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Issue link: http://digital.canadawide.com/i/1477631
the likelihood things don't turn out as pro- jected. Long-duration assets such as bonds maturing in more than 10 years, regulated utility stocks and raw, undeveloped land are highly sensitive to rates because that payoff is back-loaded. That's even more true of equity in early- stage technology companies. You're invest- ing now for profits that will only materialize (if at all) five, 10, 20 years from now. So if inflation starts running at 5 percent (as it's doing now) year after year, that future pay- off is worth less and less in today's dollars. And should risk-free assets like treasury bills and guaranteed investment certificates start paying a higher rate of interest, inves- tors are going to consider reallocating more of their savings in that direction, reducing demand for venture stakes still further. Investors don't fear imminent interest- rate hikes so much as uncertainty over the medium to long term—whether rates could keep on rising afterward. If so, the discount rate, or present value of future profits, would rise more steeply. "All these high-growth companies that are currently unprofitable, when their future profits become less valu- able in today's dollars, that hits their valua- tion harder than companies that are already close to break-even," Knapp says. "Canalyst is a capital-markets-focused business," says CEO Hot. "We're acutely aware of the fact that long-duration assets tend to be more valuable in low interest- rate environments." But Hot, who net- works informally with other local tech entrepreneurs over poker games, tennis and WhatsApp groups, doesn't consider the VC financings at peak valuations last year money ill spent. "Of the big rounds announced by Vancouver companies, I wouldn't put them in bubble territory," he says. "Those are good businesses." It's (a little) different this time There are factors working against a whole- sale retreat of venture finance, especially in B.C. The proliferation of anchor companies like Clio, Dapper Labs, Galvanize and Tru- lioo has increasingly put the province on the map of technology finance, says Randy Garg, founder and managing partner of Vancouver venture and growth financier Vistara Growth and a 28-year veteran of the local VC scene. The province is also broadly represented with champions and special- ized investors not just in information tech- nology but also in cleantech, alternative energy and biotech. One legacy of the 2021 VC boom is that several startups, now flush with cash, are in a position to make strategic acquisitions themselves to accelerate their technology development and fortify their market posi- tion. Vancouver identity verification com- pany Trulioo announced a deal in February to buy Danish software developer Hello- Flow ApS, reportedly for more than US$50 million, after itself raising an eye-watering US$394 million last June. Other venture- backed B.C. companies to make acquisi- tions in recent months include Certn, Clio and SemiosBio Technologies. And while valuations may come down, there are good reasons VC won't go all the way back to pre-pandemic levels. For one, there are ever more technology founders and early investors with significant sums in their bank accounts following premium- priced exits, Pacella says. According to data company Pitchbook, "there's US$220 billion that has to go somewhere," she says. Inflation has affected startups' capital needs, too, Garg notes. "The $1 million that used to get you eight engineers now might get you four, so your costs have gone up dramatically," he says. So they need to raise more money than they used to. Also, venture capital has become an essential asset class, both for governments looking to develop their economies and investors starved for growth in the main- stream stock-and-bond markets. "These days, everyone's a VC," Pacella says, among them pension funds, sovereign wealth funds, corporations and hedge funds. There is a risk that some of these newer entrants to the marketplace could get spooked by this year's pullback and vacate the space, but she doubts it. "Twenty to 30 percent growth is impossible to find in the public markets." As for the inf lation threat, it's worth noting that the VC ecosystem as we know it found its feet in the 1970s and '80s, a time of astronomically high inflation and interest rates by today's standards. (Before that, most innovation was bootstrapped or spun out fully formed from big-busi- ness "skunkworks" and government or university labs.) Investors new to the venture space have to understand that it's not a liquid, quarter- to-quarter performer, though. It can be a multi-decade commitment. In a blog post last fall, Pacella recounted the 17-year jour- ney of Burnaby-based Teradici Corp., a port- folio company under her purview both at Pender and earlier in her career at the Work- ing Opportunity Fund, to its acquisition by HP last year. Teradici worked on some of the "hard" technologies for remote server access that went into making working from home seamless and the entertainment streaming services we take for granted possible. For the company's investors, the pandemic fur- nished a golden opportunity to go out on top, but only after an excruciatingly long wait. "I feel fortunate to have the money in the bank and to have the runway to actually do the things we set out to do," Gandeeva CEO Subramaniam says. More than just a cycli- cal tech downturn, he faced the greater challenge of translating basic research into something commercial interests could get behind. UBC's leap of faith in his work was key to getting the infrastructure set up and attracting the attention of VCs and pharma- ceutical companies, he says. "Vancouver is a place where things can happen," Subramaniam adds, sounding more like a tub-thumping booster than a recent arrival. "What if this is the new Silicon Valley? Why don't we have that mindset? I wish there was more of this thinking." n "All these high-growth companies that are currently unprofitable, when their future profits become less valuable in today's dollars, that hits their valuation harder than companies that are already close to break-even." –HANS KNAPP, CVCA board chair and Yaletown Partners co-founder 2 0 2 2 V E N T U R E C A P I TA L R E P O RT 34 BCBUSINESS SEPTEMBER/OCTOBER 2022