The “ego raising” that populated last year’s venture capital boom time is over, according to OMERS Ventures partner Laura Lenz, who says people are now more skittish to invest amid turbulent market conditions.
Lenz sat down with BetaKit editor-in-chief Douglas Soltys at the SAAS NORTH conference this year to give insight into the changing fundraising environment from the perspective of a VC, highlighting the importance of looking at a startup’s fundamentals.
“People were focused on growth at all costs, now investors are looking at growth with profitability.”
– Laura Lenz, OMERS Ventures
Core metrics like the composition and quality of revenue didn’t matter last year, said Lenz, as the industry was generally focused on growth at all costs.
“We weren’t going down the income statement below revenue, we weren’t looking at gross margin,” she noted. “The industry was funding businesses that had negative gross margins.”
Lenz said the “ego raising” that she saw in 2021 can be blamed on both sides: companies wanted to raise bigger rounds, and VCs have their own fund dynamics for which they want to put a certain amount of capital to work.
“What the outcome of that was not looking at the fundamentals, not looking at capital efficiency, building a go-to-market motion before you had product-market fit, not having your sales reps be efficient,” Lenz emphasized. “I hope there’s a pulling back on that, I hope there’s looking at numbers in a much more granular way.”
As markets tighten and companies get caught in the crosshairs of the economic downturn, Lenz says that investors are now looking for growth with profitability, citing metric examples like gross margin, EBITDA margin, and net income margin, depending on the stage of the business.
Though the state of the economy remains unfavourable, Lenz says there is still optimism coming from VCs, but with hesitancy built in.
“There are great companies being built in Canada despite the current market conditions,” Lenz notes. “Is there uncertainty in interest rates? Is there geopolitical uncertainty in crypto? Absolutely, but I don’t think that excludes businesses with fantastic fundamentals from raising capital.”
For its part, Lenz says OMERS is telling its portfolio companies to give themselves 24 months of runway as insurance for uncertainty. She claims 70 percent of OMERS’ portfolio has more than 24 months of runway.
“The OV portfolio is in a good position because we’ve got great investments, and they have either raised very successfully in ‘21 or they have reduced their burn and are looking at profitability,” Lenz says.
For the BetaKit podcast, Lenz speaks more to businesses getting back to fundamentals, striking while the iron is hot to grab tech talent due to mass layoffs, enabling employee retention through repricing stock options, down rounds, and the return of pay-to-play provisions.
Featured image from BetaKit.