Experts weigh in on what tech companies can do to grow amid downturn

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One of the best-performing sectors during the pandemic, the technology sector is now facing a challenging time as a reversal in fortunes has companies tightening their belts.

Shopify Inc. last month announced it would lay off 10 per cent of its global workforce and would cut spending in lower priority areas and non-core activities. In June, Wealthsimple said it would be cutting its workforce by 13 per cent and would be “laser focused” on its core businesses, namely investing, banking and crypto. And last week, Vancouver-based Hootsuite said it was eliminating 30 per cent of its workforce in a global restructuring.

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Other notable tech names that have announced layoffs in recent months include Clearco, Coinsquare, online furniture seller Article, and Thinkific Labs Inc.

Younger businesses trying to drum up financial interest are also starting to see a very different climate than just a few years ago. The Canadian Venture Capital and Private Equity Association says the number of deals and the average deal size were both down in the second quarter compared with the first three months of the year.

Experts say companies need to be aware of the challenging environment, but must also find ways to grow in order to come out of the sector downturn in a stronger, more competitive position.

The bump in the road for the industry comes after a long period of growth, expansion and increased demand, which many companies had grown used to.

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“It was very difficult to read the signs that things were going to go the other way so quickly,” says Mike Abramsky, executive-in-residence at MaRS Discovery District.

He believes the troubles facing the industry could go on for some time amid rising interest rates, high inflation, recession risks, market volatility and a slowdown in activities that got a major boost during the pandemic like online shopping.

“There’s just too many perfect-storm factors in play,” he says.

“Anything tied to interest rates, the economy and stock markets, like e-commerce, real estate, crypto and some fintech companies have really imploded. And with the recession risk, we don’t know what’s next, and the fact that we don’t know will keep companies cautious.”

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Laura Lenz, a partner at OMERS Ventures who is leading the firm’s investment activity in Canada, says the first thing leadership teams need to do right now is look at ways to preserve cash — whether it’s needed or not — because doing so will help extend a company’s viability without the need to raise more funding.

Having a clear view on the path to profitability is also crucial, she adds.

This means reducing spending on marketing, discretionary items and activities, and even staff, Lenz explains.

“It also means looking at sales efficiency and renegotiating everything from rent to professional services contracts,” she says. “Another option is to look at tools out there to increase automation on low value, repetitive tasks so that your people can focus on the high-value work you hired them to do.”

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For companies hoping to secure new rounds of funding during this uncertain period, Lenz says investors, venture capital firms in particular, are looking for “outliers.”

“They want to invest in businesses that have been able to grow at 50 per cent despite this current macroeconomic backdrop,” she says.

MaRS’ Abramsky works with tech founders and CEOs and says the first thing he would ask them right now is how they plan on taking advantage of the change in conditions so their companies are better off when the downturn comes to an end.

“When things go really good, tech overreacts to the positive and people over-estimate the upside, and then when things get really bad people forget that tech is resilient and does come back,” he says.

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Companies will want to pivot toward a healthy end-market, where their products and other offerings are must-haves rather than nice-to-haves, he adds.

And even though business leaders are always doing scenario planning, he is encouraging them to go even further.

“Try more scenarios and look closely at the assumptions in those scenarios, because by nature, tech companies and tech CEOs and founders are overly optimistic,” he says.

While the core business should be the focus for companies, having more than one revenue stream is important for adapting to different situations, says Nusa Fain, director of the Smith School of Business’ Master of Management Innovation and Entrepreneurship program.

“Putting all eggs in one basket is probably an unsafe bet,” she says.

Looking ahead to where the growth in the sector will be going forward, she sees opportunity for health care innovation — especially solutions around managing some of the challenges the pandemic has unveiled.

OMERS’ Lenz sees opportunity in what she says are two growing areas: workforce automation and technology that addresses climate change.

“I also expect we will see some decentralization and a reduction in our dependency on FAANG (companies),” she says.

This report by The Canadian Press was first published Aug. 14, 2022.