“No, sorry. Thank you so much for your interest, and I’d love to keep your information for future conversations, but for now? Respectfully, no.”
Connie Lo is recreating a series of conversations she’s been having lately with retailers from Europe, Asia and Australia. Three Ships Beauty, the cultishly popular Toronto-based manufacturer of vegan and cruelty-free natural skin-care products she co-founded with Laura Burget in 2017, has caught the eye of the global beauty biz. But the startup has enough on its plate—this past spring, it inked a big deal that will see it stocked in more than 500 Whole Foods stores across North America—and Lo isn’t interested in overextension.
Early on, she’d have given a different answer. Let’s rewind to 2022, a heady time for Three Ships. It was five years in and growing at a tear, having developed award-winning products, built an almost evangelical fan base, and earned shelf space in hundreds of stores. Sure, there were some speed wobbles, but the business had momentum and profile—Lo and Burget had just made the Forbes 30 under 30 list—and the time felt right to raise a seed round.
The investors Lo and Burget met with in January of 2022 were all about the company’s go-go strategy to chase top-line growth. But the start of the war in Ukraine cast a chill and, by March, they wanted to see healthy margins, modest costs, less risky projections. The shift in tone sparked a bracing revelation for the founders: Three Ships was not growing sustainably. It was spending too much, too fast, to bring on customers, and paying too little attention to the profitability it would need to last in the long term. So Lo and Burget quickly changed course. They recast their projections, recalibrated their team and reframed the north star of the business: profitable growth only. Today, they provide monthly, no-holds-barred financial updates to the team, and give every employee the autonomy to decline opportunities that exceed bandwidth or don’t contribute to the bottom line. Three Ships is now moving forward at a far more measured clip. “When you’re an early founder dealing with expectations of investors, or self-imposed expectations, it’s easy to get stuck thinking, I need to grow fast,” Burget reflects. “We had to really intentionally pull ourselves out of that mindset.”
Burget and Lo aren’t the only ones changing their thinking. When Facebook founder Mark Zuckerberg issued his famous edict to “move fast and break things,” he captured a spirit that became the dominant narrative in startup circles for more than a decade. Exponential growth became the defining metric for entrepreneurs and the institutions that supported them, never mind the fallout of expanding by 10 or 100 or 1,000 times or more. That mindset lingers—on this year’s Canada’s Top Growing Companies ranking, you’ll find plenty of businesses riding hockey-stick trajectories. But you’ll also find a groundswell of companies, like Three Ships, that are deliberately pursuing a more sustainable course. Their pace is not the sprint of the apocryphal hare, nor is it the slow crawl of the tortoise. It’s more like the beaver: steady, sturdy, with a sort of intentional industriousness. Their path may not scintillate, but ask anyone who’s tried to break up a dam: Those critters build shit that endures. And amid the increasingly visible financial, environmental and human turmoil that can come from scaling a business, they offer a kinder, gentler model of entrepreneurship: Grow, yes, absolutely—but not at all costs.
It’s fun to think of this transition to sustainable growth as a collective vibe shift, as if a whole generation of entrepreneurs walked away from that Super Pumped series about Uber’s implosion thinking, “Yikes, we’d better super-pump the brakes.” And, to be sure, there have been enough flameouts of hype-fuelled hyper-growth companies to make even the stoked-est tech bro think twice: the WeWorks and MoviePasses and Juiceros have lost their aspirational sheen, as have the griftier downfalls of Theranos and FTX. Even Shopify, the poster child of Canadian scale-ups, has had two major rounds of layoffs since mid-2022—a measure CEO Tobias Lütke has attributed in part to overplaying its hand on growth projections.
But money is a major driver of this movement—who’s providing it, who’s not and why. A unique confluence of factors has created a more prudent and cautious funding environment than anyone has seen in at least 15 years. To contextualize: The Canadian entrepreneurial ecosystem mushroomed in the years following the 2008 crash, fed by new technologies, favourable policies and new ambitions to build (or bet on) the next BlackBerry and, later, the next Shopify. Cash was cheap and plentiful; venture capital investment in Canadian firms ballooned tenfold between 2011 and 2021. Funding wasn’t ubiquitous, and it certainly wasn’t equitable but, by and large, entrepreneurial companies were freer than ever to swing big: to staff up, to grab land, to find users, all in the name of top-line growth. It feels reductive to say profit was an afterthought (because of course there have always been startups fixated on the bottom line), but for a surprising mass of those building and financing new ventures, profit really was an afterthought.
Then came COVID-19, which shocked the system, and a series of subsequent disruptions—the supply chain crises, the war in Ukraine, the unrelenting uptick in interest rates—which have made it a lot harder for entrepreneurs to fund leaps of faith. Venture capitalists have changed their criteria: In a widely circulated 2022 memo, blockbuster Silicon Valley firm Sequoia Capital declared “the era of being rewarded for hyper-growth at any costs is quickly coming to an end,” advising portfolio companies to retrench, curtail spending and focus on “disciplined, durable” growth. Private equity, always a more margin-focused realm, has similarly cooled on go-for-broke expansion: “It is sustainable, predictable growth that usually ends up winning in the end,” John Ruffolo of Maverix Private Equity wrote in a Medium post last year. IPOs have been off the table for all but the most niche businesses for going on two years. “I think everyone’s risk appetite is being tested,” says Kim Furlong, CEO of the Canadian Venture Capital and Private Equity Association. “Investors in the last number of years would have invested without a profitability line, and now they’re saying no.”
It might seem grim, but there’s considerable upside to this trend, according to Jérôme Nycz, whose work as executive vice-president at BDC Capital involves tracking and analyzing funding trends. In his view, startups that prize fiscal fundamentals are not only better positioned to weather this “fundraising winter”—they’re more likely to come out of it thriving and far less likely to fizzle out. “These conditions, right now, are pretty favourable to create companies that are well-structured, well-balanced, and capital efficient,” Nycz says.
Borrowell CEO Andrew Graham considers this a healthy market recalibration. Back in 2014, when he co-founded the Toronto-based online platform for personal finance education and tools, his team’s prioritization of unsexy variables like unit economics made it a bit of an outlier. But Graham didn’t—and doesn’t—believe there’s any long-term sense in scaling without a clear path to profitability. “We were just never comfortable saying, ‘We’ll figure it out later,’” he says. Borrowell is no unicorn, but it has grown steadily—sales more than doubled in the past three years—and it plans to keep it up primarily by adding incremental features for the 2.5 million Canadians already in its user base, rather than frantically trying to amass more. “Going into new markets and chasing new customer bases can seem exciting or novel,” Graham says. “But doing more for the customers that you have, the people who already believe in you, is—I think—a safer and more sustainable path for growth.”
Let’s zoom out for a moment. As important as money may be—and it absolutely is—it’s not the only motivator shifting startup behaviour. Some are finding that collateral damages of exponential growth outweigh the benefits, and they’re developing their growth strategies accordingly.
The Silicon Valley scale-up formula “can be great for some enterprises,” says Anna Kim, an associate professor who specializes in entrepreneurship at McGill’s Desautels Faculty of Management, “but it doesn’t always have the best social, economic and environmental impacts on the entrepreneurs, on their enterprises, or on their local communities.” Kim’s research examines companies that “scale deep”—that is, deeply and intentionally instead of broadly and quickly—rather than scale up, often to fulsome benefit. “We’re learning that there might be different ways of growing that can be healthy, sustainable, helpful, impactful and economically viable,” she says. And in this post-pandemic, inflation-ravaged, natural disaster–laden moment, more entrepreneurs are open to alternatives.
Take the matter of the environment. As society attempts to reconcile capitalism with the climate crisis, and as growing ranks of economists tout circular economies and even “degrowth” as potential remedies, companies like Montreal’s The Unscented Company are choosing to pursue growth only to the extent that it can be done with a minimal environmental footprint. The company has heaps of tree-hugger bona fides: It produces scent-free soaps and detergents, and delivers them in planet-friendly cardboard, glass and—as much as possible—refillable packaging. It’s been a B Corp since 2015, the same year it earned Leaping Bunny certification for cruelty-free production. Consumer and retailer interest in both its wares and its approach has surged over time—sales grew 112% in the past three years—prompting CEO Anie Rouleau to think hard about how and why, and where the business ought to expand.
One of Rouleau’s motivations for starting her company a dozen years ago was to eliminate single-use plastics in an industry riddled with them, so one of its growth metrics is the number of bottles saved from recycling or landfill—more than 1.2 million in 2022—and the goal is for the growth rate of this variable to move in lockstep, if not outpace, that of revenue. Metrics like this create guardrails to keep the business growing in alignment with its purpose. The Unscented Company is by no means as big as Rouleau wants it to be, not yet, but her ambitions are neither infinite nor compromisable. “For me, to grow means to have a positive, sustainable impact,” she says. “The more I grow, I need to show a better footprint. It’s not just financial.”
Then there’s the human fallout of hyper-growth. Rumblings of the AI apocalypse aside, startups are still powered by people, and it can be brutal out there. Few upstarts are able to perfectly correlate the size and skills of their teams to the pressing, often unrelenting, needs of major surges in business. There’s often a lag, which pushes more and more work onto employees who aren’t necessarily equipped to take it on. Some excel under this pressure, but some respond by zoning out, burning out or peacing out. And many founders—distracted by their own responsibilities—fail to notice until it’s too late.
Bobbie Racette is the founder and CEO of Virtual Gurus, a Calgary-based company that operates a marketplace for virtual assistants. When the pandemic hit, the company “grew hard”—300% year-over-year—and, like many startups undergoing an unexpected surge at an unrelenting pace, the cracks came deep and quick. Feeling the intense pressures of satisfying investors and new clients, Racette admits to running her team and herself ragged. At the nadir, six people quit in a single week—all as the company was experiencing the outward indicators of success. “I realized that if I continued on that path, I was not only going to break my team, but I was going to sink the company, because the culture was getting messed up,” Racette says. “It was horrible.”
This rock-bottom situation forced Racette to take a more calculated approach to growth, with a maxim to no longer push employees to the limit. She levelled with, and got the blessing of, her investors and board, and began using biweekly leadership meetings to assess the team’s capacity to reach key objectives and recalibrate as needed. She began prioritizing her own mental and physical wellness. It’s been about a year, and the difference is remarkable. “We’re on a really good path,” Racette says. “For me, now, it’s about looking within and getting the team to help set what is achievable, or not. The growth is still going to happen, just not that crazy growth everyone makes you strive for.”
There’s an almost existential question underpinning these stories of moderation and restraint. Startups are run by entrepreneurs, and stereotypically (but not inaccurately), entrepreneurs tend to be competitive, comfortable with risk and wired to believe they will succeed. Most are energized by chasing a BHAG (a “big hairy audacious goal,” to borrow the lingo), and thrive on the adrenalized moonshot mentality of hyper-growth. For better or worse, this adds a vigour and dynamism to the startups they lead. Does choosing a more sustainable path quash the very essence of what makes entrepreneurship so exciting and valuable?
Consider, here, the instructive and somewhat curious case of Vendasta, which develops white-label digital tools for firms that advise small- and mid-size enterprises and which has quietly become one of the more durable companies in Canadian tech.
CEO Brendan King and his co-founders started Vendasta in a Saskatoon garage in late 2007, mere months before the market imploded. With scant funding options, the startup had no choice but to expand incrementally and prioritize margins as it grew, gained customers and pivoted into software. When the taps opened a few years later, Vendasta was happy to partake, nabbing multiple rounds of venture funding, including, in 2019, the largest in Saskatchewan’s history. It was on track to go public in 2020, before pulling its IPO, securing a round of nearly $120 million in private capital led by a U.S.-based hedge-fund affiliate, and starting a streak of acquisitions. It scaled big and fast—it’s been on the Top Growing Companies list for five consecutive years—which suited King just fine: “I am the most optimistic person, and I really like to win,” he says. “And I do like to make those bets sometimes.”
But in the past year or so, the company has shifted its strategy from growth-growth-growth back to growth that can be achieved profitably and efficiently. This is partly in response to the realities of the market and partly a function of maturity—Vendasta is 15 years old, orbiting $100 million in annual revenue, a stage at which startups tend to downshift. The organization has cooled hiring plans and is now working toward the “rule of 40″ popularized by VC Brad Feld, which dictates that an entrepreneurial company’s growth rate, when added to its profit margin, should equal 40. “We think that’s a sustainable kind of situation in which to grow,” King says.
King is quick to admit it’s not his default setting. He is emphatically pro-growth, and he feels the entrepreneurial pull of sprinting toward ever-bolder frontiers all the time. But with a board to rein in unfeasible ideas—plus the residual lessons learned in Vendasta’s scrappy early years—he’s arrived at a healthy balance. “I think you do have to have a sort of careless disregard for what’s possible,” he says. “But at the same time, you’ve got to be pretty grounded in what you’re doing to figure out how to grow.” For in this new era of steadier, more sustainable growth, the startups to watch won’t necessarily be those with the nine-figure funding rounds or billion-dollar valuations or grandstanding CEOs, but rather those that blend ambition with pragmatism, who mix derring-do with doing good, and who forge their own paths forward.
CANADA’S TOP-GROWING COMPANIES 2023:
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