CIBC Innovation Banking Podcast

Michael: [00:00:00] On this episode, we look at the unique challenges,  venture capital experiences in funding startups and why we have so much  trouble in this country, scaling from a million dollars in revenue to 50 million  and beyond. [00:00:12][12.1] 

Bob: [00:00:14] If you think about helping automate under automated  business processes and partnering with great entrepreneurs? That is a  unifying theme across all three decades. It's never changed. It will never  change. [00:00:25][11.1] 

Michael: [00:00:28] 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.  Bob Nye knows these challenges. As the general partner at JMI Equity in  Baltimore, Nye has helped cannuck companies overcome their hurdles and  grow into unicorns with a billion in revenue and more. Most recently with the  charitable donation management platform Benevity of Calgary. JMI has been  around for 30 years. It's seen the rise of the personal computer lead to the  dominance of that little glowing rectangle in your pocket known as a  smartphone. So I began our conversation by asking what's evolved over  those three decades? [00:01:36][68.3] 

Bob: [00:01:40] You know, early on, most of our investing would have been  in one person. You're investing in an entrepreneur and really an idea often  and typically that entrepreneur will have come from an industry where they'll  have domain. They'll have the knowledge of what a customer will need. And  you're backing them to go try and build a product to address that, hopefully  get a customer to see if it works. Could we get others? And that's what really  what venture looked like 30 years ago, if you fast forward to today, and  certainly for our firm, the amount of capital we're investing, the businesses  are going to be much bigger when we partner with them. So our average  company investment is thirty five million of revenue growing over 30 percent.  That company has could be thousands of customers, lots of proof points, the  whole team. So at this point, we're taking what we call execution risk. The 

market and the product development have been proven. Now we need to go  execute together with that entrepreneur, that's very different than earlier stage venture where you're taking all the risks, is the product good, is the market  interesting and is this entrepreneur executing well? Can we help? Very  different profile over time. The nice thing and the continuousness for us is it's  all enterprise software. It's all it's ever been. And if you think about helping  automate under automated business processes and partnering with great  entrepreneurs, that is a unifying theme across all three decades. It's never  changed. It will never change. [00:03:12][91.5] 

Michael: [00:03:13] And 20 years ago, you decided Canada was a  destination for your investments. Why? [00:03:17][3.7] 

Bob: [00:03:18] It felt like a secret back then. There was a lot less  technology, a lot fewer software firms in Canada, less capital, certainly. We'd  see companies up there. There was a number of very early successful  businesses, but we found a great company, a good leader, and that's what it  always is. You find a good company that's being successful in an area. You  go decide whether you think that's compelling. Business happened to be  based in Toronto, which is very natural. Since then, we've invested in three  provinces, over 15 businesses, well over five hundred million of investment.  It's not a secret. If there's a great software company in Canada, you're  competing against the best investors in the world to be the capital provider for that company. It's completely changed over that time period. [00:04:03][45.2] 

Michael: [00:04:03] So then what do you see as the unique challenges of  investing in Canadian companies? [00:04:07][3.4] 

Bob: [00:04:08] Early on, the products, technology, great technical talent  would build really good product. Product that solved needs that worked well,  that was easy to implement. And Canadian companies often had a harder  time figuring out how are we going to go to market? How are we going to sell  this product? Often that market's in the US. So great technical talent, good  product, less experience in sales and marketing. And that was very true  twenty years ago. I'm not so sure today. There's a lot of really good  executives, sales executives, marketing executives, talented operators in  Canada today. So I think that narrative has changed a ton over that period of  time. But early on, it definitely was a question, you know could you bring in  talent from the US that could help that? Or would you build additional offices  in the US to drive, go to market? You'd have development R&D in Canada  and you figure out distribution in the US. That's a lot less likely today. We  have a company in Calgary, a large company, no one's talking about, oh, we  need to build US headquarters to do distribution and sales or we need to 

have other arms to do that. That's not a conversation that's typical. It would  have been twenty years ago. [00:05:27][78.9] 

Michael: [00:05:27] So then how has the story changed? What's new with the story or is it a function of it's a virtual border, not a physical border anymore,  and there really isn't a difference between investing in a Canadian company  versus an American? [00:05:38][11.3] 

Bob: [00:05:39] Great point. So I think it's two different things. What you just  said there is one hundred percent correct. But I would go back one step,  which is it's been a success. There have been a lot of successful companies.  It's a much more mature market. Those folks go on to do other things. I had a  great run at the software company, I'd now like to go found one and create  wealth for my family and create opportunity and I'll go try it. And then the next  one and then I get someone who's done it before. So it's an ecosystem. And I think if you look, I mean we have multiple companies with approaching a  thousand employees and we are certainly not the only one. So that  ecosystem has matured. People see the success, their ambitions grow. Wow. We could build a much bigger company. We don't have to sell early. So I  think that is absolutely something that's changed. Second point you made is  the virtual border and I, you know, I travel a ton to Canada, obviously, during  the pandemic, it hasn't been the case, but somebody from JMI is in Canada  every week, and so we look forward to being able to get back to that. I think  it's incredibly fluid. There's not really a difference to me. If I was going up to  Boston or I'm going to Toronto, it's the same flight time. It's the same process, it's the same cultural environment. I totally respect that there are differences.  But as a business person partnering with companies, investing, I don't find it  difficult at all. And I don't really hear that talk about like you might in Europe.  You know, if they're a US firm and you're investing in Paris, you're investing  what, you're going to be a lot more sensitive to those issues and you could  get them right, you could get them wrong. When we're in Canada. It's very  seamless. I do view it as a virtual border, and I think that only is going to be  increased now. We're all used to working remotely. It's gotten much easier. I  think it's going to be a positive for Canada. [00:07:27][107.4] 

Michael: [00:07:31] Helping a company grow into a unicorn, or a narwhal as  the Canadian equivalent might be, is tough and some unique challenges in  the Canadian mindset make it tougher. But recently, Calgary's Benevity  pulled it off. Its CEO even announced the milestone to his employees by  wearing a unicorn costume. [00:07:48][17.4] 

Michael: [00:07:53] I think you sort of touched a little bit on this and intimated about your relationship with the cloud software startup Benevity. Tell me 

about that relationship [00:08:01][7.5] 

Bob: [00:08:02] What a wonderful business. We're so proud to have been a  small part of it. Bryan de Lottinville, the founder, obviously became a  business partner, has become a great friend. I'll never forget. I was in Florida  on a trip at the time and we were looking in that industry and one of our  associates got Bryan on the phone. I thought it was so interesting what they  were doing and said, don't worry, I'll have a partner there for lunch tomorrow.  He called me and he said, great news, I've got it, just an awesome company,  you're going to have lunch. I've got you set up with the CEO founder  tomorrow it's going to be great. I said, that's great. Where's the company? He  said Calgary. I said, I'm in Florida. I don't know if I can get to Calgary  tomorrow for lunch. And luckily I figured it out because it ended up being an  incredibly important meeting for us. We met Bryan and Bryan had been a  multi time successful operator in many businesses, but this had really been a  passion project for him. He and a number of his co-founders had built the  business to help try and take friction out of donating money and donating  goods and the micro donation process. And they build a platform around that. And he jokes, he does it much better than I will, but he jokes they'd still be  looking for customers to use that platform today. Luckily, they found a number of customers, Nike being an early one, who figured out that it would be really  neat to pair their donation capabilities with the employee base and a  corporate mission like Nike's. Soon thereafter, Microsoft joined them and it  was off to the races. When we partnered with the company it was right  around five million of revenue. And fast forward you know, only five years. It's  well over one hundred and growing incredibly quickly and just such a  wonderful thing to have been a part of. [00:09:47][105.4] 

Michael: [00:09:48] de Lottinville was recently quoted as saying employees  cried when they were told the company reached unicorn status of a billion  bucks because that rarely happens. Why does that rarely happen?  [00:09:59][11.6] 

Bob: [00:10:00] Unfortunately, when you found one of these businesses, the  numbers are undeniably against you. If you look at the studies and I don't  have the numbers exactly, but the number of businesses that make it to one  million of revenue and then five and then 10 and then 20 and then 50, it is  incredibly small, I mean incredibly, incredibly small. And just because you've  made it to 10, it doesn't mean that you're magically going to make it to 50.  The fail rate, not the fail rate, but the inability to keep those growth rates up.  And there's a lot of reasons why that happens. Amongst them are the market  size, the ability to scale the business. You've got to be able to grow a team.  One person can build a product and service a couple of customers. Well, now

I got build a hundred person company. That's a much different skill set. I've  got to attract talent. I've got to operate differently. Very different skill sets. And so there's a lot of reasons that are stacked against you and obviously  competition being one we haven't spoken about. And so for a company to  make it to the size and value they have, it just means so many things have  had to go your way and you have had to execute so well against that  opportunity. It's rare that it's not both. You have to have picked the right  market and the right product and you have to have got some luck and then  you have to have gotten it perfectly. And that Venn diagram of all those things crossing, it's just rare. Those employees should be incredibly proud. And  there are some entrepreneurs that will own one hundred percent of the  company the day it sells. And that's one mindset and one philosophy. But  when you're building these growth companies, it's so neat. Bryan is an  incredibly generous person and the amount of people's lives who've been  changed by being an employee and team member, at Benevity is amazing.  And I suspect that's one of the things he's most proud of. [00:11:50][109.7] 

Michael: [00:11:51] It is often said, though, the Canadians are great at  building startups but fail at scaling globally. I wonder if you touched on one of  the issues, and that is that it's a different skill set when you're talking about a  company with a million in revenue versus 50 million. What's the solution?  [00:12:05][14.2] 

Bob: [00:12:06] It's hard. The traits and skills and characteristics of an  entrepreneur that make them successful early are often, sometimes the polar  opposite of what make you successful later. And when you're early, if you're  going to found a business, I mean, no one thinks you should do it. No one  thinks quit your really good day job that pays you well with stability and health care benefits and mortgage your house and work 20 hours a day. So it's  against all odds. You have to not listen to people. You have to be dogmatic.  This has to succeed. None of the noise is going to get in my head. You have  to have incredible customer centricity. We're going to do everything, maniacal focus on customer success. I will do everything to make these first few  customers successful and make them reference customers. And I will also  just hire any good people I can find. If you're a talented, high integrity, hard  working person, come join my mission. I will figure it out to get anyone else to work for me and then would evolves over time as the company starts to get  bigger, starts to get real customers, it starts to get sizable employee base and those skills start to flip. Now, I need to listen to all these people, less  dogmatic, my ears, need to listen out, not in. My vision needs to go out, not  in. I need to manage people. Now, we have all these people and they want to  know what to do. It used to just be me or the people right with me, and  instinctively they know what to do. So now all these people need 

management. And now, probably most importantly, as the company starts to  orient functionally. Early on, everyone's doing everything and everyone knows what's going on. And then over time, you start to organize. We're going to  need sales, marketing, R&D, customer success, finance, so we get  functionally oriented. And then what happens is founders aren't close to it all.  You can't be in touch with everything at that point. And so the key then is  you've got to go get great functional leaders. And what's tricky about that is  those people then know much more ideally than the founder CEO about their  function. Otherwise you wouldn't hire them. And so now you've got to cede  some authority. We've got to let them go, do what they need to do in that  area. And that's hard because the instincts of the entrepreneur is what has  gotten them there. That's what's created the success. And now I'm potentially  going against my instincts because things are proven or it's what they've  done before and and probably 70 or 80 percent of it's right. But some of it  won't be right for their company. And that's hard to know which part. So  there's a lot of reasons. It's a difficult path. It's a rare person that has that self awareness to be able to turn on the traits that made them successful in one  area and make them successful in another area being different.  [00:15:01][174.4] 

Michael: [00:15:02] It sounds like you're talking about the founder's dilemma.  When is it time to step aside and let somebody else manage the day to day or what have you? For you as an investor, how do you sniff out when it's time for that founder to make that move? Step aside, appoint a chief executive officer  or what have you? You have to take that into consideration, I imagine, when  

deciding whether or not to open your wallet. [00:15:26][24.4] 

Bob: [00:15:27] You know, these are akin to marriages. I mean, this is a  serious financial partnership. We certainly take it very seriously. We represent endowments, pensions, nonprofits, money. And I like to think that the  entrepreneurs we partner with take it just as seriously and respect us, too. So it's a very serious endeavor you're about to embark on together. And with that in mind, one of the things which I try and do very early because we're all just  humans, is try and take a lot of the drama out of it. You know, I think what  happens for founders often, and I completely understand it, is it becomes a  very traumatic thing. Right. Am I going to be the CEO or not? It's very binary.  And we try and do early is have that conversation early. What is it that you  like doing? What do you enjoy? People tend to enjoy things they're good at  and they tend to not so much like things that they're not good at and so try  and have those conversations early when there is no obvious answer. So  there's no agenda. It's just setting the framework for how we'll think about this together over time and setting it up so you can have checkpoints. Great. Let's revisit the succession planning, every company should be thinking about that 

and let's revisit it every twelve months or six months, whatever the  appropriate thing is for a company like that. And mainly, I've often found it's  the entrepreneur who comes to us with I'm really enjoying this. This is going  great. This area I'm struggling with. How are we going to compliment me,  solve this, grow the team and some percentage of the time that might be  them moving to a chair person role where some percent of the time it's we're  going to get a great operational leader to help compliment you. There's a  wide range on that. So there's no one answer. But the main thing is if you can make it an open, honest conversation, I think it goes much better for  everyone. [00:17:24][117.5] 

Michael: [00:17:27] To the casual observer, the recent Canadian Venture  Capital Private Equity Association announcement was shocking. Despite the  pandemic, or perhaps in part because of it. 2020 turned out to be the second  best year on record for investing in Canadian related tech startups. But it was  no surprise to Nye, he watched the sluggish second quarter amid the March  lockdown lead to an accelerating of activity over the summer and ultimately  the strongest year on record after 2019. According to the CDCA, 2020 turned  out to be the second best year on record for investing in technology related  startups in Canada. Does this surprise you [00:18:07][39.3] 

Bob: [00:18:08] In the last two weeks of March, and the first two weeks of  April, it certainly would have surprised me for any investor. If you say you  thought 2020 was going to be a great year in that period, I'd be really I'd  question most things you said. Obviously, this is a incredibly traumatic time  that's affected so many people, many people incredibly severely. But on the  technology specifically, the ability to stay productive remotely and continue  helping your customers and continue providing value. I think it really shined a  light on it, and so the trend of software becoming ubiquitous in everyone's  business, I think only got accelerated by this. So it's probably the same curve  we were on. COVID ironically accelerated it in many ways. And there was  obviously a couple of months there that were very difficult. But it caught up  quickly and it wouldn't surprise me if 2021 wasn't a continuation of the second half of 2020. [00:19:09][60.9] 

Michael: [00:19:09] A lot of that interest revolved around ESG based  investing. In your mind, what's the secret to a successful ESG based  investment? [00:19:18][8.4] 

Bob: [00:19:19] We're not an impact fund specifically, so there's all kinds of  funds now that that is their mission. That's all they focus on. It's certainly  something we spend a lot of time thinking about in any given company. And,  and I've spent a lot of time with folks who dedicated their careers to this. I 

think there's a lot of different ways to come at. And if there's one thing I have  observed that I've really respected in watching them and then the investments that we've made that have been ESG oriented, it has been clarity on what  they're trying to do and what they're not trying to do and what their mission is  and how to define success and how to be as ambitious as possible about that success. That can be a tricky thing. You know, we're trying to do good. How  do we make sure that we're trying to do that as aggressively as we can? And  the companies that I've been involved in that have done a great job of this,  they've had that. They have had a competitive instinct and want to succeed at what they're doing in a very significant way. And that, for me, I think, has  really been correlated with success. When it's harder to see it's a lot of  different areas I suspect that's harder, so it's certainly one unifying theme.  [00:20:35][76.5] 

Michael: [00:20:37] You said something really interesting that I suspect  applies not just to environmental, social and governance based investing, but  investing generally is you want to know that this company knows what they're  trying to do but also knows what they're not trying to do. [00:20:53][15.8] 

Bob: [00:20:54] I've stolen that from our founder, Harry Bruner, who's been  doing this for as long as this industry has been around. It's incredibly powerful and the best operators I've been around just have a phenomenal sense of  what it is we can accomplish, how we're going to go accomplish it, what it is  we're not going to accomplish, and a maniacal focus on not doing that and  how to create focus. And it can't be many things like it just can't. It's three  things. Maybe it's five at the most, you know, and if it's a younger growing  company, it's fewer. You need a lot of management capability to go after  many things. And I think it's it has a good way of not getting distracted. We  don't need a student body left. We don't need student body. Right. That's  hard for organizations. One focus I wake up every day. I know what I'm doing. It's very highly correlated with success. So often, you know, the companies  we're involved with, they are not at all lacking for ideas or product initiatives or new market initiatives or growth ideas. The exercise is often pairing those  back. So of these 12 great things, which three are we actually going to  execute on? Infrequently do I meet bad people in this industry, generally very  good people. And but where you have misfits in the company and the  investors is often on this same issue, is alignment. So how has that investor  had their success historically? What is it that they're driven by? What's their  plan? What's your plan? How have you had your success historically and  maybe it hasn't been at the company, maybe it's been in your prior jobs or  other career areas, and if your mission and their mission don't align even in  great situations, often that can go awry and well-intentioned people can end  up in difficult positions. And the opposite is incredibly powerful, really smart, 

talented entrepreneurs working their tails off, partnered with people who've  seen it and done it before and made every mistake in the book and know how to help them avoid those. That's really powerful. [00:23:04][130.1] 

Michael: [00:23:05] So Marc Usher at CIBC Innovation Banking tells me you  guys go back decades together. [00:23:09][4.1] 

Bob: [00:23:10] He and I were chatting and it's further to the discussion we  were having before around founders, and I've seen Mark in so many different  situations. I think one of the things you have to realize in all of this investing, if you're advising like CIBC or helping bank companies, is all of this exists, this  whole ecosystem exists because of these entrepreneurs. They put it all on  the line, to build one of these companies, and we talked about it before, it's  against all odds and against what everyone's telling them to do. And I think  you have to have a great respect for that and come to those relationships,  understanding it and appreciating it and knowing that everything that comes  after, which is so much great job growth and shareholder value creation of  wealth generation for people and pension funds and insurance companies,  families and investors all starts because in the end, one person had an idea,  figured out how to help a customer, figured out how to do that twice, then  figured out how to build a product around it. All the different things it takes  probably mortgaged their house along the way. It's something you have to  have great respect for, and I think you have to treat with a lot of trust and  integrity and I know Mark shares that and I've seen him share that. But it's  one of the reasons we love working with CIBC. But I also think it's a it's a  really good thing for investors to always remember when they're around these types of businesses and and trying to have the privilege to work with them.  [00:24:36][86.1] 

Michael: [00:24:36] Bob, it's been a privilege having this conversation. Thank you so much for your time. [00:24:39][2.7] 

Bob: [00:24:40] Absolutely happy to do it. We love talking about Canada, it's  been an unbelievable relationship for us. So I look forward to the border  reopening. [00:24:46][6.8] 

Michael: [00:24:49] Bob Nye is the general partner at JMI Equity in  Baltimore. 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. [00:24:49][0.0] 

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