Hindsight is 2020
By: Omers Ventures
Tags: Canada, Startups, Founders, Tech, Venture Capital

Image by jwvein from Pixabay

Written by Laura Lenz, Partner, OMERS Ventures

The end of every year is a natural time to reflect, take stock and distill learnings to take into the year ahead. This year has been anything but typical. All I keep thinking about is what we would have done differently in 2019, had we known what 2020 had in store. Taking stock has taught me a lot about myself.

We’ve said frequently this year that getting to know people ‘virtually’ has its challenges. In sharing these reflections I hope to give founders we have yet to meet a little bit of insight into me as an investor, into the OV ethos, and into our future thinking for Canada.

Balance, what’s that?

I am the mother of three young, very active boys. My husband and I both work full time. The greatest service I could have done to all of us, had we known what 2020 would look like, would have been to hire the best caregiver for my family (me included!) to ensure our home life ran smoothly.

I’ve always prided myself on being able to balance a demanding career with raising a family. The first lockdown turned our home into a mini correctional facility and I felt like COVID was destroying everything that I had built over the last decade. We’ve since put coping mechanisms in place, but it’s been much more difficult than I ever could have anticipated. I share this so other working mothers who are struggling know that they are not alone. All that said, we remain grateful that we still have thriving careers.

Wth hindsight, I also would have committed to testing for my second-degree black belt in Tae Kwon Do in early 2020. I figured with a new job, training five days a week would be difficult to commit to, but now I regret not committing to it as I haven’t trained with others since the lockdown.

An unconventional first year

On the work-front, I felt like we had accomplished a lot in my first quarter with OV — built a solid strategy to cover the Canadian ecosystem, raised a US$750M fund IV, and signed a term sheet to lead my first OV Canada investment. In hindsight, I wish I’d spent some of that time flying across the country to meet exceptional founders. Building connections with founders that turn into meaningful, trusted relationships is extremely hard to do over Zoom. I resort to walking meetings in Toronto, but with more than a quarter of deals occurring in western Canada, those walking meetings are very difficult to do with everybody!

The pandemic really reinforced the value of strong, ongoing relationships that exist long before a founder is actually raising capital. Especially in a relatively small ecosystem like Canada, founders appreciated pre-emptive term sheets this year as it was a much faster, simpler method of raising capital in a closed-travel world. Forging these relationships will continue to be pivotal to how we operate in Canada. We are not focused solely on warm introductions, so if you match the criteria we look for in Canada, and feel like we could be a good fit, do reach out.

COVID has forced a massive acceleration of digitization across entire industries and a requirement to rethink, retool, and reinvest in workflows and employees. The pandemic instilled a much-needed wake-up call to antiquated industries that relied on legacy technology, or, in some cases, pen and paper. The pandemic resulted in a compelling event that benefited start-ups through either acceleration of the procurement cycle or product-led growth adoption in ways that I hadn’t anticipated at the outset of the pandemic.

Things we learned

The most surprising thing about this year is how strong tech companies, and in particular SaaS companies, valuations and corresponding EV/ARR multiples have been.

If you look at previous global shocks, starting with the tech bubble at the beginning of my career, it took 21 months to recover, the events of 9/11 took 9 months to recover, and the financial crisis of 2008 took 36 months to recover. Revenue multiples (EV/Revenue) fell off a cliff during the financial crisis of 2008 and only started to show recovery in 2016.

But, COVID hasn’t resulted in the economic shock the markets expected in March. This is especially true for tech companies as COVID has forced a massive acceleration of adoption by both consumers and enterprises of tech solutions resulting in budget being shifted away from services and into technology solutions. This has resulted in the NASDAQ increasing 80% (at the time of writing) since the low on March 23rd and tech companies that have annual revenue growth rates over 30% are trading at 25x next year’s revenue.

We’ve also learned, once again, how important culture is to an organization’s success. The pandemic has reinforced that culture is critical and demonstrated how difficult it is to build over Zoom. Many employees today have never been to HQ to create meaningful working relationships or exchanged that serendipitous moment solving a problem over the water cooler, let alone soaked in the culture. Hiring for a management team in this environment is extremely difficult and takes time, but is not insurmountable.

What does the future hold?

There’s no doubt about the continued acceleration of technology businesses supporting areas like distributed teams, virtual care, micro learning, eCommerce, and automation. But we also envision decreasing nodes of reliance in the supply chain resulting in more localization, more consumer awareness of personal privacy, and more conscious consumption patterns around food and energy which will benefit our planet. We shall be watching these areas with interest in 2021.

We have seen tremendous velocity in Canadian exits in 2020. In fact, more than 50% of the top 25 Canadian deals over the last two decades have occurred in the last two years. We’re hoping that trend continues as we have a formidable Canadian investment portfolio! We’ve announced two investments in Canada this year, Solink and Tehama, with a third to come early in the new year.

I’ve built my career on making investments with a solid focus on key metrics. In Canada, that means we look carefully at:

Velocity — revenue growth, net dollar retention, gross dollar churn, MQL:SQL conversion, days in sales cycle, account expansion, and Net Promoter Score (NPS)

Capital Efficiency — net cash burn:net new revenue, capital consumption required to achieve $10M revenue, and sales efficiency

Potential for profitability — low customer acquisition cost, with a high lifetime value per customer, the payback on the customer acquisition costs, revenue per employee, and gross margin.

Heading into 2021, I’m really excited about the OMERS Ventures Canadian investment team which has expanded this year — we now have four Associates and two Partners dedicated to Canada. We are deploying our recently raised fourth fund, focused on early-stage businesses. For us that means Series A-C with a first cheque of $5M-$25M.

There is no doubt that 2020 has been a challenging year, but it has been one that has taught us a lot and ultimately made our team stronger and even more resilient.

We look forward to working with you all in 2021!