CIBC Innovation Banking Podcast

Maria Pacella [00:00:00] Now is actually the best time to be starting a business, because if you think about it, if you have those three ingredients mentioned before, the right people, the right market, and the burning problem that you're trying to solve, is going to do very well in the long run. 

Michael Hainsworth [00:00:18] 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. Maria Pacella didn't go to an Ivy League school, but the managing partner at Pender Ventures knows that entrepreneurs are paying the price of 14 years of free money. The market environment can be tough, but she believes in ABR and PPP. Startups should always be ready. Ready for what? To sell. And success comes from focusing on people, product and pent-up demand. In today's conversation, she offers some lessons from the School of Hard Knocks. 

Maria Pacella [00:01:11] As someone who went through not an Ivy League education, but School of Hard Knocks, obviously I'm biased, but, you know, I think that venture is a career that you need to go through a whole bunch of experiences, operations being one of the most important areas and being an apprenticeship kind of career. And the best way to get some experience is through working in  different roles in a few different companies. I think there's something to be said for someone who has persevered through different things, and that can often happen when you have worked hard, from, right from the get go. 

Michael Hainsworth [00:01:54] So then what lessons did you learn from the School of Hard Knocks that taught you that it's more about the person than anything else? 

Maria Pacella [00:02:03] I would say lessons are be prepared for anything, figure out how to be resilient to what that means for you, figure out how to react to a situation to minimize your own stress. Be resourceful. Always try to think a few steps ahead with respect to both your career and how you want to invest. 

Michael Hainsworth [00:02:24] So how did you find yourself at Pender? What was your path? 

Maria Pacella [00:02:28] Well, it was a bit of a winding path, but it kind of feels in many ways full circle to home. I did move back to Vancouver after some time in Toronto doing investment banking with the aim to get into venture capital, and I went to work for a firm called GrowthWorks Capital that managed a large fund, at that time, 400 million. So I knew a lot of the other venture capitalists in town, which included the fine folks from Pender, which also managed a venture fund. And so we certainly knew each other through a few co-investments, but that I really got to know,  Dave Barr, the CEO of Pender, through our time on the board of CFA Vancouver. And I really came to kind of understand how, how he embodies culture and tries to do so throughout the firm. And so getting to know him and then the reputation, frankly, of Pender in terms of how from the get go, intentionally hired people from different walks of life, different experiences, different skills, was really held up as something quite important to really bring that diversity of thought to decision making and investment decision making. 

Michael Hainsworth [00:03:47] Be prepared for everything. Find your resiliency. Create a corporate culture that reflects your values. These are just some of the lessons Maria learned at the School of Hard Knocks. But how does she apply those lessons when making investment decisions? She invests in early-stage enterprise software, and while she's not optimistic about the economic environment in the near future, software that helps a company be more efficient in uncertain times solves a pain point and is powered by a forward-looking corporate culture is more likely to receive funding. And it's also a company most likely to weather the current financial storm and the next one. 

Maria Pacella [00:04:30] Well, a very wise mentor told me a long time ago, encapsulated this very well, which is people product and pent-up demand, a kind of three ways to sort of sum up what we look at. So first and foremost, it's people. And, you know, I think for many investors, venture capitalists will tell you that. But it's very much about the people for us. In fact, we would take less obvious product, a less obvious large market if we just had a phenomenal team, a world class team that we're willing to back. What we look for in the people is that passion, the drive,  the superior knowledge, their ability to attract, retain and motivate other great people, and also how they think about allocating capital within their business so they truly understand. If I take a dollar investment, I'm going to put it into this area and I should expect this kind of return. I have some good theories that have some actual foundation around those theories on how to allocate capital. The product clearly has to be a product that has some early customer traction, has a tangible value prop. So in general, we do enterprise software. And so for that business, it needs to drive revenue or decrease costs or both. So it has to drive some sort of efficiency gain in their customers. And then pent-up demand, it needs, the solution needs to be solving a burning problem. There's lots of really good companies out there, particularly on the consumer side, but they're more nice to haves sometimes very, much more difficult to assess and not our expertise. But if you have a product that's really solving a burning problem, that's going to shorten sales cycles, that's going to continue to do well in tough times like we're maybe experiencing right now. And so that will give us a lot of confidence that sales will come sooner rather than later. 

Michael Hainsworth [00:06:42] Tell me about those tough times in this market environment. You fear that it's going to get worse before it gets better? 

Maria Pacella [00:06:50] Yes, I think that certainly last year we saw a lot of the impacts more at the capital markets level, first, obviously the public markets, seeing a massive drop across the board in valuations, but in particular in technology. And I would say this year we're sort of seeing now more the fundamental economy being affected, slowing down of actual sales of companies, lower spending, things like that. Obviously, the cumulative impact of interest rates permeates throughout the economy and to the checkbook of you and I, as well as inflation. So I think we haven't seen that through yet. And so I do think it's going to be kind of sideways for a while from a business Main Street, if you will, perspective. Companies are still either slowing hiring altogether or even laying off. And it's not just technology. And so I think it's, you know, not a crash car landing that maybe we were expecting a while ago, but it's more of a drawn out kind of slowdown, lower growth. And I also don't think we're going to see this ramp down of interest rates. We might be here or a level of interest rate that's well above zero for quite some time. So that will certainly dampen things for a while. 

Michael Hainsworth [00:08:12] So you figure it'll take longer for the macro effects of these higher interest rates to sort of filter down. You know, we've had basically free money for 14 years. We can't unwind that overnight. 

Maria Pacella [00:08:23] That's exactly right. We're paying the consequences for free money. And money shouldn't be free. And while there is still money out there for investments, that money can be pickier now and needs to drive, you know, a lot more than a five percent return on a GIC. 

Michael Hainsworth [00:08:39] How have you managed to close fund financing in this economic environment? 

Maria Pacella [00:08:44] Despite that negativity, now is actually the best time to be starting a business. Because if you think about it, if you have those three ingredients and mentioned before the right people, the right market and the burning problem that you're trying to solve, a company getting started today that can actually hire people because it's a more available labor market. They can actually produce a product, they can sell the product is going to do very well in the long run. They're kind of forced. The scarcity forces them to be capital efficient and bring focus to the business, make maybe tougher decisions that you wouldn't necessarily make during the good times when there's lots of free capital flowing around. And all of that means, and we've seen this in the last two cycles, that some of the best companies get built during these times. So investors that align with that way of thinking, that helps, you know, understands the nature of our cyclical business, you know, kind of realized that now is a great time to be investing in venture when valuations are lower and companies are more thoughtful about capital deployment, aligning with investors that also understand this, this vintage over the next few years should be a good one, kind of allows us to still raise money at this point. 

Michael Hainsworth [00:10:03] And I can imagine that as you were raising money for Pender's second fund, all you needed to do here, and I'm grossly oversimplifying it, but all you need to do is say, "Look at our success with Pender’s First Fund." That's a proven means of getting the money where it needs to go. The people who need to get it and ultimately it goes back into the hands of those who are investing with you. 

Maria Pacella [00:10:25] Yes. I mean, I think that's definitely key here and certainly in our case. I think, though, we're always supposed to say, you know, past performance is not an indication of future performance. 

Michael Hainsworth [00:10:35] Exactly. 

Maria Pacella [00:10:36] But in fact, everyone does look at track record. It does matter. Certainly, my investing activities goes back over 20 years. But if we look at Fund One here at Pender, it was a small fund, but a mighty fund. We managed to do some great investments. We managed to lead a number of deals. Despite our size, we managed, I think, most importantly, to be disciplined around valuation during a very tough time to be. So It was a 2018 vintage, but we managed to stick to our guns. We also didn't deploy capital super quickly, which is really something that a lot of funds did deploy capital in a year or two and raise funds every one or two years. I can't imagine doing it quite so quickly. We never kind of sacrificed the integrity of our due diligence process, you know, etc.. So I would say maybe some of those early investors in Fund One, would have questioned what I was doing taking so long to make investments. But now we've proven that our thoughtful approach and disciplined approach is the right one for the long term. 

Michael Hainsworth [00:11:42] And I can imagine to the area in which you've chosen to focus upon, you know, health I.T., it's an area that's really not very well-served in Canada from an investment perspective. 

Maria Pacella [00:11:53] Exactly right. It is definitely one of the big reasons why we've chosen to make it an area of focus for us. It has been an area of interest for myself for many, many years. The last fund I mentioned, we did invest in biotech, broadly defined in clean tech. A really when these life sciences companies came in to us and seeing the inefficiencies even in the R&D process in all the data they're generating and then of course seeing out there in the world again a lot of inefficiencies. And it really is after agriculture, you know, the biggest market in the world, lots and lots of problems to be solved, definitely in many cases, hits close to home, makes a big impact. And in Canada, I do think it's mostly attributable to the great talent, but also our public health care system that we punch above our weight in terms of innovation. But we don't seem to necessarily commercialize the technology. And so there was, really is, a gap in that part of the market to help these companies get started, commercialize and be successful. And so we think that this is an area, given our network across the country and then reach into the U.S., which tends to be still the first customer for many of these companies, that this is a great area for investment and clearly an area where there's pent-up demand. 

Michael Hainsworth [00:13:20] And in Maria Pacella's world, she advises startup founders of the ABRs, always be ready to sell the company if that's what it takes to get it to the next level. It's never too early to have the books ready to open a data room. It's never too early to hone the pitch, and it's never too early to ask the right questions. 

Maria Pacella [00:13:43] It all leads back to that disciplined thinking and that rigor. Of course, you're just starting a company. If you're just building for an exit, it's probably not the right mindset at all. However, as an entrepreneur, you do need to ask yourself, "What do I want to build with this company?" Am I looking to build a world class technology solution and technology company? And what does that mean for me? Not only what does it mean for me, but what does it mean in the context of the ecosystem in which I work and in which this company is going to operate in. Part of being visionary, and we all want that visionary entrepreneur, is looking ahead and having some theory on how that market landscape is going to develop. And there will be other players, there will be competition. So always being ready is really more about picking your head up from the day to day, which is fixing the bug in the solution and hiring the next VP development and all of that and always being aware of macro trends, competitors, other technological changes which might completely wipe out your solution. A lot of companies right now are talking about like, what's AI going to do to my business, for example, and really trying to stay a step ahead, trying to be always ready for something coming down the road and that might be in fact, be an acquisition that's too good to refuse. 

Michael Hainsworth [00:15:15] You say, though, that it's important to craft and refine your story so that you've got that story just on the tip of your tongue when it comes time to be ready for whatever comes next. What's the difference between focusing on the big picture, while incorporating enough detail to draw attention to your story? 

Maria Pacella [00:15:34] That elevator pitch is a really good way to make sure you have that. If you cannot tell your story in a short form of some kind, that's often indication there's even a challenge in your solution, because if you can't articulate it, whether it's big picture or at a small tangible level, how would your customer understand where your products are going to do for them? 

Michael Hainsworth [00:16:00] But then there's the point where that elevator pitch has to be expanded beyond the 32nd ride up to the top floor. How do you hone that story? 

Maria Pacella [00:16:08] Yeah, and this comes with iteration and refinement. It comes with thinking through almost kind of a business plan framework, if you will, thinking about how do I scale this product into different verticals? How big is that vertical? How do I distribute to that customer set? How much is it going to cost to distribute to that customer set? And then, of course, pricing. So it is, you know, a multiple of factors that go in behind that thinking. I think though, at the same time, within a pitch deck of some kind, 20 slides, a great leader should still be able to hit those key points in their story that they've crafted and been prepared to for it to also change with learnings. And it's okay to say we've tried in this vertical with this customer set, but that pent-up demand was just not there. 

Michael Hainsworth [00:17:05] As you pointed out at the beginning of this part of our conversation, that you don't necessarily want to start your company with the idea of what your exit is ultimately going to be. You really need to be focused on that product or service in the first place. You do, however, advise that you don't want to wait for the phone to ring or for opportunity to knock and then build your dream team, deal team. You really ought to always be closing. 

Maria Pacella [00:17:33] Yeah, absolutely. A big part of always be ready, whether it's a financing or an M&A or going public, I guess for that matter, is to have the experts around you. There's an incredible amount of work that actually goes in to the diligence process and it's you know, everything from, you know, how do you negotiate on the pricing to do we have all of our employment agreements tidied up and taken care of? I've seen transactions get held up for very various reasons, which you would never think of at the last minute. So having either formally or informally a set of advisors around you and ready is always important. So as a leader of a company, you should establish a network of lawyers and bankers, etc. You'll actually learn a lot from having those coffee meetings or lunches. They're a great network in and of themselves. They can refer maybe a new director, they can refer even a customer or even someone that becomes a partner in the business or an entity that later down the road becomes actually your acquirer. It's really about having a pulse on the market, and a great way to do that is to also make sure that you're talking to a variety of advisors that already know your story. And so when you are literally ready, it's a quick phone call. You can move faster and be more ready for an inbound. 

Michael Hainsworth [00:19:06] And I suppose this sort of ties in to the idea that even at an early stage, you really ought to have a data room ready. 

Maria Pacella [00:19:15] Hundred percent. It is, just seems to be table stakes now for the always be ready again for financing, an M&A or an IPO. Having that data room is good hygiene. We're kind of going back in many ways to the fundamentals, which you're very grateful for now. And part of that is having your financials in good shape, all this documentation up to date. Again, that discipline, it's funny how when you go through that process of getting this stuff ready, you might think about, oh, we you know, we haven't been thinking about this area of our business and it might actually lead to some strategic thinking around doing a partnership with this others strategic that you would kind of put on the back burner. But now something has changed and you just sort of resurfaced it. So there's lots of benefits of having a data room ready. 

Michael Hainsworth [00:20:10] So even if you have no intention of selling your start-up tomorrow, having that good financial hygiene and asking yourself the right questions will help you better guide your company through sunny days and financial storms. Pacella advises her clients to be willing to ask for help. Seek mentorship and learn from others and be willing to realize that success doesn't depend on an Ivy League education. 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. I'm Michael Hainsworth. Thanks for listening.