you will quickly be found found out and if you're not found out soon enough. You will not be able to grow into the valuation that you raise at if if it was raised under the auspices of we had Ai when when you actually didn't um and then last tip I would say is um, take advantage of the current sort of down market right? Like a lot of pressure follows frothy valuation. If you raised in 2021 at a frothy valuation at at at ah at an you know, an enormous multiple. Um, it's it's going to be tough to grow into um so take advantage right now of growing with a little bit less pressure on valuation right? take advantage focus on the business fundamentals focus on profitability.
49:16.82
Matthew Lombardi
Um, you know great companies come out of downturns and recessions they always do and and the reason for that is actually very simple and rudimentary. Um, when when the economy is is under pressure and you know.
49:18.96
mike_flywheel
So I love it So make sure your story is big enough if you are seeking venture funds have a process almost like job hunting to go out and seek introductions and opportunities to present what you're working on or um, don't.
49:31.82
Matthew Lombardi
Ah, the people that you would potentially sell to are sort of tightening the purse strings and cutting back on their spending if they will still buy your product in a downturn you know that your product has value.
49:35.00
mike_flywheel
I think use the word Zeitgeist don't chase that that mood of whatever is the current thing. So I've noted that I'm not going to rename the pitch please dot ai although it's very tempting and then the last piece is take advantage of that that down market a little bit because if people are buying your product now.
49:45.22
Matthew Lombardi
And that's why great companies come out of downturns and recessions so take advantage of this time. You're really going to get a good customer stress test.
49:54.61
mike_flywheel
They truly do see the value and as things come back to the upswing that'll help hopefully drag you to the top a lot faster. Um, if people want to learn more on venture capital and venture backing are there like a couple.
50:12.72
Matthew Lombardi
Um, don't change I Guess don't you.
50:13.97
mike_flywheel
1 or 2 top places you think people should go you mentioned you know a published report earlier I don't know if that's where you would say to go but what would be like your top 1 or 2 resources and we'll link them but but that people that want to learn more where should they go.
50:38.39
Matthew Lombardi
Forwardly. Absolutely.
51:02.49
Matthew Lombardi
Yeah, absolutely. So um, I'm I'm a big fan of a fellow by the name of Chris Newman he is a gp at panache ventures. They're a canadian venture capital firm. Chris puts out a regular newsletter that he cross-publishes to his blog. So Chris Newman at Panachsh Ventures worth reading on a regular basis I'm also a big fan of the book venture deals. It's by a vc in the us named Brad Feld and there's coauthor as well whose name escapes me. But.
51:19.35
mike_flywheel
That's wicked and we'll make sure if there's something specific from each otherwise we'll just reference those in the show notes but they sound like valuable resources I know we talked a lot today about um, venture backing and how that works but obviously one Eleven is a huge hub for this in Toronto and so.
51:31.86
Matthew Lombardi
The book venture deals by Bradfeld great resource. Um, and if you're looking for. Ah you know a great media publication that covers canadian venture deals I so I'd suggest beta kit which is an online publication.
51:37.00
mike_flywheel
Um, if people are wondering. Are they at the right stage to work with one eleven should they apply should they have a conversation where or how should they find out more about that Matt.
51:46.41
Matthew Lombardi
Um, that is that's been been operating for a number of years and and really has the pulse of the Canadian startup ecosystem.
52:01.12
mike_flywheel
I love it and you're located right? downtown Toronto. So if people are interested. Come find me and we'll go walk over from the Microsoft office to the one eleven office a short five six minute stroll we can grab a coffee with Matthew and team. Um. Any other closing thoughts on your side Matthew otherwise you know I really want to thank you for your time today. This has been super educational for me I'm sure a lot of people are going to find it useful but any closing thoughts on your side.
52:20.94
Matthew Lombardi
Absolutely so appreciate you letting me make a ah little ah little plug at the end so they should visit wwwwwdot one eleven spelled out o n e e l e v e n dot com.
52:52.60
mike_flywheel
It's a hell of a mic drop I love it. Thanks a lot Matthew Matt's ah Matthew managing director at 111 from downtown Toronto here in Canada thanks for joining us today.
52:59.26
Matthew Lombardi
Yeah, last thought is if you're if you've ever thought about starting a company now is a great time to do it so highly encourage you to to take advantage and and and to you know, don't wait start something today start it off the side of your desk start small. Um, iterates and and and just just launch right? like bring bring something ah bring an idea to life. don't don't wait don't put it off a day longer.
53:34.96
Matthew Lombardi
Thank you Mike.