Techopia-EY Insights op-ed: Balanced growth needed to entice investment in local tech sector

Editor's Note

This is one of the articles in our new publication, Techopia-EY Insights. Check it out here.

Markets are volatile, but capital remains strong and stable in Canada. This environment holds a lot of opportunity for Ottawa’s tech businesses — if they’re willing to shift perspectives and demonstrate value based not on growth at all costs, but rather on balance. 

Why is volatility shifting the investor focus to non-traditional metrics? 

Canada’s tech capital markets are resilient. Here in Ottawa, we’ve seen considerable growth and expansion across the sector — even over the past 12 months, as volatility became the word of the day.  

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Valuations and leverage multiples have certainly come down. This has created significant implications for financial sponsors looking to do deals using leverage, as well as strategic buyers who need to justify making accretive acquisitions.

At the same time, the venture capital (VC) that seemed so readily available for companies in Ottawa and elsewhere last year is certainly more limited in today’s dynamic environment. Debt capital providers are becoming increasingly selective and cautious. This is particularly poignant when we consider the fact that much of the local and domestic tech investment has come from the U.S. in recent years. 

It wouldn’t be surprising to see VC backers in San Francisco and other parts of the U.S. continue to scale back the kinds of Tier 2 cluster investments that had become commonplace in Ottawa, Calgary and other Canadian centres in favour of more scaled assets in Tier 2 buckets. Put simply, tech companies here must now compete for what could quickly become a much smaller share of international investments, as U.S. lenders assess a growing range of choice at home. 

Taken together, these shifts bring a higher threshold around traditional deal priorities — think due diligence and cash flow generation — as well as renewed emphasis on an additional value driver: the ability to mitigate risk and thrive in spite of uncertainty. 

What does that look like? As lenders become more selective with capital deployment, Ottawa businesses seeking investment will have to demonstrate exactly how they plan to dial down risk and navigate an operating environment that continues to evolve day over day. Investors today are looking beyond organizational fundamentals, business plans and structures for a clearer value proposition built around resilience and agility. 

On the equity financing side, that dynamic means the focus has pivoted from growth at all costs to the importance of balance — profitable and sustainable growth. 

Ottawa businesses that embrace this moment to double down on a strong business plan that seamlessly integrates risk mitigation can set themselves apart in the eyes of increasingly selective investors and lenders no matter what economic headwinds emerge next. 

How can Ottawa’s tech businesses transform today’s uncertainty into tomorrow’s success? 

Focus on capital preservation and operational efficiencies. That’s where equity investors are increasingly concentrating and Ottawa’s tech companies should follow suit. Structured debt and an increase in the number of financial and non-financial covenants are evident as a way for lenders to mitigate the uncertainty. As the cost of capital goes up on the debt or equity side, companies will need to look inward to execute on growth plans, fuel associated investments and make businesses more efficient.

Double down on long-term objectives to create scale and sustain stakeholder value. Doing so requires Ottawa’s tech businesses to continually assess the best capital structure and then partner to help achieve those objectives. Ottawa — with relatively affordable talent along the southwestern Ontario corridor and geographic proximity to the U.S. that makes it an easy flight away — continues to be a solid option for investors looking to diversify into Canada. Maintaining that competitive edge will require businesses here to stay focused on the fundamentals that make them ever more attractive.

Define growth objectives that reflect aspirational — but realistic — goals. Early-stage companies will need to show a certain level of growth funding for parties to become interested. That’s particularly poignant right now, as choice is up and capital investments are down. 

What’s the bottom line for Ottawa’s tech sector?

The growth at all costs mentality that has spurred the industry forward could hamper efforts to grow in this dynamic market environment. Tech companies here can set themselves apart in a sea of investor choice by pursuing a more balanced strategy, one that manages risk and drives innovation in equal measure.

Aaron Smith is a partner with public sector and health consulting with EY; Stephen J. McIntyre is a partner in assurance with EY; and Chris Jerome is a partner with private tax at EY.

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