Though it maintained interest rates on January 24, the Bank of Canada signalled it is beginning to contemplate cuts.
“What came through in the deliberations is that Governing Council’s discussion about future policy is shifting from whether monetary policy is restrictive enough to how long to maintain the current restrictive stance,” central bank governor Tiff Macklem said in his opening statement.
Governor Macklem also noted that underlying inflationary pressures still persist despite higher interest rates pushing overall inflation down, and the central bank may have to raise rates if “new developments” push up prices.
Canada’s tech sector could be poised for a recovery if interest rates do drop, but the playbook is much different this year for founders and investors, cautioned several industry insiders speaking to BetaKit.
The fastest hiking cycle on record, the Bank of Canada’s rate increases over the last two years battered the white-hot tech sector as deal flows slowed and valuations dropped. With those rates unchanged (for now), here’s what Canadian tech should expect in 2024.
Era of free capital won’t return any time soon
In 2021, the venture market was characterized by near-zero interest rates that led to soaring tech valuations, a bull run in public markets, and a frenzy of deals closing in a matter of days or weeks.
“The era of free capital is over,” said John Ruffolo, founder of Maverix Private Equity, adding it won’t come back for a long time. “We’re just reverting back to the long-term mean, and that’s what you should count on.”
Companies that refrained from fundraising last year in hopes of maintaining their high valuations shouldn’t carry that same mindset into this year, he added.
Because interest rates aren’t expected to return to pandemic-era lows, leadership teams need to deploy capital more strategically, said Kim Furlong, CEO of Canada’s Venture Capital & Private Equity Association.
“The operational approach, in the years where cash was readily available, is that you were willing to spend more to do some kind of customer acquisition and to grow your business knowing that cash runway was flush, and now it’s not,” she said.
“The companies that will do well are not the ones that are just looking to survive, but the ones that are looking to be strategically deploying dollars.”Kim Furlong
“The companies that will do well are not the ones that are just looking to survive, but the ones that are looking to be strategically deploying dollars in areas that they have done their homework, in terms of where the growth is possible.”
As companies deliberate on where to deploy capital, deciding how to secure financing becomes just as critical. Right now, equity costs more than debt “relatively speaking,” said Mark McQueen, founder of Wellington Growth Partners.
“Entrepreneurs will always, I think, figure out which is the right solution for them based upon their own comfort level and their own expectations of what their companies might be worth three, five or 10 years from now,” he said.
Return to sustainability
Andrew Graham, co-founder and CEO of Borrowell, said it’s important to consider that the 2021 bull market was unique because of fiscal and monetary stimulus. This, Graham noted, was partly what led to businesses that really only functioned in zero-interest rate policy (ZIRP) environments.
“I think we’ll see consolidation occurring, [and] a lot more mergers and acquisitions.”Ben Bergen
Council of Canadian Innovators
“It wasn’t healthy to have a bunch of these ZIRP business models out there,” Graham said. “Those businesses ended up sucking up a lot of investment and talent and other things. And, you know, it’s probably better for all of us that rates return to a more normalized level.”
He added, “I think there’s hope for the ones that can find new business models or pivot the business, but for a lot of those companies, they’re not going to survive because we’re not going back to a world of zero interest rates.”
In 2024, founders need to focus on prioritizing profitability, said John Rikhtegar, director of capital at RBCx. He added that entrepreneurs might want to consider bootstrapping more, as venture capital doesn’t have to be synonymous with company building.
“The second thing which is important for founders to really understand is when deciding between price and value always go with value,” Rikhtegar.
Valuations can be fleeting, if 2021 proved anything, he said. “Prioritize early-stage investors and partners who are going to be the ones who will be in your corner, support you on your board, [and] provide a tremendous amount of value to you.”
On the flip side, firms that have cash reserves or have been able to generate profit will be in a better position this year to lead mergers and acquire other companies, said Ben Bergen, president of the Canadian Council of Innovators.
“I think we’ll see consolidation occurring, [and] a lot more mergers and acquisitions,” Bergen said.
While this could lead to some layoffs, it would also free up talent, he added.