Illustration by Alexia Khruscheva
Before COVID-19 disrupted the daily habits of people around the world, Ritual Technologies Inc. was one of Canada’s fastest-growing technology startups. It built a business on making the regular morning caffeine run and on-the-go lunch more efficient, offering a mobile app that allows restaurant and café customers to order and pay ahead for quicker take-out.
The company had signed up more than 10,000 restaurants, primarily catering to office workers, in dozens of cities in North America, Australia, Hong Kong, Britain and Europe. And Ritual was on track to reach profitability by 2021.
Over three weeks in March, everything changed.
As the novel coronavirus spread and people were urged to work from home and avoid unnecessary outings, Ritual saw traffic to restaurants in some central business districts plummet by 70 per cent or more.
After initially underestimating the threat of the pandemic to its business in the first week of March, “by week three, we had to make a decision to survive,” chief executive Ray Reddy said. On April 2, the company pulled out of the Netherlands and Germany, its two markets in continental Europe, and laid off 181 people – more than half its staff.
Ritual chief executive Ray Reddy in Toronto on Oct. 9, 2018.Michelle Siu/The Globe and Mail
Ritual is one of many innovative and fast-growing Canadian startups that have found themselves in a previously unimaginable position: slammed by pandemic-related shutdowns in industries they serve, including restaurants, retail stores, hospitality and travel services.
Before the world changed, the dream for founding entrepreneurs and the venture capitalists who funded their early expansion was to reach so-called unicorn status, with a market value in excess of $1-billion.
Now, these star performers have hit a wall. “This event immediately impacts some of the highest growth companies in the Canadian tech ecosystem,” said Matt Golden, whose Toronto venture-capital firm Golden Ventures backed Ritual early on.
Revenue gains have not only failed to materialize, but some companies have had sales largely wiped out almost entirely. It’s unclear to what extent their markets will bounce back, how long that will take or what the availability of further growth capital will be.
To even survive, these entrepreneurs have to adapt. For many, that means following a two-point game plan. First, they have to slow the bleeding by cutting expenses, hoarding cash and paring back expansion plans. Some are also raising bridge financing from investors who still back their strategies.
For previously high-flying startup entrepreneurs, it’s a jarring thing to hear: Cast away your optimism and a growth-at-all-costs mindset. But the second step is to keep doing what made them stars in the first place: innovate and chase new opportunities.
That’s something Mr. Reddy has already started to do. Ritual is now developing a new app for local business far beyond eateries, anticipating providers of all kinds will have to rely more than ever on digital tools and online sales.
“What is going to change as a result of [the pandemic] is digital is going to become the new default” for local business, he said. “We are going to survive it and come out strong."
While the pandemic has hit many sectors hard, the blow to Canada’s innovation landscape has been particularly striking, as it includes many of the fastest-growing companies in the country. And many of those companies have been hiring dozens – if not hundreds – of employees each in recent years and emerging as global industry leaders.
Last year, venture-capital firms invested more in Canada – $6.2-billion according to the Canadian Venture Capital and Private Equity Association – more than any year since the peak of the dot-com bubble in 2000, after adjusting for inflation.
But many of these same companies are still at their early stages, and still not profitable or self-sustaining without outside capital providers.
In some ways, the 2008-09 financial crisis looked just as bleak for startups. As financial markets teetered on the edge of uncertainty, the Silicon Valley venture-capital firm Sequoia Capital sent out a slide deck to its portfolio companies warning that the days of flush financings and profligate spending were over. The title: “RIP Good Times.”
The document emphasized that cash was king; businesses had to focus on generating returns and reaching profitability. Companies that didn’t cut expenses early or deeply enough would enter a “death spiral.”
Now, venture capitalists are sending a similar message. Damien Steel, managing partner and head of ventures with the Ontario Municipal Employees Retirement System, considers any company in the pension fund’s venture portfolio without enough cash to cover needs for 18 months, to be in “the red zone.” He’s pushing them to extend that to two years.
“We’ve been saying the speech to founders since early March and we’re not going to stop saying it: Get to the other side," said Peter Misek, a partner with Framework Venture Partners in Toronto. "We don’t know what the other side looks like, but you must get to the other side.”
For Ritual and Montreal-based startup Hopper Inc., which caters to millennial leisure travellers with a mobile booking app, that meant making a quick, sweeping cut to staff in mid-March.
“Speed is everything in an environment like this,” said Hopper CEO Fred Lalonde. “One thing I learned in past crises: No matter how low you estimate your revenue will go, you’re probably going to be overestimating [how low that is]."
Mr. Lalonde expects diminished access to capital for early stage companies even after the travel industry begins to recover. But analysts expect Hopper and other top performers will be able to tap existing backers to help them carry on, as Montreal-based travel accommodation provider Sonder Holdings Inc. did in late April, when it raised more than $100-million.
In the meantime, Hopper is selling products such as cancellation insurance and price guarantees to travellers seeking flexibility. The company is also developing offerings such as flight seat selection options.
For some companies, ensuring the survival of their clients is the focus. Toronto-based TouchBistro Inc., for example, relies on the survival of the businesses to which it provides online restaurant management software. Half of Canada’s independent restaurants don’t expect to survive the pandemic and most multiunit businesses expect to permanently close at least one location if conditions don’t improve in three months, lobby group Restaurants Canada found in a recent survey.
To help the beleaguered industry TouchBistro serves, company CEO Alex Barrotti has dusted off two projects the company had on its to-do list for years – both of which he hopes will help restaurants tap new revenue.
One is an online system for processing takeout and delivery orders. Another is a digital gift card that restaurants could sell to their customers. TouchBistro is offering both to customers for free for several months. Since the online ordering service went live three weeks ago, 500 restaurants have added it, processing more than $500,000 in orders.
"Everything is about doing what we can to make sure our restaurants stay afloat,” Mr. Barrotti said. Last month, the company furloughed 131 of its 560 employees, after more than 500 customers of its 25,000 customers asked to temporarily defer payments.
Other companies have tried to avoid layoffs, including Montreal’s Plusgrade LP, which sells online upgrades for airplane seats and cruise ships. Plusgrade was generating more than US$50-million in annual sales before the crisis; in March, its revenue plummeted to zero.
But because the company has been profitable for at least five years, CEO Ken Harris says he’s been able to keep on all 120 staffers while cutting other costs. “We entered this period with a strong balance sheet, feeling very much like we could weather the storm.” As Plusgrade waits things out, Mr. Harris is encouraging his staff to develop new initiatives that can deliver revenue when bookings pick up.
“To a degree it’s making me feel like an entrepreneur again,” Mr. Harris said. “There was a point in time [in the past] when I had zero revenue also. We’ve got to all be entrepreneurs right now and climb out from point zero up.”
Still, expectations and strategies will have to be reset. After the dot-com bust in 2000, entrepreneurs and the venture capitalists who backed them focused less on soaring market valuations and stock prices, and more on whether innovations were actually useful and how fast companies were burning through the cash they had already raised.
Ritual, for example, anticipates having to survive on revenue 75 per cent to 80 per cent lower than expected for an extended period. But the underlying business model is sound and delivering value, said board member Steve Leightell, a partner with Toronto growth capital firm Georgian Partners, which backed the company early on.
“All of it still works: the value to the merchant, the way the consumer wants to interact with merchants. None of that changes [beyond the current] economic impact,” he said.
In fact, many entrepreneurs expect the pandemic could dramatically accelerate the digital transformation of their industries and offer new opportunities.
Before the crisis, Toronto’s Tophatmonocle Corp. (Top Hat) had already made a name in the academic publishing business. Its app lets instructors administer tests, grade assignments and provide digital textbooks and other course materials to three million students at 750 North American universities and colleges, all through their smartphones.
This week, Top Hat CEO Mike Silagadze unveiled plans to add audio and video-conferencing to Top Hat’s platform so professors can run courses entirely online in virtual classrooms, something he thinks will still be necessary this fall.
“We believe online is going to permanently be a much larger part of the higher education experience,” Mr. Silagadze said. “When things go back to normal, it’s not like they will go back to what they were before.”
Ritual’s Mr. Reddy anticipates that even as the economy opens up, consumers will be wary of waiting in lines or handling cash and PIN pads. “We think this behaviour change is going to be permanent [and] the scale at which local businesses are going to adopt digital will be unlike anything we’ve seen before," he said.
So, he has been pitching a new idea to banks, grocery stores, the Liquor Control Board of Ontario and the city of Toronto: a mobile app allowing customers to “virtually line up," and to enter outlets at scheduled times. It could help businesses control traffic flow and save customers time. It could also help municipalities contact-trace virus carriers, according to a Ritual proposal document obtained by The Globe and Mail.
Mr. Reddy declined to discuss the proposal, but he said, “We are generally talking to cities, commercial property managers and local businesses to understand how digital solutions can help local businesses open up again and operate safely in a world with social distancing.”
As people stay home, more shopping has gone online. The pandemic has reinforced the importance of having a robust online presence.
Montreal-based eyewear retailer BonLook began nine years ago as an online retailer, then added stores – 35 of them across Canada. When the COVID-19 pandemic hit, the company sustained a “catastrophic” drop in sales, CEO Sophie Boulanger said.
But BonLook continued to fill prescriptions and advertise online as malls remained closed. In April, its e-commerce sales surged by 180 per cent compared with the same time last year. While it does not make up for lost store sales, the early investments in technology are helping the company to weather the storm.
“Right now it’s just a matter of holding on until things come back to normal,” Ms. Boulanger said.
Once the stores reopen, she said BonLook will accelerate plans to offer more digital options on-site, including self-service stations. “Bridging the experience between the [online and bricks-and-mortar] formats has always been our goal,” she said. “We will push that further.”
Even startups that have not been as threatened by the pandemic are reassessing how they operate.
As people began working from home, Vancouver-based online furniture retailer TradeMango Solutions Inc. (operating as Article.com) experienced a jump in orders for office furniture. By early April, Article had sold out of its most popular desk, the Culla, in both oak and walnut. The next shipment quickly sold out, too; more arrive this month.
Even once the pandemic passes, company co-founder and CEO Aamir Baig expects customer demand could be more volatile than before, and he wants to be able to respond more quickly. It typically takes Article nine months to get a product from concept and design to availability for sale its website. Mr. Baig would like to shorten that to three months or less.
Once a product is sold, it takes two to three months to produce and ship it to a warehouse; he’d prefer to fulfill orders on demand in two weeks.
“It could entail some shifts towards near-shoring, onshore manufacturing. It could entail offshore manufacturers changing their manufacturing methods so that they’re able to manufacture a lot faster, versus the long lead time manufacturing that is typically done,” Mr. Baig said. "It’s a changing landscape.”
Like Mr. Baig, many entrepreneurs are thinking about what the “new normal” will be as the effects of COVID-19 ease. “The mindset has shifted from [the pandemic being] something you get through to what’s the new world going to look like – your market and how you go after it and accelerate the business into that change,” said Justin LaFayette, managing partner with Georgian Partners.
Toronto-based Knix Wear, which sells leisure apparel, bras and underwear, has not been hit too hard by COVID-19 – although it closed its two stores in Vancouver and Toronto. But even before the crisis, more than 90 per cent of its sales were generated online. Despite the economic uncertainty, the pandemic caused shoppers to buy online, and April was Knix’s biggest month ever as revenue increased by 65 per cent compared with the same month in 2019.
To improve the online shopping experience, Knix responded to the pandemic by accelerating a project that had been on the backburner: virtual fitting-room chats. Founder and CEO Joanna Griffiths had considered offering online fitting for some time and moved quickly to test the idea. Knix sent its full product line, a rack, and some decorative plants to help a store staffer set up a “mini-showroom” at her home.
Now eight store employees are doing the same on Google Hangouts or Zoom. Customers wear a fitted t-shirt, and staff walk them through how to measure themselves, and show them products. Online fitting appointments have booked up quickly, and the company will add more slots.
“The great entrepreneurs, the great innovators, react well to change and see it as an opportunity,” said Janet Bannister, managing partner with Canadian venture capital firm Real Ventures. “They’re wired to move quickly, they’re wired to make the most of limited resources, they are often the people who are at the front lines of creating these changes."
Then vs. now
Ritual Technologies Inc.
Then: October, 2019: Sixteen months after raising US$70-million from investors, Toronto-based Ritual has more than tripled the number of restaurants it serves and announces an expansion into Hong Kong, the Netherlands and Germany.
Now: On April 2, with traffic in core business districts it serves down by 60 per cent or more, Ritual lays off more than half its staff and pulls out of Germany and the Netherlands. The company is now developing an app that would let shoppers “virtually” queue outside stores.
TouchBistro Inc.
Then: September, 2019: TouchBistro raises $158-million in a venture deal led by OMERS, valuing the Toronto company – which has more than 16,000 restaurant customers using its point-of-sale software system across North America and Britain – at $500-million.
Now: On April 14, TouchBistro says it is furloughing 131 employees. More than 500 restaurants have asked to temporarily stop paying fees. TouchBistro has introduced a virtual gift card and online takeout-and-delivery options to help customers generate sales.
Plusgrade LP
Then: November, 2018: The Caisse de dépôt et placement du Québec buys a $200-million stake in the company, which is profitable and enables travellers to bid online for airline seat and cruise cabin upgrades. The deal values Plusgrade at $600-million.
Now: March: Amid global travel restrictions, Plusgrade sees revenues, which had surpassed US$50-million on an annualized basis, fall to zero. The company has cut costs, but does not plan to lay off any of its 120 employees.
Hopper Inc.
Then: January, 2020: The online travel company is coming off a year of growth of several hundred per cent after expanding its service to let travellers book hotel rooms and purchase other services, including insurance and ticket-price guarantees.
Now: On April 6, Hopper announces deep but undisclosed cuts to its roughly 500-person staff after revenues dropped by 75 per cent to 90 per cent. Hopper is developing new offerings to appeal to customers when travel picks up again.
BonLook
Then: Two rounds of funding from Montreal-based private investment firm Walter Capital Partners in 2016 and 2017 give the eyewear retailer the ability to expand its network of stores. The company started as an e-commerce business, but now makes most of its sales in its 35 retail outlets.
Now: After closing the stores in mid-March, the company laid off about 400 of its 430 employees, keeping just a skeleton staff to keep its digital operations running. Since then, BonLook has rehired about half of them under Ottawa’s wage subsidy program. After a “catastrophic” drop in revenue in March, e-commerce sales spike in April compared with the same time last year, but not enough to make up for lost sales in stores.
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