CIBC Innovation Banking Podcast

[00:00:03] Michael Hello. I'm Michael Hainsworth. The CIBC Innovation Banking podcast explores the world of start-ups, growth stage companies and late stage companies that have made a big splash in their industries around the world. Start-up entrepreneurs looking to raise funds found 2021 to be a far better year to fuel and check their business than the year before. In the first three months of the pandemic, life ground to a halt for more than just its global citizens. Venture capital firms snapped their wallets shut but something became apparent rather quickly. Start-ups that pivoted or provided the world with the digitalization required to survive and thrive during the global health crisis found VCs willing to open that wallet wide. And as we find ourselves in the third year of the coronavirus pandemic, we find optimism for the future in Christian Lassonde, the founder and managing partner of Impression Ventures, who is an entrepreneur himself. He took what he learned working at video game giants, Electronic Arts and Lucasfilm, and applied them to Android software development firm, Claystone. And the lessons learned there inform his work as a VC. And if you believe his social media profiles, he's not interested in a high profile. He's a quote, fintech VC - that's it, super boring, end quote. Wait, what?.  

[00:01:27] Christian Yeah, I think it's a little nod to venture capital is sort of over glamorized in the media. And in my view, and I guess an impression ventures is we're not supposed to be celebrities. Our company's success is our success. And so commercial ventures, anyway, we really want to sort of want our companies to be successful and them to be the celebrities, not us. 

[00:01:47] Michael And did I read somewhere that the smartest people are often the most sarcastic as well? 

[00:01:54] Christian I'll go for that. I've always said that to be a successful VC, you need to have equal parts optimism and cynicism. And so cynicism and sarcasm, I think, come you know hand in hand to a certain extent. So I guess it's also a little nod to that.

[00:02:09] Michael Well, you started your career as a video game programmer. How does the problem-solving nature of programming inform your work as a VC? 

[00:02:17] Christian You know, in video game programming in particular, the central problem with video game programming is that you're trying to extract as much performance out of very limited hardware as possible. And so it's very much on the bleeding edge. So it's a great, as it turns out, completely unintentional, it's a great launching pad for really a deep dive into technology, which of course, is a great training ground. As a VC, we invest in technology and technology companies. But a bit more interestingly, I think what I realized working especially early on in my career at a company called Electronic Arts, and working on a project called Ultima Online. And we had a little over three hundred thousand subscribers. And this was in the late 90s, early 2000, when people had to have dial-up to be online subscribers. And we get it. We're trying to eke out every bit of performance as we can was really an introduction that the business problems in many ways were just as interesting to me anyway as technical problems. And so that was a great launching pad for problems are kind of in a way created equal, and it's whatever interests you in solving them is a great launching pad for what I do today, which is again, solve problems – just at a different scale, if you will, then the technical programming problems I used to solve back in the day. 

[00:03:26] Michael So then how did the differences in the way Electronic Arts and Lucasfilm help you decide to build Impression Ventures? 

[00:03:35] Christian Maybe not Impression Ventures directly, but you know, I was working at Electronic Arts, working on Ultima Online, and that was my first sort of foray into the business of companies. And then I shifted to Lucas Arts and obviously technical problems, lots of interesting technical problems that we solved there, and launched a couple of fantastic games. But when I saw things that hung with me for a long time was just the vastly different approach to effectively the same business, these two businesses talk and that has stuck with me to this day, which is there is no right way to run a business, if you will. There are almost an infinite number of paths that one can take in building a business and understanding the right path, for the right company, with the right team is as much of the challenge as all the other challenges of product-market fit and customer acquisition, and so on and so forth. So the gift that those two companies, in particular, left me that I contain with me to this day, is understanding really that there are vast differences in the way you can run exactly the same business model and that's really valuable. 

[00:04:35] Michael Meantime, you described launching Claystone as your successful failure. I suppose every good entrepreneur sees failure as a learning opportunity. So what did you learn? 

[00:04:45] Christian I had read a lot of books and obviously was in the valley prior to Claystone. And you certainly get inundated, indoctrinated with this “fail fast” mantra and, you know, build companies quickly. And so Claystone in many ways for me, was putting all of those practices to work of test, launch, learn, iterate, test, launch. You know, that continuous loop, continuous learning loop. And we did exactly that and sort of disproved our thesis in about a little over 12 months. And that was seeing that process work, not an eye-opening experience for me, but the validation of, in fact, that that “fail fast”, if you will. But more importantly, that test, iterate, and learn loop and so that has stuck with me to this day. And also just it was a life that really was the launching pad for Impression Ventures because I had built up a whole repertoire of how-to’s, if you will, for building tech companies. And it turns out that was a great sort of a starting point for Impression Ventures like, you know, I have all this experience. I want to share it, I want to share it with some capital. And that was really the genesis of Impression Ventures.

[00:05:46] Michael What's the biggest how-to that you collected from Claystone that people don't realize is as big as it should be? 

[00:05:56] Christian Customer acquisition, as it turns out, actually is, in my view, actually fairly easy. The hard part is engagement is actually OK. You've got a customer, they've come in the door, whether it's paid or unpaid, but you've got to download somebody opened your app. Now comes the hard part, which is actually getting them to use the software on a regular basis. And then oftentimes the vast majority of pitches we see even to this day, I mean, 11, 12 years later, is companies talking about their success in customer acquisition, but no mention of “Hey, does anyone actually use this stuff?” And so that's probably my biggest go to for any of the companies we work with is OK. Yeah, absolutely we have, we have to have a handle on customer acquisition and be able to do that successfully. But equally important is customer retention and more importantly, than customer retention, but actually engagement. 

[00:06:45] Michael And how do you maintain that engagement? Because there may be a perception that once you've acquired the customer, the hardest part is done. 

[00:06:53] Christian That's the art in the science of tech start-ups, if you will, because the engagement really comes down on a per-company basis on a per-feature set basis, you know what it is, the value that you're bringing to the customer. And sometimes the value bringing is on a monthly cycle, for example. I don't know. It's tied to a calendar date, if you will, and people are trying to force that on a weekly basis. Well, it's never going to happen somewhere to work right and vice versa. It's, you know, it could be that the opportunity to bring value to a customer comes weekly and you're really only trying to bring it to them monthly. And so there's a disconnect. So you really have to understand your business exceptionally well to understand what is the cycle that your customer should be interacting with your software, with your service, with your app, and then optimizing all of your engagement points to be aligned with that optimal cycle. But understand the optimal cycle is very difficult. That is generally not obvious. 

[00:07:45] Michael But once you've got that engagement, you've also got an evangelist. 

[00:07:48] Christian Yeah, absolutely. Exactly. 

[00:07:52] Michael  If you can't sell digitally, you've got a big problem. That's Lassonde's view of companies struggling through the worst health crisis in 100 years. Once VCs got their bearings in 2020, the Canadian Venture Capital and Private Equity Association reports 2021 saw the average deal size double. And while valuations may seem high, there's a hidden middle market of entrepreneurial founders opting to land financing at reasonable prices because they recognize the marathon nature of the game and have opted to not sprint to the finish line. That might be a decade or more away, but Lassonde tells me this wasn't the mindset when the pandemic first hit. 

[00:08:31] Christian Not high-tech, that's for sure. But start-ups in particular, they went out and said, “Can you help us solve our customer acquisition or our customer acquisition problem, our customer engagement retention problem?” Now that the old ways of gauging with them are gone, can you help us with that? And of course, so that we saw not just an acceleration in- well, we saw first acceleration in adoption of tech software and fintech which of course then accelerated investments into fintech. And so it has been a banner fintech environment for the last well, since sort of June-July issue of 2020.  

[00:09:03] Michael So then what does it tell you about 2022 that in 2021, the average deal size doubled to 20.7 Million dollars? 

[00:09:11] Christian It is a good measure of the environment that we are in. Once a customer can engage digitally with whatever financial service product that they're dealing with, very rarely have we seen them wanting to go back to a pen and paper. So, you know, if you're a very late adopter, let's say a cheque imaging on your phone. But now that the pandemic has taught you how to deposit your cheque on your phone, you're not going to go back to the branch and deposit your cheque. It's just too darn easy to use it on your phone. That's just a very simplified example of this sort of shift. So we have not seen a shift back to the old ways, and we're not forecasting that shift back to the old ways. I just don't see that happening. What may happen? It may not happen in 2022, but maybe more like 2023or 2024is the adoption of fintech solutions is likely just to lose momentum, if you will like at some point, there's going to be a loss of steam. You know, we're still in the depths of pandemic lockdowns all across North America, so that's just going to continue to accelerate or continue that momentum into fintech. But post-pandemic, whenever that is, and I'm definitely not trying to predict when that it's going to happen, but post-pandemic, we would imagine that there would be a slowdown of deceleration if you will, but it'll be interesting to see when that starts happening. Obviously this Omicron, for me, has shifted that date to even further out, which is, I guess, good news. But yeah, it's very hard to predict the future. We just are expecting a reversion to the mean, if you will. And I think that's a very healthy thing, in general, is a reversion to the mean.  

[00:10:34] Michael So then what are some of the signs we ought to be looking for that shows that the trend is slowing down? 

[00:10:40] Christian I think the signs will be hard for the public to read. I think those of us on the front lines will see it first, just lengthening time for partnership inking deals, you know, less PoCs, less pilots, or those pilots now taking longer. Adding a month here, out in two months there, that's going to be the reversion to the mean, is just things will start to take longer than they have now. And things have been accelerated. PoCs and pilots have been shortened. Sometimes we've seen contracts go straight to commercial terms. I think the reverse will be back to, you know, critical business as usual, and that's probably  generally a good thing in general. 

[00:11:14] Michael You've described valuations today, meantime as a tale of two stories. What do you mean by that? 

[00:11:21] Christian There are those who are taking advantage of the acceleration in the marketplace and commanded multi frothy multiples, if you will. But that is only that one half of that story. The other half a story is there still, and I would say actually the majority of deals are out there. What we're seeing are valuations that are similar in line to valuation expectations of even a decade ago. In other words, the seed stage anyway. We've not seen a massive increase in valuations. And at the A stage, I would say we've seen an increase in the valuations but they're in line with the growth changes in the businesses. In other words, if companies are growing faster, higher revenue numbers, of course, or valuations should be higher to commiserate with the increase in growth in revenue. So we've always had outliers. We've always had companies at the C stage, you know, trying to command a hundred million dollar valuations and I largely vaporware. That was the case in the 90s, that was the case the 2000s and certainly is the case in the 2020s. Maybe there are a few more today than there were a couple of years back, and they certainly grabbed media attention. But I would say that they remain the exception, not the rule. The rule is most start-up founders realize they're on a 10-year journey. If they raise capital at the very peak of a bubble, they very much risk pricing themselves out of the market if the next time they go to market, you know, the bubble has deflated and we're at a trough, if you will, with valuations. That's a big drop from the top down to the bottom. It's much safer to sort of continue trying to raise the average mean valuation, if you can. And we certainly see a lot of smart CEOs out there doing that. 

[00:12:55] Michael So those founders who recognize it's a 10-year journey, it sounds like they're recognizing the importance of playing the long game. 

[00:13:02] Christian Yeah, that's exactly right. And you have to play the long game adventure. You know, it's not to say that there are not quick exits and there's not a way forward with a massive raise and a quick exit. But we like to see that impression. And we like to sort of think of fundraising and company building as an opportunity set. And the more opportunity you have, the more optionality you have in the business, the greater long-term value you're going to have created for yourself and your other shareholders. And so picking a sole single path, limits optionality, it limits your options. And that's generally a bad thing versus a good thing and a much safer bet for you and your entire shareholder base is to have as many potential paths forward as possible. 

[00:13:42] Michael So it sounds like as part of that tale of two stories, we're seeing high valuations but there are companies at reasonable valuations and sizes. They're just not getting picked up by the media. 

[00:13:42] Christian Bingo. 

[00:13:42] Michael I wonder with the consumer and retail sectors seeing significant investment growth, I think it's five times greater than what we were at at the low of 2018. How does a start-up in this space with reasonable valuations and size, that's not getting picked up by the media, get VC attention in 2022? 

[00:14:09] Christian It's a challenge. The attention span of VCs seem to have shortened over time, So being able to then demonstrate to, VCs take meetings that were paid to take meetings, so getting a meeting shouldn't be hard. But in that meeting, showing to those VCs that your solution truly is ten times better than the next best alternative, that's what gets people's attention. That's what gets meetings and that's what gets investment.  

[00:14:32] Michael And how do you quantify better? How do you know something is ten times better, not two times better? 

[00:14:39] Christian You're asking the hard questions. Generally, it's customer adoption trends. I mean, we look to see how quickly customers adopt this and how customers engage with the solution. And if the engagement in the adoption is rapid and exponential, it's ten times better. 

[00:14:57] Michael Canada has always punched above its weight in technology. Before there was BlackBerry, Nortel Networks was Canada's shining tech star, home of Alexander Graham Bell's first sketches of what would become the telephone. Today companies like Shopify dominate the global stage. And the CVCA says the numbers show Canada's venture capital ecosystem is maturing. So for the veteran VC Christian Lassonde, what does a mature ecosystem look like? 

[00:15:25] Christian One where there's very little government dollar involvement in the support of the venture capital funds in Canada. Not to say that we don't have government involvement. There's not a national initiative and strategy around technology and innovation. There should be which apps we should have won. But 10, 12, 15 years ago, the venture capital funds in Canada were decimated. There were very few of them around, and the federal government very wisely formed a program in order to kick start the venture funding scene in Canada. That was successful. I mean, we have many, many more venture funds today in Canada, but it's time, in my view, that the venture funds in Canada should sort of stand on their own. I mean, their performance, their 10-year performance, their multiple fund performance should be able to get funding on its own behalf, not without government support. That's the very definition of a mature industry. If not there already, I think we're very close to that.  

[00:16:24] Michael The numbers also show that U.S. money flowing into Canada is doing so at record rates, and what should that tell us about the U.S. appetite for Canada? 

[00:16:35] Christian My view there is it's less about the appetite for Canada and more the appetite for non-US deals, and we're a very convenient spot for deals, to be honest with you. So maybe there's an appetite for Canada. There has been an absolute shift in the last 10 years. I mean, I remember being with companies very early on an impression and I would say easily more than half the companies were building X for Canada and X, whatever you want in there. I really, really don't hear that anymore. I mean, it is a shocker when I come up with a company in there and they've set their sights on building a small company in Canada for a Canadian-only solution. And that shift in mindset to a global footprint. We are building whatever we're building for a global audience is definitely attracting capital, not just from inside Canada, but from globally, including the US, obviously. And so I think that's a recognition of that. But I think there's also a bit of that is US investors diversification away from the US. They want exposure to other markets and rightly so, Canada should be one of their destinations. 

[00:17:30] Michael To what do you attribute Canadian start-up entrepreneurs recognizing that there's a whole wide world out there? Do we give it all to BlackBerry? Does BlackBerry get all the credit?. 

[00:17:39] Christian I would say Shopify probably gets more of the credit than BlackBerry at this point. I don't know if I have a strong opinion on that one. Recall, I wasn't here from 2000-2010. I wasn't here and very much in that sphere. And frankly, the rest of the United States was, I wasn't even aware it was going on the rest of us. I was just only aware of what was going on in the Bay Area. BlackBerry put us on the map. Shopify definitely continues to put us on the map. You know that Nortel, even before that, put us on the map as well. So Canada has a lot of great tech stories. We just aren't very good at telling them, for the most part. 

[00:18:13] Michael You've opened your checkbook recently for True State on a state document management, Owl.co, and Financial services AI. What interests Impression Ventures these days? 

[00:18:23] Christian  I mean, anything fintech obviously related. And we invest in both direct to consumer businesses like, well, simple to B2B businesses like Owl, which is selling fraud detection software to insurance companies. So, you know, fraud as it continues to be an area where we love, not because we have fraud, but because the option to detect fraud either prevent it altogether from happening or detect it as a net benefit to consumers. I mean re-extract that fraud from whether it's an insurance or banking product and not value gets returned right back to the consumer in the form of effectively lower costs of that product. So we really like that. We're continuing to look at the housing market and how to make housing accessible. We've made an investment a little over a year ago in a comfortable fraction. Thematically, it's right on that theme and we continue to look at that space. 

[00:19:14] Michael  So many of the entrepreneurs that I speak to who are still working with venture capital firms are also taking on debt financing at the same time. At what point should a start-up consider debt financing in addition to or instead of talking to someone like you?  

[00:19:29] Christian Yeah, I think the two go hand in hand. The sweet spot is when you have a reputable business model and your debt finance can begin to feed the beast, if you will. In this case, feed the acquisition of customers at a profit unit economics. Profit unit economics, in other words, you can buy a customer for a dollar and over a year, over a month or whatever, they can give you a dollar back or two dollars back, then you want to be able to invest as much as possible. And this is where venture debt is a great offering, if you will. So venture capital is really for the expansion of your services, the building of your services. Initially, the expansion of your services, venture debt really is best suited, in my view, for expansion of the customer base of a current, the current offering you have today. And so they work really well ahead. So early-stage seed companies don't tend to get venture debt because we're still in that "we're building the thing that we're going to sell stage of their business,” but once you have the thing that you're selling and it's selling positively on unit economics, you know, that is a great option. We have conversations at the board level with our portfolio companies, whether it should be going to get venture debt. And of course, CIBC is at the top of that list. 

[00:20:38] Michael So as far as the year ahead, are you more optimistic that it's going to be better than the year behind us? 

[00:20:45] Christian Yeah, I mean, again at the start of this podcast sort of mentioned that, you know, VCs have to be equal parts optimist and cynics. And so this when it comes to the world ahead, that's where the optimism comes in. Yeah, no, 2022, I'm very optimistic or for what, you know, the deals that we're going to see, the companies we have in the portfolio today. And yeah, you can't be in venture capital without fundamentally believing that the future ahead of us is better for humanity than the past, if you're not, then you're in the wrong business. 

[00:21:11] Michael Christian, thank you so much for your time and insight. 

[00:21:13] Christian My pleasure. 

[00:21:17] Michael Christian Lassonde is the founder and managing partner of Impression Ventures. Startup entrepreneurs looking for the financial future to move into their growth stage need to show their product or service isn't just twice as good as what's already out there. It needs to be ten times better. It needs to provide a struggling market with a product that helps them overcome the hurdle of a global pandemic. Even after COVID-19 is in the rearview mirror and it needs to focus on that 10-year journey. It builds on initial success by turning its customers into evangelists. I'm Michael Hainsworth. Thanks for listening.