originally published: 2022-11-11 12:10:22
Hessie Jones (00:03)
Hey everyone. It’s been a big newsweek and if you haven’t been paying attention, there has been some pretty major shake ups both in the startup world as well as the crypto world. We’ve seen Meta and their unprecedented number of layoffs in their company as well. All is Elon Musk and all that crazy that’s following him on Twitter. And so one of the major crypto changes FTX that has actually collapsed this week. So these are all fallouts of the current economic climate and it’s favoring, I guess, a looming recession. Welcome to Tech Uncensored and this is our weekly live event where we’re going to be talking about the current economic climate and its impact on investors and startups. My name is Hesse Jones and I am privileged to be joined today by Paul Barter who is our adviser, our strategist, he’s an investor, he’s also altitude accelerators, entrepreneur in residence and he’ll provide us his thoughts on this topic. I’m also happy to present, while I add them all, pam Banks who is our executive director at Altitude Accelerator, as well as Sam Hussein who is our Venture Services Manager. So welcome everyone to today’s LinkedIn Live.
Paul Barter (01:26)
Pam Banks (01:27)
Good morning, Hessie.
Hessie Jones (01:29)
Good morning. Okay, so let’s start with the first question. Paul, I’m going to direct this to you because if we are in a recession, people are saying here are the major instigators. Like you have people being laid off. We say COVID was one of the things that instigated this recession. We said Ukraine was some of the common elements that actually define a recession. Don’t compute. Unemployment did rise, but yet we’re still adding jobs to the economy in the US that we added 260,000 jobs last month. Canada 108,000 unemployment stays fairly steady and employers are continuing to hire despite the inflation. So would you say that this is a bit of an anomaly and maybe this was a manufactured recession?
Paul Barter (02:24)
I’m not sure if I’d use the word manufactured recession, but it is absolutely an anomaly. It’s one of the most distinct times in history. We do have inflation, significant inflation in Canada and probably more importantly in the US and the rest of the world where we’re bumping into 10% annual inflation in some of those markets. And the inflation for a number of reasons, some of them are real time Ukraine issue as well. But probably the most important reason we have inflation is we’ve had free money for a long time now. And free money like literally zero interest rates. And when you have free money, you spend it right? Individuals spend it on things like real estate and so you get bubbles in real estate. Firms spend it on things like acquisitions or trying to grow into new markets that are get profitable. So they make bets because it doesn’t cost them anything to make a bet. But when interest rates go up to counter inflation, all of a sudden those bets start to cost money and they look at those bets and they cut expenses.
Hessie Jones (03:46)
I remember having this discussion with Pam and you’re talking to somebody who had his own thoughts about whether or not this indeed was an anomaly. What are your thoughts on that?
Pam Banks (03:57)
Hessie I talked to a few people that are investors and also money managers about what’s happening from a market perspective and what the predictions were looking forward to 2023. And they definitely said we’re heading for a slowdown. The length of time they’re not sure of, but they said this sort of adjustment has already happen from an investment perspective. So we’re maybe seeing the front end of it now happening in the tech sector. When you think of what’s happened in the last week with Meta, Twitter and others. So we may still be adding jobs and portions of the economy that aren’t there yet that maybe haven’t felt the slowdown. So I think we’re in a leading kind of position when you think about the tech industry because we may be leaders in other segments of the economy that maybe aren’t there yet. So there definitely is the sort of explosion that’s about to happen from an inflation perspective and what’s happening also with interest rates. So if we think about tech feeling first, what’s our opportunity? If there’s still this lag between what’s happened to the tech sector and what’s happening to the rest of the economy, what are some of the opportunities from an entrepreneur or a founder’s perspective?
Hessie Jones (05:32)
That’s actually a good point. We’re going to deal with that a little bit later. So let’s turn to the tech industry. This is a good Segway. This is what we’re seeing. There were mass evaluations last year, and what we’re seeing is now some of these companies are actually finally coming home to roost. Not only have we seen shutdowns in much of the tech sector now, we’re seeing this week and last week some significant effects of that massive funding ground. Meta laid off an unprecedented 11000 employees. We saw what Elon Musk is doing and continues to do to the Twitter platform after its big layoff, and Apple is on a hiring freeze. My question to you guys is that it seems like big tech is the one that’s taking the brunt of the bat when it comes to this economic downturn. By all indications, is this actually a good time to be in the tech space? So, Paul, why don’t you start?
Paul Barter (06:44)
Well, I’ll make a couple of comments. First of all, Meta laid off 11,000 people, which gets them back to their headcount level of early last year. So they were hiring at a nonprecedent level for net new bets, largely their Metadata’s bets or VR bets, which were not part of their existing revenue stream. Right. So it was a bet on the future or kind of new technologies to be adopted in the future. And they were betting ahead of the game. And again, because of free money. They were able to do that. So they actually haven’t cut their headcount level back to where it was a decade ago. They cut it back to where it was earlier last year. So, yes, a big number, and unfortunately, if you’re one of those people, but little perspective there in that conversation. It’s not just the big tech companies. So the Big five have frozen or laid off some folks. The next 20 have also done the same thing. And their stock valuations are down a lot. We see this in every economic downturn. You get a regression to the mean, right? You get companies that valuations were getting ahead of the curve.
Paul Barter (07:56)
We saw it in Canada back in the day with Mortal and Research in Motion. If you go back a decade or two decades ago, there was those types of companies that were ahead of the curve and you’re aggressive to the meat. And the reality is we’ve got a lot of big issues in the world today. Some of those issues are things like the environment, challenges with the environment, with global climate change, issues around healthcare. We hear it every day about our hospitals that are at a limit, issues around education. If we have kids in school, we know how challenging the education environment is, etc for. And there are some system solutions that need to be applied to those challenges. But there are also technology opportunities there. And so big hard problems, technology should be at the table in solving some of those problems and there’s still incredible opportunities for innovative startups and entrepreneurs to create the next trillion dollar company in space.
Hessie Jones (09:08)
What do you think, Sam? You’re also an investor in this space. What are your thoughts on the tech sector in this looming recession?
Samie Husain (09:21)
Yes, I think similar to what Paul is saying. I think I read a recent statistic that investments from VC firms are down about and close to 50% year over year, which means that it’s now smart money. They’re going after companies that have a higher chance of success. They can’t take bigger risks like they were.
Hessie Jones (09:46)
Pam. Oh, so I’m sorry, Sam. Go ahead.
Samie Husain (09:49)
So investments are still being made, but not to the degree that they were. Evaluations are now getting to a more reasonable level.
Pam Banks (10:00)
Again, kind of looking back and I always think about the founders that we work with from an altitude accelerator perspective that are relatively early, they’re going and they’re looking for their first seed stage funding. And when they look forward and they think about what’s happening in the tech sector, they’re kind of frozen. They’re not sure whether to stop, go ahead or go backwards. And I know that Paul, we’ve talked and I think you have some tips on some of the key things that founders need to think about. So to me, the message is, you know what, you need to be really a series founder and a series entrepreneur. I think that we’re kind of looking back over the last year or so. As Paul said, there’s a lot of money out there. There was a lot of pent up money and demand to invest and it was an opportunity to stimulate the economy and put what I would call inexpensive money out there to see what was going to stick and what was going to hit. The pendulum always swings back the other way and those companies or investors put their money on big bets.
Pam Banks (11:14)
Now they’re coming pulling back to the other, to the other side and really focusing on companies that have what I call solid foundations. I always think the most important thing is making sure that a founder and a company has a really good finance and revenue model before they even talk to an investor. In other words, who’s going to buy what you have to sell? We see a lot of speculation both from an investor perspective and also from a founder perspective. I think the environment that we’re in now really should draw people back to the center of the being of your idea, who are you building this for and who’s willing to pay for it? So again, back to basics.
Hessie Jones (12:00)
Thank you, Pam. Okay, so let’s switch topics a little bit and let’s talk about this crypto winter that comes with this apparent recession. This industry has also experienced their own, I guess, over valuation levels. And I think the biggest news this week was FTX and the acquisition by Binance because they weren’t able to COVID many of the losses that they had experienced. And they’re by far one of the top ranked cryptocurrency exchanges because for the most part they’re trying to keep this industry afloat in the last few months. Just to give everyone a sense, this company, FTX was actually valued at 32 billion a few months ago and now it’s at 1 billion. So this 30 year old founder has pretty much lost his fortune within one day. So what do you think, if anything, the medium term impact on the sector, Paul? And what do you think investors need in order for this, I guess, type of sector to be a viable investment opportunity?
Paul Barter (13:24)
So I’m a skeptic, I’m a crypto skeptic. I would say that it’s actually not available this morning, it’s a dollar this morning. So they’ve filed for bankruptcy and there’s some knock on effects, there’s some other exchanges now that are not allowing investors to draw funds in this space as well. So clearly you’ve got some pain going on in the sector, in the crypto sector in general. I think I’ve had conversations with Pam about this and some folks have. An old friend of mine, Don Tapsky, wrote a book about it and the underlying technology for crypto is blockchain. And blockchain is a legitimate technology and we’re seeing some great use cases, albeit anecdotal use cases, industry specific use cases, where blockchain is a legitimate alternative to basic databases in the market and I think you’re going to see that, but it’s not going to happen overnight. And so I’m supportive of blockchain as an underlying technology, but I think crypto is like me personally. I think crypto is largely multilevel marketing. It’s just like your friends that is trying to plug some kind of multilevel marketing program hey, resell these shampoos or whatever. The people who get in early to multi level marketing programs make money, but the folks who get in late lose money.
Paul Barter (14:58)
And what we’ve really seen with crypto is people who got in late are losing money and many of those people are the people that can least afford to lose money. Many of our laws that we have on the books in North America right now came into place after the 1929 com, 1929 crash and rules were put in place that you needed to be a relatively sophisticated investor to get in high risk environments, permits. And that hasn’t been true in crypto. Right. So we have lots of unsophisticated investors that have gotten the sectors and those that got in early made some money if they got out. But those that got in late have lost a lot of money on paper, maybe all of it, and not just on sophisticated investors. I know this morning that teachers, the pension fund, lost $95 million. And if I was on the board of directors of teachers I might be wondering about the employment of some of the folks that made those decisions.
Hessie Jones (16:15)
Absolutely. Thanks, Paul. Pam, you have a comment on the crypto space and blockchain?
Pam Banks (16:23)
Yeah, if I think about crypto, crypto is really an alternative to our traditional sort of banking financial systems, right. It’s a way to avoid some of the constraints and implications around that. You can see that some of the bigger institutions are trying to get closer to crypto because they want a piece of crypto. You can guess and wonder who has impacted some of the changes around the whole crypto platforms and wonder how traditional banks and finance are going to get involved or control of that in some way that I don’t have a crystal ball to see what direction that’s going to be. But I think, again, going back to the fundamentals of crypto, which is blockchain are legitimate improvement, innovative improvements that have impacted many industries. If I think about one, really important is supply chain. And blockchain has improved major efficiencies around logistics and transportation and taking out a mint costs for things like smart contracts. So I believe in the fundamental backbone, which is blockchain. And you know, of course, we’re partnered up with the Canadian Blockchain supply chain association. I see lots of good work that they’re doing to help people and companies move their goods.
Pam Banks (17:56)
And I believe there’s real value in that crypto. I think there’s a lot of players out there in the space and I’m not sure who’s going to win.
Hessie Jones (18:08)
Thank you, Sam. Do you have any comments on this one?
Samie Husain (18:12)
I’m with Paul. I think it’s a multi level marketing scheme. I don’t really believe in crypto. I read a very good article, I think it was in the Wall Street Journal about an engineer who had a very high paying job in California but he loved to mine crypto. He decided he was going to quit his job and mine crypto full time and he moved to Nevada because he needed a greater power source. He went right near the dam and he lived there for one year and after that he quit mine crypto. He said it’s all a sham and went back to engineering jobs.
Hessie Jones (18:45)
Did he lose a lot of money?
Samie Husain (18:46)
I think he broke even, but he didn’t make much, that’s for sure.
Hessie Jones (18:50)
Yeah, well, just like on that space and the crypto space also, I mean, everybody knows here because we support a lot of environmental sustainability is one of the culprits when it comes to mining because of the amount of energy sources that it’s using. And until it can solve that issue, it’s going to be, I guess, difficult to get to mainstream. Right. And unfortunately it relies on many computers, many servers actually doing all those computations in order to validate the information that’s on the chain. OK, so let’s shift to the topic of startup and all of this has an impact on the companies that altitude accelerator supports and for startups who have this resilience to weather the storm, what are they doing now and what should they be doing?
Paul Barter (19:59)
Paul, I think the advice we’d give them now is the same advice that we’d always give them, right? So a couple of things. If you’re going to start a new business, you have an idea for an entrepreneurial back, kind of that you want a big vision. You want to see something that is not being delivered in the market already. You have this big vision for crocs and kind of stepping in to kind of solve a big problem in the market. So you need that big vision. So you need to know that the market opportunity is large enough. You also want to look at the number of competitors that are in your space. Right? And so I don’t think the opportunity to have big visions has gone away over the last period of time. There are lots of big problems in the world today that can be addressed with technology. There are probably less competitors for you if you’re a startup that’s executing and that’s maybe a good thing for you. When we talk about what you need to do to be successful, we start with that big vision and then we say there’s five other things that you need.
Paul Barter (21:09)
You need to be able to move quickly, so you need to be fast at executing. And iterating we talk about pivoting to new opportunities as your clients or customers take you, train you on where those new opportunities are. You need to have great user experience. So the solutions that you deliver to market need to be easy for the users to work with. You need to have the ability to hire great talent and retain them. And you need to have a resilient founder, right? And so after you’ve done those five things, you need to go raise money. So some of those things haven’t changed overnight. It’s probably easier now to hire and retain great talent in the tech sector than it was six months ago because there’s hundreds of thousands of people that are on the market that are looking for those jobs and they’re not going to be offered $300,000 to go work for Meta anymore, right? So I had one startup at a Kingston, really thoughtful, fast moving team, great founder, etc. And they had two great technologists they wanted to hire as their CTOs back in March, April, and they lost both of those candidates one after another, a month apart to two Meta who hired them for a lot of money in US dollars.
Paul Barter (22:41)
They’re not going to lose people to that big company out there for really a lot of money. Now also, maybe there’s an opportunity to hire people for not a low price, but a reasonable salary that both the startup can afford and that the individual can live on over the next period of time. So it’s a good time to hire, maybe not quite so good time to raise money, but you’ve got less competitors as well. And so if you can prove that you have a business opportunity and get some traction in the market, there’s less people competing with you for the funds that are there.
Hessie Jones (23:19)
Thanks, Paul. Pam.
Pam Banks (23:21)
Yeah, I was just going to jump on that. Paul, you mentioned about making sure you know who’s in your market and competitive market analysis, that’s really important because lots of times we meet up with founders who are solving a problem that they’ve had, which is good because it shows the passion there, but not necessarily a problem that a lot of people have. So understanding the scope of the market and doing market research on competitive analysis is really important and also thinking broadly, so you might be solving a problem that’s in your community, but think about how that company is going to scale. You need that to be a problem in many communities. So that opportunity to scale is all about knowing who your market is. That’s where centers like Altitude and accelerator and other regional innovation centers across Ontario can really support founders in doing this because we have the capacity to help dig into market research that can help founders figuring out, should I be turning left instead of right? Is this a big enough problem for me to jump in and create a business to solve? So that piece is really important. On the talent piece, I agree with Paul.
Pam Banks (24:42)
I think the changes that we’re seeing right now in big tech is going to provide opportunities to some of the smaller founders. And I think the challenge is thinking creatively and how you’re going to bring that talent into your company when you’re really early stage. I know that there are creative ways to do that. One of the ways that might be an option for some founders, as I was just talking to an industry colleague that jumped into my tax, and my tax has a ton of new programs that are focused on bringing in new sort of graduate students into the workforce. So it could be an opportunity for a first hire for a founder. So I think it’s important to look into options like that that are creative. So instead of saying, okay, I don’t have $100,000 to bring in a developer, look at some of these other tools that are out there for a cofounder. Look at possibly bringing in a recent graduate to help you with parts of what you’re trying to accomplish and make sure that the problem that you’re solving is a big enough problem for your business to scale.
Hessie Jones (25:55)
Thanks, Pam. That reminds me of the program that we’re running with Algoma and for a lot of founders who, let’s say, don’t have the capacity, because they’re kind of doing everything these days, to not only do the competitive analysis or try to do some market validation and do surveys, et cetera. Our program with Al Goma allows students to not only understand the problems that some of these startups are facing, but they’re also augmenting and doing the research for them so they can contribute to the startup strategy. So to your point, there are resources out there to help founders, but at the same time it helps create the knowledge and capacity for students who really want to learn more about this space. So thank you. Sam, do you have any comments about startup?
Samie Husain (27:00)
Well, I can comment about the tech part of it. I mean, I agree with Paul. I think though, there’s a time lag here. I think we won’t see a drop in demand for tech people for at least another six months. I had a colleague of mine who’s a senior vice president at Wealth Management from downtown, he had to hire a tech person. The guy came in and said, I want 130. There are all my other offers if you don’t believe me, and I’m not coming in. And they hired them. So it’s still and I demand. But I think that it’s coming. That route is coming where we’ll have a choice.
Paul Barter (27:36)
I also think we talk about tech like it’s one thing. There’s a whole bunch of subs skill sets in the technology sector and some of those skill sets are less in demand today than crypto are less in demand today than they were yesterday. Some of those skill sets are incredibly valuable still. So any kind of machine learning skill set people are being hired at a premium and there’s not enough to go around, so that’s like anything, technology evolves. Last decade skills are not in demand anymore, but the current skills that are in demand are an incredible demand.
Samie Husain (28:15)
Yeah, I agree.
Pam Banks (28:16)
Hessie Jones (28:17)
Okay, so we’re coming up on time, so I think I’m going to call it for this week. So thank you, Pam, Paul and Sam, for coming and weighing in on this important topic as we head into this hopefully not so bad recession in the coming year. If the audience has any topics that you want us to COVID please do so and comment on our LinkedIn page. And I think we will be weighing in on the next topic for next week, so you still have time. And from that end, happy Friday, happy Remembrance Day and have a good weekend, everyone.
Paul Barter (29:01)
Okay, thanks for having us.
Hessie Jones (29:03)
Take care, guys.
Paul Barter (29:10)