CIBC Innovation Banking Podcast

Morad Elhafed [00:00:00] I think there's too many businesses that have been built on the premise that money is cheap to free, which is the environment that we've been into and have invested in places that don't make sense and kind of lost their way a little bit. 

Michael Hainsworth [00:00:16] 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. Today, I introduce you to Morad Elhafed, the general partner at Battery Ventures in Boston, an investment maven who's got his finger on the pulse of what it takes to succeed in these inflationary times. And Andrew Phillips, the managing director in Boston for CIBC Innovation Banking. We are in a world of high interest rates and increasingly discerning investors, but according to both gentlemen, there's never been a better time to start a business. We'll also discuss Boston's bustling business ecosystem. Morad and Andrew offer a glimpse into why this city has become a breeding ground for innovation. I began our conversation by talking about Morad jumping into the fray just before the 2008 financial crisis, and we discussed how today's funding environment compares to 15 years ago. 

Morad Elhafed [00:01:21] I've been in this business over 15 years at this point, Battery has been around for about 40 years. We've been through up and down cycles, time and again. I can tell you what we're seeing now is more competition. We invest in software companies. That market’s become more global, used to be that a lot of the innovation happened in Silicon Valley, that continues to be true. But we're seeing innovation in various places across the U.S., in the Midwest, you know, internationally, we do a lot of business in Europe. We see a lot of dev teams popping up in places like Eastern Europe, Turkey. And at the very macro level, we're in an environment of high deflation still running pretty hot, interest rates are high, cost of financing is high. And so companies and investors have to be very thoughtful about where they invest the next dollar. There is definitely a separation between high quality businesses and kind of lower quality businesses in terms of valuation, right? There's a lot of interest, a lot of money chasing. Companies that are run well, that are growing profitably, there is less appetite in this market environment, in the higher interest environment for money losing ventures. But I'll say, you know, it's a great time to start a business, it's a great time to invest. We did some of our best deals in the 2008, 2010 timeframe. This feels a lot like that. To be honest with you, you know, it feels like we've seen this movie before. 

Andrew Phillips [00:02:47] I've had the privilege now of witnessing how Battery's managed through these cycles a few times at this point, going over the last 15 to 20 years of my career. You nailed it. I think what lenders have learned, particularly in software and technology, is if you're prudent about who you’re partnering with and your structure is a great place to lend. I think 15 years ago or so or the last downturn, one it was structurally and systemically on the macro level, much different than what we've experienced recently. Looking at the micro, however, I think we've all learned how to invest and lend in these types of businesses really well and we realize how resilient their models are, especially if it's a B2B SaaS or a B2B software business. So it feels to me like the credit markets this time around are more supportive of what investors are doing, supportive of the landscape overall. To Morad’s point as well, I think, you know, we all recognize that we've learned some of the best deals came out of 08-09 and that vintage. And so I think people are being selectively and thoughtfully opportunistic this time around as well. 

Michael Hainsworth [00:03:46] You know, Morad, you mentioned that this environment has really given you a clear understanding of a high quality company versus a low quality company. How do you determine what is high quality? 

Morad Elhafed [00:03:57] What we look for when we invest are leaders or companies that are leaders in their markets, whether it's a large market or niche markets. Companies that have solid product technology, companies that have loyal customers that come back and buy more or renew their contract. We look for companies that have strong management teams. We look for businesses that they may or may not be profitable by the time we invest, but they have a path to profitability. And if they're not, there's a good reason why they're not profitable, meaning they're investing in places where there's a go to market or product development where they're getting a return on their investment. You know, at the end of the day, you know, we're looking for durable businesses that we can continue to build on and get them to scale where they can either go public or a bigger company or a bigger investment firm will recognize these are very solid businesses and be very interested in acquiring them at some point. So on the lower quality side of things, I think there's too many businesses that have been built on the premise that money is cheap to free, which is the environment that we've been into and have invested in places that don't make sense and kind of lost their way a little bit. We try to again understand which ones are the ones that are investing for growth in a way that is sustainable and which ones are not really doing that. 

Michael Hainsworth [00:05:24] So then what should entrepreneurs in fundraising mode know about what it takes to land financing from someone like you? 

Morad Elhafed [00:05:32] At the end of day, in markets like this, it's back to fundamentals, right? So investors are looking for businesses that can scale, that can be durable in the long run. And so if you're an entrepreneur and you're building a new business, think about alignment with your investor. Think about the vision for your company and try to convey that vision in a way that could make sense for investors. If you’re fundraising for full growth, for investment in sales and marketing. You know, let's talk about the data and let's talk about the metrics, let's talk about why that makes sense. If you're thinking about investing in more product development innovation, let's have that conversation around why you need to do that, why entering new markets make a lot or, makes a lot of sense. And so it's a conversation that needs to happen before fundraising. People have to be more thoughtful about how they think about investment, whether you're an investor or an operator. Right? So investors are going to chase high quality companies and get companies that we as investors believe can scale and be successful in the long run. And then entrepreneurs have to believe that. I understand that, you know, money is no longer cheap or free and it's relatively expensive and each dollar is more and more expensive. And you have to make decisions on where and when to invest, whether you're going to invest in go to market again and really can be very, very thoughtful and data driven in terms of, okay, why does this investment make sense? You know, money is expensive. Can I justify a return on this investment? So those are the type of discussions that we have with entrepreneurs. 

Andrew Phillips [00:07:05] Especially when you're thinking about bank financing. I think one thing we've always paid close attention to and appreciated was the ability of a high growth software business's ability to potentially pivot, to break even or profitability if they ran into economic headwinds overall. And I know Morad and you know, for you more broadly at Battery, this is oftentimes important for your later stage investments as well. We've seen that proven out time and again through a few different cycles recently during COVID and then to a point in 08-09 as well. If a business is thinking about where they're investing, raising capital to invest, you know, particularly debt capital, it's great if they have the ability either the track record or the ability to articulate their capability of pivoting to profitability or break even if whatever growth objectives they're trying to achieve don't materialize. 

Michael Hainsworth [00:07:56] In this pricier fundraising arena, every dollar needs justification. Andrew emphasizes adaptability as the make or break factor. The bottom line? Despite economic headwinds for those with grit and vision, the innovation game remains wide open. Both Morad and Andrew are Boston based. And while Battery's reach goes beyond Boston, there is an incredibly rich history of innovation in the city. 

Michael Hainsworth [00:08:22] How has Boston weathered the doubling of interest rates and the slashing of corporate valuations? 

Andrew Phillips [00:8:28] I think it's been fairly similar to what we've seen outside of this geography as well. Businesses, if capable, as I mentioned earlier, have certainly paid closer attention to growth related spend than sales and marketing and R&D. If they haven't pivoted to break even or profitability, they'd certainly been thinking about how to get there if needed over the last couple of years. And so there's been a bit of restraints from that perspective overall and how they've operated their businesses and plan to use their capital, I'd say, and I'd really appreciate Morad's perspective about this as well, because they have offices globally, a lot of the investors I work with based in Boston have what I'd call or folks think of as an East Coast, more kind of conservative investing mentality, or at least anecdotally that's what I've experienced working with later stage businesses, oftentimes profitable, etc., where you know, in other geographies I'm thinking of the valley, for example, it's been maybe more of a speculative kind of unicorn chasing mentality as well. But Morad's the expert. I'll let him speak to that. But I think maybe that's something a little bit unique to Boston if I think about how these businesses in this market and their investors operate. 

Morad Elhafed [00:09:31] Yeah. That's well said, Andrew. I mean, I'll tell you, I've been in Boston for 15 years. My kids were born here, we’re raising a family here and we love this town. It's an incredible place to live. It's an incredible place to start a business. You have some of the best universities in the world here. You have a vibrant tech and biotech and health care ecosystem. You have proof points right, you have great big businesses in technology, companies like HubSpot and Toast and Wayfair that kind of have been started here. The financial industry is vibrant, is strong. You have some of the best lenders like Andrew that we work with. We have some of the best venture capital firms, the best private equity firms. So yeah, I think it's a great place to start a business. 

Michael Hainsworth [00:10:17] You mentioned the universities and all of that. Tell me about Boston's ecosystem. Does its proximity to MIT but a more historical focus on medical startups overshadow the city's software community? You mentioned we're still in the process of digitalization of the economy. 

Morad Elhafed [00:10:34] Yeah, it's a great question. You know, I think about that from time to time. I don't think it's a competition. I think you have a lot of talent, a lot of capital, a lot of ideas all over the place. And if you're into tech and software, there's a lot of room for you to build a business and hire people and grow that business and fund it. Between all the university talent and a lot of the entrepreneurs that have worked at other businesses that have been successful in the region, I see a lot of the innovation. 

Andrew Phillips [00:11:02]  I think from that perspective too, Boston oftentimes has a global feel to it, because the university and education system draws so much talent in from everywhere. Our partners, various firms, entrepreneurs, etc. that we're working with here in Boston are representative of the global community in many respects. 

Michael Hainsworth [00:11:23] Boston's unique fusion of academia, tech and conservative investment strategy consistently sets it apart, making it resilient in the face of economic challenges. Supporting this environment is one of the reasons why Morad is a member of the Forbes Business Council. 

Morad Elhafed [00:11:41] I value that community. I value perspective of fellow members. I think it's a great place to share thoughts and ideas and publish them. There's a lot of things that I believe we do really well here at Battery, and I think it's an honour and a privilege to kind of share those thoughts, whether it is about moving on from a big innovation product market fit thought process to becoming more profitable growth minded companies, big ideas versus something maybe more tactical like how do you adjust pricing for software in those kind of high inflation, high interest rate environments? So there's a lot of things that are being shared around the council. And I find that to be intellectually kind of really, really interesting. 

Michael Hainsworth [00:12:29] It sounds like it's a combination of you never stop learning and it's important to give back to the community. 

Morad Elhafed [00:12:35] A hundred percent. That's exactly what it is about. 

Michael Hainsworth [00:12:38] So then as Battery is marking four decades of fueling the innovation economy, how does that remarkable past inform Battery's future? What does that future look like for your world? 

Morad Elhafed [00:12:53] We are very focused on making sure that we continue to preserve what's made us successful. And when you think about integrity, humility, teamwork, core tenants of Battery, those are the things that I think will continue to make us successful. When you think about the type of entrepreneurs and companies we invest into, the type of people that we hire at Battery, the culture apprenticeship that we have developed and how we train the newer generation of investors, we spend a lot of time thinking about and making sure that we continue to develop over time. We are very lucky to have a core group of investors, our immediate partners that have been with us for a very long time, and we owe it to them as well to continue what's working, to adjust what hasn't worked as well. And all this in a culture of entrepreneurship. One of things that we pride ourselves on is the ability to try new things. And if they don't pan out, you know, we're not afraid to back up and say, okay, maybe that was not a good idea, and kind of move on. And so having that culture again, entrepreneurship and thinking about new ways to grow and develop our business and generate returns for investors while keeping the employee base happy, motivated and intellectually challenged, I think is really what we're proud of. 

Michael Hainsworth [00:14:22] So, Andrew, what would be your advice to an entrepreneur in the Boston area looking for financing in this environment? 

Andrew Phillips [00:14:29] Well, I'd say with respect to finding a bank partner or finding a lending partner, it's really just understanding, you know, the institution you're working with, the people, the process, making sure you're comfortable with your front line as an advocate within an institution, you understand how they operate the processes, manage relationships when times are good, when times are bad. I think that's probably the one aspect that sometimes managements, investors, etc. may overlook, how will things work here in partnership if things don't go according to plan. And that's when it's great to understand exactly what that means and who you're working with at that institution. So I'd say building out a depth of understanding of who your lending partner is in their broader team and how they operate is incredibly important. And I think quite honestly, that's where the value add of somebody like Battery really comes into play because they'll have history, repetition, you know, with deep-seated lending relationships where they can help guide their entrepreneurs and their management teams with how to work with their lenders, both in good times and bad. 

Michael Hainsworth [00:15:29] You know, Morad, that was a very interesting point about, you know, managing relationships when things are good, but also when things are bad. I think some entrepreneurs are fearful of approaching someone such as yourself when things are not going well. And that's the point at which they should be turning to you. 

Morad Elhafed [00:15:46] Yeah, I think they're fearful of lenders when things don't go well. You’re an entrepreneur, you're building a business. What you need is to work with somebody who wants to build a business. I always say I'm not a venture guy or private equity guy. I'm a guy who likes to build businesses. When you have that level of discussion with entrepreneurs and you say, let's talk about how we build businesses, we're in it together to set our expectations, let’s align on the vision. When things go well, it goes well. Where you don't go well, at least there's alignment, then you can talk through issues. My best advice to entrepreneurs, find somebody who wants to build a business together with you. Don't just look for the investor. It's not about financial engineering. It's not about making a quick return. It's about really having, again, this vision for building durable businesses in the long run, with somebody who you are aligned with. 

Michael Hainsworth [00:16:38] Morad's parallels between today's environment and the opportunities the 2008 financial crisis created, reveals deals can be done in any environment. Showcasing yourself as a top tier company over your less prominent counterparts is paramount. Market leadership, customer loyalty, robust management and a viable roadmap to profitability are all keys to success during these uncertain times. For both Morad and Andrew, the emphasis is on a business's sustainable growth and scalability. And beyond its athletic accolades, Boston stands as a hub for tech, biotech and finance. Both Morad and Andrew are confident that the city is a conducive environment for innovation anchored by its eminent academic institutions and a vibrant entrepreneurial culture. 

Michael Hainsworth [00:17:31] 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.