CIBC Innovation Banking Podcast

Michael: [00:00:00] On this episode, we look at seed financing in Canada, look for the trends and find out what companies need to be able to scale in today's new normal. And we take a deep dive into the issue of gender parity among entrepreneurs. Crunchbase reports, historically, almost 20 percent of seed financings go to female founded startups, but new figures for 2020 also saw overall funding dropped to two point three percent. [00:00:26][26.2]

Michelle: [00:00:28] If you think of the immense wealth that's being generated in the technology sector, in the venture backed company sector, to have this 50 percent of the population on the sidelines, it just doesn't make any sense. [00:00:39][11.6]

Michael: [00:00:43] Hello, I'm Michael Hainsworth. The CIBC Innovation Banking podcast explores the world of startups, growth stage companies and late stage companies that have made a big splash in their industries around the world. We talk to the entrepreneurs who have made their mark thanks to a fearless passion for what they do. And through the lessons they've learned, we learn how to be better at running our own businesses, engaging our own clients and exploring new ways of thinking about the innovation economy. Michelle McBane is the managing director at female led firm StandUp Ventures. McBane invests in female led startups. We started our discussion by finding out what she looks for when she's looking at the leadership level for female led ventures. [00:01:28][45.4]

Michelle: [00:01:30] We named StandUp after the little girl standing up to the bull, the fearless girl, and we did that because she's everything you look for in a founder. She's confident, she's courageous, she's fearless, she's curious. And so at the seed stage, there's never a lot of data that you can base an investment decision on, there will be some early customers. They'll be a team that has a great idea and some domain expertize. And sometimes there's a product, sometimes there's not. And so at the end of the day, at the seed stage investment phase, you're really looking to see if these founders have the passion, the domain expertize, the ability to recruit customers and talent to join them on this crazy journey. [00:02:14][43.9]

Michael: [00:02:15] One of the lessons I've learned over the course of this podcast series is that failure is an option. Tell me about that when it comes to women in leadership positions. [00:02:24][9.4]

Michelle: [00:02:25] What I'm really excited to see is a whole cohort of women who've successfully raised seed fund and now raise larger series A, Series B financings. And so that is you know the track you're on as far as benchmarks of a company hitting the key milestones is you know if you're venture backed, if you're going to grow to a big exit or to an IPO, all those sort of things. So we're starting to see a lot of role models out there. We're also starting to see second time founders coming back and starting a new company. And so our last two investment were repeat entrepreneurs. And so the lessons they learned from their prior journeys are just, you can't put a price on that. And so it's really exciting to see that. You know, even as me as a venture investor, I've learned a ton over the past 20 years. Right. And you're learning all the time. But the ability to quickly recognize something is just something you get from experience. And so the value of a prior experience just can't be discounted enough. Having said that, you know, often it's first time founders who are coming in and starting a company for the very first time. And we want to make sure that we surround them with some really great leaders and the experience they need to kind of go that next step. And so that's the big part of the community that we're building at StandUp [00:03:41][75.8]

Michael: [00:03:43] Mentoring is something that's important not just in the industry, but I can tell, to you specifically, you've got a part time instructor role at Ryerson University. You must have seen a change in the ratio of male to female students in your entrepreneurship class. [00:03:57][13.4]

Michelle: [00:03:57] Absolutely. And just overall, there's a lot more women who are stepping up. The challenge in the past was the traditional profile of a tech founder was someone who looked and felt like the Mark Zuckerbergs of the world. Right. The coders and the hackers. And that, to me, is just one profile of a founding team. It's not the entire team. When we made investments, whether or not there were women around the table, we looked for a balanced team and we looked for people who had the business insight and the ability to operationalize what was being done. And so that's our call to action for any founder is that if you have a business idea, you can start a tech company, you can go find a co-founder to help you build what you're doing. Don't let the fact that you didn't go to Waterloo stop you from building your next big venture. [00:04:47][50.2]

Michael: [00:04:49] The gender gap in technology is reportedly growing, not shrinking. But funding is something that's been discussed as a key part of the solution. How so? [00:04:59][10.1]

Michelle: [00:05:00] It's a flywheel effect, there's some great studies that Carter did a couple of years ago, and they showed that on the cap tables, they called it the cap table, got only 10 percent of the holdings were by women, and that included angel investors and founders, and so if you think of the immense wealth that's being generated in the technology sector, in the venture backed company sector, to have this whole 50 percent of the population on the sidelines, it just doesn't make any sense. And so anything we can do to get a diverse group of founders into the game is, is a key priority. Diverse teams will outperform homogenous teams day in and day out. And from a culture point of view, we really observe that in our company, talent is a precious commodity these days. Recruiting amazing people to join startups is probably after getting funding and customers, probably the top three challenges that founders face. And so to be able to create a culture and live that culture and be a place that people want to be, the talent has a lot of options. [00:06:04][64.1]

Michael: [00:06:05] I was reading this fascinating piece from Crunchbase that showed that about 10 percent of venture dollars globally that went to startups went to startups with at least one female founder. But seed or angel rounds that went to women represented about 17 percent of funding. What does that tell you? [00:06:20][15.3]

Michelle: [00:06:21] Well, I mean, that the pipeline is probably growing. And I get really frustrated when I hear folks say, well, I can't find deals that have this profile. There's just so much insights and talent and possibility there. And so what you're seeing is basically the change that's been happening over the last three to four to five years, but they're not getting you know you saw a lot of hundred million hundred and fifty dollars million rounds over the past few weeks. They're not participating quite yet in those rounds. It's a journey. And I'm quite positive with the crumbs that are being laid for those companies to break out and raise that larger portion of funding. The other piece is we absolutely need more diversity from VC perspective. And I'm hearing that more and more from founders that, you know, the founders who have optionality and have the metrics to raise a Series A Series B, they're actually looking at the other side of the table and wanting to make sure that representation is important to the firm that they're going to partner with going forward. So the limited partners believe in it and are driving the process. The founders are asking for it. And so now it's up to VCs to start thinking about how they diversify. And again, back to my original point, diverse teams outperform homogeneous teams. So if you have you have a diverse pool of talent bipoc, gender, all dimensionalities around the table. You're going to cast a much wider net around the type of deals that you bring to your, to your firm. [00:07:50][89.3]

Michael: [00:07:51] Well, I was fascinated to learn from that article that industry wide, firms with a female partner are not more or less likely to invest in startups with a female founder, but a venture firm that was founded by women. That firm is more likely to invest in female entrepreneurs. What are female funders seeing in female entrepreneurs that others are missing? [00:08:13][21.6]

Michelle: [00:08:14] There's stuff that you just recognize that sometimes it's just intangible. And so I'll tell a story of one of the founders that I worked with closely. And there was this lovely executive who recognized herself in a founder in our portfolio. So, you know, a mom of three kids who started a venture backed company in her 40s. And that is just not the profile that fits what you would typically see, although it's a fallacy. The average age of a founder is actually forty two. So it's actually not what you think it is from a profile perspective. In my view, the ability to see and peel back the potential of an individual versus just kind of cookie cutter, you know, this is what it should look like is pretty powerful. And so in full circle back to that, this executive just found such inspiration in the founder that we back. She's like, if she can do it, I can do it, right? I think a lot of times and everyone has an imposter syndrome. But I think it's about really helping people break out of that imposter syndrome and do what they're doing. Listen, even for me, like I started a venture fund late in my life, even though I'd been a VC for 20 years and you know, I had some amazing people really supporting me, I had the track record to do it. And still, it probably took me a lot longer to do than the average VC would do to build their fund. But I also believe that we're having some really great successes. [00:09:38][84.4]

Michael: [00:09:43] When COVID-19 struck in 2020, everything shut down, but by the middle of the second quarter, venture activity was back. By the third quarter, seed financing was on track to bring us the hottest summer in years. With 2020 in the rearview mirror. We now know the CVCA reports it was the second highest year on record for VC dollars invested in Canadian companies. So I wanted to know, was this pent up demand or was there something else at play? [00:10:08][24.9]

Michelle: [00:10:13] I was actually in Florida when the call to come back home hit, and so we came back home and the first thing I did was go around our portfolio. So to your point, around pent up demand, everyone put their pens down around any kind of new deal. Right. And everyone wanted to make sure, triage the portfolio companies that were obviously in retail or hospitality or travel who were fundamentally hit more than some in the other businesses where we have a supply chain data company. They, of course, accelerated through COVID, but that took a little bit of time to work its way through the systems. So when we first came back say in March, April, it was 100 percent about supporting our existing portfolio, you know, finding any funding program and ability to give them the ability to have 12 to 18 months of cash or more to be able to either ride the pandemic or if their business was accelerated through the pandemic, to be able to be in a position to grow through it. And then slowly deals that had been put on pause started getting done. So in the other portfolio I work with, but there was actually four acquisitions through the summer and so the corporate partners were also seeing a great opportunity to add some cash on hand if they were public to use that cash to bolster their organizations. And then September to now I mean, the public markets took off and everything else followed from there. And so everyone's quite interested. I've never been in such a busy market. We've made and we we're a high concentration fund. We're not a high volume fund. We typically do four investments a year. We've made five new investments since October. And so it just speaks to the opportunities that are out there. And we're trying to make sure that we're still holding true to our principles. But there's just been some fabulous opportunities. And of course, there's some fabulous founders who may have been on the sidelines thinking about starting their second venture, who are seeing deals coming together on terms that make a lot of sense for them. So it's an incredibly exciting time, but it's been really the busiest time, without a doubt. But because the tech companies, for the most part and 80 percent of our portfolio is pure play B2B enterprise, those companies are really seeing their growth accelerated through digital transformation. So you're seeing all of that funding kind of pulling out in those businesses, as I said, being fundamentally changed, seeing the potential for doing things virtually. And there's comfort around that. [00:12:42][149.2]

Michael: [00:12:43] What was fascinating to me about the VC data from 2020 was that late stage investments accounted for most of that investment. But the record year, which was just the year before, was driven by investments in early stage companies. It felt like this was a safety play, but I don't understand that because it seems to me that it would be easier for a seed stage startup to weather COVID than an established player that needs clients, that needs customers immediately and could very well be losing them. [00:13:12][28.9]

Michelle: [00:13:12] I mean, that's a great observation. I think you have to look and peel back and look at the specific companies that received the funding too, so in one case, this Top Hat, it's education right. And so that's just going to be doubled down. The other one is Weathsimple. You know riding on the tailwind of all of the trading that's going on in the Robinhoods of the world. You know, they were really well poised for COVID. So huge opportunities in a few select deals. I think those deals got bigger. I'd have to look to see if the number is actually bigger. But the dollars going into those select deals was, of course, very large because there's some pretty big pools of growth capital. And that speaks to the maturity of the sector too, you know, like four or five years ago, there was no growth capital in Canada. And now you're seeing very large pools of growth capital coming together. And that's from a number of parties. I think, you know, there was one large pension fund whose data came out a little while ago and the CEO claimed that their numbers weren't what they should be because they hadn't had enough exposure to tech. So people are catching up on that side and putting pretty large pools out there to really double down. [00:14:19][66.2]

Michael: [00:14:19] I wonder, though, what comes post COVID. B2B enterprise software saw some strong growth because of, to your point, about whether it be work from home or just trying to do things distance wise. Companies that leverage that power saw some tremendous growth. What about as we see the light at the end of the tunnel, are we going to see a slowing of that growth or is this all part of the new normal? [00:14:43][23.3]

Michelle: [00:14:44] I mean, that's the million dollar question, or multimillion dollar question. I was listening to a podcast of a very recognized fund manager in the US, agreed with everything he said, but it closed it like evaluations are going to take a big hit through the fall. And of course, we saw just the opposite. And so I think if COVID's taught us anything is to be resilient, to ride through these waves because it's impossible to predict what's going to happen. What I will say is there has been some fundamental changes. And will things slow down a bit? Likely, but has, in some sectors, has there been a fundamental move towards adopting these technologies at the enterprise level, at the consumer level. I absolutely believe so. [00:15:25][41.4]

Michael: [00:15:28] It's often said that if a startup can perform well in tough times, it will thrive in the good times. With 2020 thankfully in the rearview mirror and that light at the end of the COVID tunnel appearing to brighten. So then what are the unique needs of companies looking for seed financing today as we come out on the other side? [00:15:44][16.4]

Michelle: [00:15:46] So they have a lot of options now, which is fascinating. There's a lot of angels now which you didn't see three, four or five years ago. You know many of them are coming out of companies that were acquired like Wave, Shopify, a whole group of companies. And those entrepreneurs are fabulous angel investors and they're contributing where they can. And that, to me, is a flywheel of a really healthy ecosystem. Right. You know, that's kind of the phase two of having a sustainable technology ecosystem here in Canada. So as a founder, you have options to bring the right people and the right amount of capital around your venture, a decent price to be able to be successful and to hit some key milestones. And, you know, venture is a traditional take in the right amount of money, hit the milestones and go to that next phase. And it's a really great way to ensure a certain amount of discipline into how much money you take, the pricing and the next piece like it's all very, very set. And people are, for the most part, aligned with that. So founders really have the optionality to bring in the money at the right price, the right amount and with the right partners. And so that's really exciting to see. You know, there's some really, really great players out there, both angels and seed stage funds that are pretty active. The seed stage pools of capital are also getting larger, which allows the fund to go a bit deeper in their winners. And that's just going to continue encouraging people to stay at the seed stage, the challenge is the business model at the seed stage or seed stage fund is a bit flawed, because you don't always have the ability to put enough money at work in a deal, so now with the deals that are a bit larger. You have the ability to do that and continue playing. you know most funds will kind of transition and become more of a Series A fund as they build a bigger pool of capital. Otherwise, they have to make a lot more number of investments in different portfolio companies. So it's a dynamic time, I think is my key takeaway. That's the great part about being in venture and playing in the startup world. My old partner would call venture investing a roller coaster, you know the highest of highs, the lowest of lows and sometimes on the same day. And so if I chat with anyone about doing a startup or working at a venture fund, I think that's the first thing I'll say to them. There's nothing predictable. You have to be able to go with the flow. [00:18:07][141.1]

Michael: [00:18:09] So then what would you say to a woman graduating from Ryerson today who had been in your program with an eye to your field? [00:18:15][6.4]

Michelle: [00:18:16] I would say it's the best job in the world. It's a place where no day is the same. It's a place where you will learn every day. I'm still learning all the time, both from a deal structure, point of view, financing, point of view. Also, it's a great place to see best practices across a portfolio of companies. So if you went to a startup, you know, you'd be working closely with that one company and you'd learn their view and how they work if you're in a portfolio ventures. And typically at the seed stage, we work quite closely with them from seed to series A, so we'll be observers and board members and interact as required with the company. You get to see across a portfolio of ventures what works, what doesn't work. So again, you're always learning. You're going to learn, you know, most funds will have a bit of a thesis, we're a generalist fund, we focus on healthcare and B2B enterprise, but we don't say we're fintech, we don't say we're supply chain. We are across verticals. And so you get to learn about new businesses every day. The people are fantastic. I really miss them all. I'm miss seeing people in person. I think I'm looking forward to the time that COVID is done. And, you know, we can maybe not at the same pace because it was a little crazy, you could be out three or four nights a week if you wanted to, but at a reasonable pace to start collaborating in person a bit more, and that piece, while we've managed through Zoom to kind of hack it. There's something to be said for that face to face time with your colleagues and your peers. [00:19:45][89.2]

Michael: [00:19:46] Yeah, I look forward to a time when I don't have to worry about the mute button anymore. [00:19:49][3.0]

Michelle: [00:19:49] Yeah, exactly. So I think if you can't be a specialist, if you're going to go into this role, you have to be able to remember that your client is the founder at the end of the day. If the founders are successful, you'll be successful as a fund and you know your LPs are equally important, but the LPs will only reinvest if your fund is successful. And so that downstream means that your portfolio companies have to be successful. So we double down on doing our best to contribute in any way we can to the success of the venture. [00:20:24][34.6]

Michael: [00:20:25] Michelle, fascinating stuff. Thank you so much for your time and insight. [00:20:27][2.1]

Michelle: [00:20:28] Of course it was a pleasure. [00:20:29][0.4]

Michael: [00:20:31] Michel McBane is the managing director at StandUp Ventures. This has been the CIBC Innovation Banking Podcast where we learn the secrets to innovation, economy success from the entrepreneurs who are paving the way for the future. If you haven't already subscribe on Apple Podcasts, rate the show and tell us what you think with a review. I'm Michael Hainsworth. Thanks for listening. [00:20:31][0.0]

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