What can tech companies do to thrive in a recession?

As one of the best performing sectors during the pandemic, the tech sector is currently facing challenging times as reverse fortunes prompt companies to tighten their belts.

Last month, Shopify Inc. announced it would lay off 10% of the global workforce and cut spending in lower-priority sectors and non-core activities. In June, Wealthsimple said it would cut 13 percent of its workforce and would “laser focus” on its core businesses, which are investing, banking and crypto. And last week, Vancouver-based Hootsuite said it was eliminating 30% of its workforce during a global restructuring.

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

Young businesses trying to attract financial interest are also starting to see a very different environment than just a few years ago. The Canadian Private Equity and Venture Capital Association said the number of deals and average deal size both decreased 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 also find ways to grow out of the industry downturn in a stronger, more competitive position.

The development path of the industry comes after a long period of growth, expansion, and increased demand, which many companies have developed.

Mike Abramsky, managing director at the MaRS Discovery District, said: “It is difficult to read the signs that things are going to go the other way too quickly.

He believes that the troubles facing the industry could continue for some time due to rising interest rates, high inflation, recession risks, market volatility and a slowdown in driven activities. as strong during the pandemic as online shopping.

“There are just too many perfect storming factors going on,” he said.

“Anything tied to interest rates, the economy and the stock market, like e-commerce, real estate, crypto and some fintech companies has really exploded. And with the risk of a recession. recession, we don’t know what’s next, and the fact that we don’t ‘don’t know’ makes companies cautious.”

Laura Lenz, a partner at OMERS Ventures who is leading the company’s investment in Canada, says the first thing leadership teams need to do right now is look at ways to preserve cash – whether it is necessary or not – because doing so will help expand the viability of the company without raising additional capital.

Having a clear view of the path to profitability is also important, she adds.

This means reduced spending on marketing, discretionary items and activities, and even employees, Lenz explains.

“That also means reviewing sales performance and renegotiating everything from rent to professional service contracts,” she says. “Another option is to look at the tools out there to increase automation on repetitive, low-value tasks so your people can focus on high-value work without you hired them to do.”

Lenz said investors, especially venture capital firms, are looking for “exceptions”.

“They want to invest in businesses that can grow at 50 percent regardless of the current macroeconomic backdrop,” she said.

MaRS’ Abramsky works with tech founders and CEOs and said the first thing he would ask them right now is how they plan to take advantage of the change in conditions to make their companies good. than when the recession is over.

“When things are going really well, technology overreacts to the positive and people overestimates the positive, and then when things go really bad, people,” he said. Forget that technology is resilient and will come back.

Companies will want to move towards a healthy end market, he adds, where their products and other services are must-haves, not goodies.

And although business leaders always plan according to the scenario, he still encourages them to go further.

“Let’s try more scenarios and look closely at the assumptions in those scenarios, because by nature tech companies, CEOs, and tech founders are all over-optimistic,” he said.

While the core business should be the focus of companies, there is more than one source of revenue, says Nusa Fain, director of the Smith Business School’s Master of Innovation and Entrepreneurship Management program. It is important to adapt to different situations.

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

Looking ahead to future developments in the field, she sees opportunities for healthcare innovation – particularly solutions around managing some of the challenges the pandemic has revealed. revealed.

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

“I also expect we’ll see some decentralization and reduce our reliance on FAANG (companies),” she said.

This report by the Canadian Press was first published on August 14, 2022.

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