Views from the Valley: Is The Worst Over for Tech?

Speaker 1 [00:00:01] Hi, it’s John here. 2023 is shaping up to be another tough year in tech. In the U.S. alone, more than 100,000 tech workers have already been laid off this year. Google, Microsoft, Amazon are just some of the giants that you’re seeing in the headlines shedding thousands of jobs in the last few months. As an onlooker, things appear to be pretty dreary. But how does it look from the inside? I’m in California at the C 100th annual summit asking just that. Canadians those are the C in the C 100 have gathered in Silicon Valley to talk about the tech climate. How bad is it? What do entrepreneurs have to be mindful of? And are the worst of the layoffs over? Maybe a self-correction was overdue. Maybe this is time for new companies to shine. Let’s remember that General Electric, just one example, was founded during the Long Depression. Hewlett Packard was founded during the Great Depression and Microsoft was founded during a recession in the 1970s. In Canada, Hootsuite and Shopify are among the many tech companies founded during recessions. So what better time than now to create and innovate? This is Disruptors, an RBC podcast. I’m John Stackhouse. Today, I’m reporting live on location from Silicon Valley to get a snapshot of the tech sector through the eyes of Canadians. In the thick of it, I’ll be speaking with founders and venture capitalists for their thoughts and insights. But first, let’s get a sense of the landscape from Andre Sharrock. He’s a managing partner at Maple VC, a venture capital firm with Canadian roots. Andre, welcome to Disruptors. Thank you for having me here. Andre It’s been a rough start for many in the tech sector to 2023. The recent lay off announcements all carry a sort of theme of Oops, we over hired during the pandemic and now we have to scale back. People like Mark Zuckerberg are admitting it. Microsoft, too, Is the worst over? No, that is a great observation. It feels like everyone made the same mistake in a way, and they’re correcting for it and they’re all saying, Oh, it was my fault, right? They over hired. ET cetera. It’s not over for tech in any shape where form tech really propels or excels in an environment that we are entering. Right. Like if you look back in all sorts of moments of downturns over time, the best technology companies are created in these times. Why is that? Well, one is capital efficiency, profitability, things that we are hearing now that matter more than ever before that are frankly fundamental and important for building business and profitable commerce. At the end of the day, and so for sustainable businesses to matter in this world, capital efficiency is important. The other that comes to mind is focus. When you have a ton of capital at zero cost, everyone and their mother has an innovation lab and oh, there’s this department. And I was speaking to a prospective LP, they were doing a tour of one of their portfolio companies and the CEO was doing this tour of the office and they skimmed by a room and they were like, Wow, there’s a lot of people over there like, What are they doing? And the CEO could not communicate or articulate what that team was doing. And that is like that. That is an example of the times we came out of capital wasn’t properly being allocated. Yeah, many people forgot that technology is a business, right? It’s not a charity. It’s not religion, it’s a business. Right. And so business discipline is back. Yes. You’ve been through cycles before. A lot of the entrepreneurs I’ve been talking to seem to have suffered, and they now recognize they suffered from two binges in 2020 and 2021. One was the hiring binge, one was the capital binge because money was free. So it was easy to raise. And because of the pandemic and so much changing all around us, everyone went crazy with hiring. In some ways, as painful as it is, you can adjust to the hiring binge more easily than you can to the capital binge. And that may be one of the challenges I’m hearing for the year ahead. People are going to be hearing a little more stern words from their investors, saying your runway is not infinite. What do good entrepreneurs and great founders need to consider as they kind of stare at that somewhat limited runway of on the capital side? So to set that up even further. Last year, no one really went to the markets as much, at least in the earlier stages, where I play because everyone had 24 months of runway or plus. So let’s not let’s not mess with this environment right now. We’ll wait till next year. But to your point, rightly so. Well, of course, next year you’re going to this year, i.e. you’re going to have 12 months of runway. So guess what? You’re going to have to go to the market. And that valuation you got with that runway that you touted last year, well, the economy changed. So your contracts that you thought you were going to close are not closing. Now, some can get very creative. I think the best founders will find ways to make money, maybe from customers they didn’t think would be customers or didn’t put an emphasis on or a priority on or whatnot. And so I think some of the best founders will find a way to make money a B, now that they’re running out of cash, it’s okay to do A down round. You know what no one talks about matters down round in 2009. We should talk about that. I don’t know all the details because it wasn’t talked about, but some of the best companies in the planet have down roots. It’s okay. And my message to the VC is, and speaking also to myself is don’t put a bunch of structure around that. I like If you are in the world of venture, the game is about upside potential, not protecting downside risk. At the end of the day, one or two or some small relative small percentage of your portfolio will outweigh all the losses. And so while you shouldn’t reward the founder with the same valuation and that’s completely fair, I think founders should be open to down rounds and VC should be open to clean terms on those down rounds. And then we will we will grow out of it. Can you explain, Andre, to our listeners what a downright. Is and why it matters to a to a startup. Sure. And so a valuation is ultimately implied at the earliest stages, less so on the fundamentals of the business, right? These businesses are either pre-revenue or very inconsequential revenue, so you can’t really give them a revenue multiple to imply a valuation. And so the valuation is really comprised of how much someone is willing to pay on the investor side and what the founder is willing to give up on the founder side. And that math take one and divide it by the other implies the valuation. And so while that is effectively a vanity metric, founders ultimately want to see that valuation going up. It does imply what they physically kind of on paper own of this business. And so when a valuation is 100 million due to some infusion of 10 to $20 million of cash, a down round implies you’re going to do that at 80, at 70 at 50 half of your valuation, and that will signal to the market or you think it will signal to the market. You know, my company is not doing well. But again, I emphasize that that metric was a vanity metric. You could actually have revenue going up if you could talk about your revenue or talk about the amount of engaged customers or users or whatever that number actually might be going up. How about we get to a time and I think we might be entering that time where people talk about an actual business that is solving a customer’s problem and as a bunch of customers paying for that problem, does the way we solve that problem and by the way, that’s going up and right now the markets don’t see that and we understand that, but we have a long view. And so we raise that a down round, you know, 30, 20%, 60% down. But we have a long term view and we’re solving customers pain points and we will get there and eventually the valuations will catch up to underlying business performance. You’re an optimist. And one of the things that always inspires me in Silicon Valley is it is it’s a place for optimists. And even in these dark moments, people here are more optimistic than people outside the valley about the Valley’s prospects, about tech prospects. What gives you what gives you optimism? The biggest outcomes in tech happen at major shifts, And so us VCs, particularly those in Silicon Valley, have been waiting for a shift to happen for the longest time, and it was been a head fake in 2020, 2016, 2017. Well, now we have a real shift finally after 1213 years. So when there is an economic shift.

Speaker 2 [00:08:56] Pair that with.

Speaker 1 [00:08:57] A technological shift like the last time we had this was in 2008 was nine when there was also an economic shift combined with a mobile shift. We are seeing that with generative AI and this economic shift. And like when those two things happen, historically the best things are created. And so like we are giddy, like we are really excited that these moments have presented itself for the best values to take advantage of. So we’ve got a technological shift, an economic shift, a capital market shift, one might add to that. So the shift is on. The shift is on. Andre, thanks for being on disruptors. Pleasure to be here. Next up, I’d like to introduce Chris Arseneault. Chris has more than 25 years of experience and is the co-founder, president and CEO of Adobe Capital. Chris, welcome to Disruptors.

Speaker 3 [00:09:45] Thank you very much, John.

Speaker 1 [00:09:46] It’s great to be with you again. I don’t want to age you, but you have lived through a few tech market downturns and that includes the dotcom crash from way, way, way back when wondering how you’re seeing this one being any different.

Speaker 3 [00:10:01] What’s interesting is that it’s totally different and it’s exactly the same. There’s a lot of elements that touches the emotional front of decision making for an entrepreneur and for an investor. That’s literally the same roller coaster that you’ll see in any events like this one. And at the same time, everything is different because all of the data is different, right? So you have to adapt.

Speaker 1 [00:10:24] How would you describe most of your conversations with entrepreneurs as we look deeper into the year?

Speaker 3 [00:10:29] So entrepreneurs are kind of like trying to figure out how do they stay in the driver’s seat, how and when to raise, what type of relationship do they really want to have with their cap table and their numerous investors? What has happened from our perspective over the last year is that entrepreneurs that had maybe five or seven investors on a cap table, they’re choosing one or two with who they’re really going deep, deep in decision making, deep in reviewing their strategy, reviewing their burn, considering lower growth, but with confidence, it’s hard to do reviewing their mains and how to basically build a company when everything is changing rapidly under their feet. Right. So I think it’s a unique time in the market to actually build strong relationships between investors and the entrepreneurs and between boards and the entrepreneurs, because this is a time where you have transparency like never before. You have honest. Russians. You have time to actually do due diligence. You have time to actually review what’s going on in terms of the plans of the of the business. And you have time to build trust. So this is a unique time to figure out with who you want to work with. And that’s equally for the entrepreneur as much as the investor.

Speaker 1 [00:11:46] That’s a great expression. You have time to build trust. A lot of entrepreneurs may not quite see it that way as they’re scanning their cap table, thinking about which investors to spend more time with to try to deepen that trust. What sort of things should they be thinking through and looking for?

Speaker 3 [00:12:04] Well, some entrepreneurs right now are still scratching their heads because their first time entrepreneur, they’ve only been in the market for the last 5 to 7 years and they’re like, hey, investors were willing to pay 30 times IRR. Why are they barely wanting to be ten times now? Like, why did that shift happen? And what does it mean for me, right? So building trust basically means understanding where the entrepreneurs are coming from, why they’re there, they’re interested in investing. We’re continuing to invest in your company, what they’re willing to do over and beyond, just putting in capital to help you become successful.

Speaker 1 [00:12:39] For founders who are facing those kinds of pressures and no doubt lots more, what kind of advice do you give them just in terms of managing their own psychology, their own emotional state, but also their business brain through more challenging times than many of them have probably ever seen?

Speaker 3 [00:12:54] We often talk about optionality, and optionality basically means a way for founders or the executive leadership team to stay in the driver’s seat. What does it mean? It means you have to take the hard decision in terms of your burn. And most of the company’s burn comes from compensation, right? So it’s the salaries that are the bulk of the burn of the company. So you have to take the harsh and hard decisions with regards to your own roadmap of product, of hiring, of letting go, reorganizing that helps you stay in the driver’s seat. You also have to decide what type of company are you going to be, not just now, but in the future. And sometimes in order to be able to be there and be in good shape, in order to execute on the long term vision of the company, you have to take different type of decision in the short term. And there’s no easy decision here. It’s tough.

Speaker 1 [00:13:50] Yeah, nothing is easy right now, it seems. How long do you figure this will go on?

Speaker 3 [00:13:55] Well, we already are starting to see a shift. I think there’s still going to be a lot of layoffs in tech this year because of companies that didn’t take the hard decisions last year. They burned through even more cash and now they’re forced to take, you know, decisions that are even more radical. So we will see more layoffs. But net net, we still came from an industry in a world that was hiring at high, high speed and at a higher pace. I just looked at the I know, a portfolio of active companies. At the end of 2021, the active portfolio had 15,000 employees. At the end of 2022, they had 16,000 employees. So even though there was over 2500 layoffs, we still net hired close to a thousand people. A lot of the roles that were let go either are finding jobs in other industries. Therefore, they’re we don’t expect that they’re going to stay on the market very long or they’re starting their own companies. So we already are starting to hear and see people that got laid off last year that are starting to own tech companies in 23. And we expect that by year end and for 2024, we most likely will see the biggest boom in startups in tech. In terms of growth numbers.

Speaker 1 [00:15:13] That’s a really hopeful note to to wrap up on and incredibly sage advice from someone who’s seen these challenging times before. Chris, thanks so much for being on disruptors. Thank you.

Speaker 3 [00:15:23] Very much.

Speaker 1 [00:15:25] Up next, more predictions on the path forward for the tech industry direct from Silicon Valley. Stay with us.

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Speaker 1 [00:16:18] Welcome back. Today, we’re talking with Canadians who are living through the tech sector’s new reality. I’m at the C 100 Summit in Silicon Valley, surrounded by many of the industry’s top thinkers and innovators. Our next guest is Sherry Hash Jones, founder and managing partner at Sightline Coaching, an executive coaching firm based in the Bay Area. Sherry, welcome to Disruptors.

Speaker 2 [00:16:40] Thanks. Good to be here.

Speaker 1 [00:16:42] It’s great to have you here. And talking about talent because everyone is talking about talent in 2023. It was in many ways the most common thread through the C 100 summit. What did you take away?

Speaker 2 [00:16:55] Well, I mean, it’s interesting looking at this year versus last year. And I feel like last year we were tussling with will remote continue. And I think this year it’s just really just continuing. The same story, which is remote is here to stay. The question is how do we as leaders and companies deal with this new kind of environment? And, you know, me and my work, I work with a lot of young leaders. And I think what we lose when we go entirely remote is the stuff around culture, around connection, around leadership development. Leadership is apprentice craft, right? Like we learn by watching other awesome leaders. And if you are only seeing a leader on a little square on your Zoom screen, I’m kind of concerned about how we actually help that next generation of leaders come up.

Speaker 1 [00:17:43] One of my takeaways is, and I think we all see this, that hybrid, however you define that, is here to stay. And it’s really on companies and managers to optimize remote work using technologies and their rapidly growing, but also optimize in-person work. Make sure that you’re mentoring, coaching, inspiring in ways that even with the best immersive communication tools, you’re not able to be that true human perhaps. Yeah, that we are.

Speaker 2 [00:18:09] It’s like in-person totally. It’s like human with a capital H and whereas that may have happened organically before because we were with our teams in person, they could watch how we work. I think now to your point, we need to be really intentional and almost create programing around it and be really intentional with our leaders that they are mentoring, coaching, making that a part of their of their bottom line in terms of how they’re working with their teams.

Speaker 1 [00:18:34] Now, another factor that’s changed from last year is layoffs in the tech sector and job uncertainty. And we talked about that, how to communicate to teams who are perhaps nervous about their future, but also wondering how best to work in person or remote. What did you take away in terms of how leaders, founders, entrepreneurs can communicate with tech workers in this very different environment?

Speaker 2 [00:18:57] I mean, what I heard was more communication and not less and more transparency, not less. If anything that we gained over the pandemic was, you know, showing up as human capital, age, human again. And, you know, our leaders can show up that way, too, and trust that our employees can have more of a seat at the table in terms of how things are going. I think that we really heard that from the CEOs who spoke the last couple of days, that, you know, there needs to be a level of trust there, a level of transparency that, yes, there’s going to be hard news. You can’t share everything. But the more that you share or probably that, the better the outcomes will be in terms of generating that trust in connection with your teams.

Speaker 1 [00:19:39] How do you think this year is going to be different from last year or last several years from a from a talent point of view?

Speaker 2 [00:19:46] I’m based here in San Francisco, so we’ve had a lot of layoffs in the tech sector. Having said that, we still have a lot of industries that are really booming. And so I think there’s a bit more pragmatism in how we hire being more selective. But, you know, if you’re top talent, there’s still going to be lots of opportunities for you to always be recruiting, right? I say this to all of my leaders. It’s definitely not something that you outsource to just your recruiting teams and be maintaining those networks. We all have eyes on top talent, right? This might be a time where folks are more open to moving and shifting.

Speaker 1 [00:20:21] We also have heard about a hyper intensity of the year ahead, given economic conditions, the cost of capital, the challenges of the sector, and a lot of entrepreneurs and founders are being told you have 12 months to kind of get this this right. Hard to lead a team with that kind of pressure, but good leaders do what differentiates them.

Speaker 2 [00:20:44] You know, my background was in consulting and I remember every minute counted, but the great partners were still those who could get in solve a problem. But we’re still taking time to develop along the side. So I think of it as, you know, double KPI. It’s not just, you know, what the outcome is, it’s how you’re doing it, because that’s going to retain the team longer term. And I think what we heard over the past two days is it’s not necessarily the pace of the work or the amount of the work that burns people out and gets people frustrated. It’s more about how the work gets done. And if you if you have a sense of purpose, if you’re feeling. Like you’re engaged. People are going to give their best.

Speaker 1 [00:21:19] Whether in-person or remote. High fives have a value. I’m going to give you a high five sherry.

Speaker 2 [00:21:24] Thank you.

Speaker 1 [00:21:25] Thanks for being on disruptors.

Speaker 2 [00:21:27] Good to be with you.

Speaker 1 [00:21:28] Our next guest is Dominic Penaloza, founder and CEO of Peace, which offers on demand work pods in public locations. Dominic, welcome to Disruptors.

Speaker 4 [00:21:38] Thank you, John. Thank you. I’m super happy to be here.

Speaker 1 [00:21:41] You’ve had an incredible career journey, almost 30 years in China, and you’ve just been in lockdown in Shanghai for probably feels like 30 years and now you’re here in Silicon Valley. Give us a sense, Dom, first off the top of how different things are coming out of the pandemic in China from a tech sector point of view.

Speaker 4 [00:22:04] Yes. So that part of the reason I said I am super happy to be here is because of the fact that this is my first trip in about three years. So I’m super grateful for that. I think the rate of change was so, so fast in China recently with the changes in the Zero-covid policy that things are still rapidly evolving. I think from the tech industry specifically, perhaps from the entrepreneurs perspective, there might even be more opportunity than before. This might be an interesting implication if there is a decoupling that is happening within tech. I suppose that might be bad for global efficiency, but it might be good for local opportunity because different teams have opportunities to build different products or similar products because of decoupling.

Speaker 1 [00:22:53] I’m curious how you see things evolving in China, but also elsewhere because you’re innovating in the future of work spaces. Where do you think work goes as the world reopens?

Speaker 4 [00:23:04] I think one of the fascinating events right now is that as I spend some time reconnecting back here in North America and I’m seeing for myself that everything I’ve been reading for the past three years about the remote work revolution, the hybrid work revolution, how approximately 30% of all American workers are now hybrid. So this is really a new normal and this is really a megatrend. And it’s quite real. It’s amazing to me because so far in China, it’s almost zero. So despite everything that we’ve gone through over there in terms of managing COVID and the great opportunity to work remotely during those periods for everyone, it’s fascinating that the reaction has been so different and basically everyone is scrambling to get back into the office. And so it’s still office five days a week as normal or as you’ve seen in the headlines from the last two years, even trying to get people to not do 996 the 9 a.m. to 9 p.m. six days a week. But everyone is still in the office and not much has changed in terms of workspace and how people work and the way that people interface within China. And so that’s fascinating to me.

Speaker 1 [00:24:22] That that’s going to become a fascinating almost AB test in the world. If you have especially brain centers like Shanghai where you live that are all in-person and then other brain centers like here in Silicon Valley, where the occupancy in San Francisco is somewhere in the 20 to 40%. Do you think innovation is going to take a different course in China because of that in-person work habit that seems to be taking root again?

Speaker 4 [00:24:49] I think that is a that might be $1,000,000,000,000 question, because if we’re talking about broadly innovation in general and the whole tech industry, maybe it will be better possibly, but maybe it will be worse. I think old school thinking tends to believe that we need to spend time together physically because a lot of innovation comes from those random collisions of ideas in the cafeteria, in the elevator, in the hallway, or at the watercooler. And so if that is happening, much less in the Western markets, will someone gain an advantage in terms of innovation If things are quite different in China, where everyone is still spending a lot of face to face physical time?

Speaker 1 [00:25:37] I want to get your perspective as a serial entrepreneur. You’ve had a number of startups, many great successes operating in fast growth markets, particularly in Asia. As you look at the current environment, it’s really tough time for or for leaders, for founders, for entrepreneurs. What advice do you like to give people in these sorts of environments?

Speaker 4 [00:25:59] The advice I’d like to give people is that if you’re a younger entrepreneur, perhaps you can take something from us more experienced entrepreneurs. I am encouraged to see that. It turns out in the latest data I saw that the age of 50 is the best time to start a company. And perhaps. The reason that is so is because by that age the person has been able to see several cycles. For myself, I was there at the beginning of the Internet and I also experienced the great dot.com crash, which gives me a certain kind of perhaps calmness or at least perspective when we talk about the current recent market shifts. And so I think having that kind of perspective will help you to be calm, to navigate your new company, or think about how to navigate your new company in these waters and knowing that these are cycles and entrepreneurs must carry on no matter what the cycle and to see the cycle as an opportunity. There are some silver linings of being in a tougher market for fundraising, for finding customers who have budgets to spend.

Speaker 1 [00:27:08] These are cycles. Very wise words. Dominic, thanks for being on disruptors.

Speaker 4 [00:27:13] Thank you. Thank you so much, John.

Speaker 1 [00:27:15] That was Dominic Penaloza. I’d like to thank our other guest to Andre Charoo, Sherry Hatch Jones and Chris Arsenault. The tech sector is once again in a period of transition. Funding that once came easily is now scarce. The narrative has completely flipped Headlines about massive investments in tech, unicorns and IPOs have now become headlines about mass layoffs. Perhaps the only thing we can say with certainty is it’s going to be a bumpy road ahead. But, you know, those who fasten their seatbelts and keep their eyes on the destination will get there. And they may find they’ll get their way ahead of their competitors. Those are the real disruptors. I’m John Stackhouse and this is Disruptors, an RBC podcast. Talk to you soon.

Speaker 2 [00:28:12] Disruptors, an RBC Podcast is created by the RBC Thought Leadership Group and does not constitute a recommendation for any organization, product or service. It’s produced and recorded by JAR Audio. For more disruptors content like or subscribe wherever you get your podcasts and visit RBC dot com, slash disruptors.

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