Venture Insights Unveiled

Mike Pinkus: Over the last 10 years at ConnectCPA, we've had the privilege of witnessing the incredible journeys of over a thousand businesses. We've been there for the thrilling highs and daunting lows of entrepreneurship. We've celebrated wild successes and monumental exits, and we've also stood by businesses as they've navigated the stormy seas, facing roadblocks and challenges that every entrepreneur encounters in their day-to-day grind.

Join us as we dive deep into the stories of these resilient individuals who dared to dream, who persevered, and who were a testament to the power of entrepreneurship. This is their journey, their lessons, and their triumphs. Welcome to GrowthTales. I'm your host, Mike Pinkus, co-founder of ConnectCPA.

Mike Pinkus: Today we have an amazing guest, Alex Baker, who's a partner at Relay Ventures. Relay has been around since 2008 and has really built a name for itself as being a progressive venture firm. Relay normally enters at the Pre-seed or seed stage level of a business and has some notable investments in companies like Seven Shifts, who specialize in shift management software for restaurants, and companies like Cookin, who have built an app that allows you to order dishes prepared by local cooks straight to your door.

Relay, as a VC firm, has always shown their ability to spot winning opportunities really early on in the business journey. But we're so excited to learn how they do that. Thanks so much, Alex, for joining me today. So Alex, how did you end up in venture?

Alex Baker: It's kind of an interesting and unique, um, story. So it was in 2008—actually, 2007—and I was consulting for BearingPoint, which was KPMG Consulting. I was doing work weekly in San Francisco, and I usually had taken the last flight out on Thursday nights. But that week I had a meeting late Thursday and had to stay the night. So I took the first flight out Friday morning.

And I, um, I had bought something, but I had to take it back with me. It was this record—believe it or not—it was like this recordable DVD player, which was very unique back then. And I brought it on the plane with me 'cause I didn't check bags, and it's important to the story because I put it up top, and the guy next to me started asking me questions about it.

Alex Baker: And it turned out we got to talking, and he gave me a business card at the end of the flight and said, “Look, we're hiring for someone at my venture capital fund. I run the fund for Royal Bank of Canada. You've got a unique background in consulting and understanding what is happening in the financial services space. Would you teach me about consulting if I taught you about venture capital?” And that is literally how it happened.

I knew nothing about the asset class. I knew nothing about venture capital. It was really early days in Canada for VC funds. There was nothing really written about it—it was hard to research VC assets at that time. There were maybe four or five funds. And I even remember my first Founders and Funders event that I went to—there might've been 50 people there.

Mike Pinkus: Wow.

Alex Baker: So it was pretty early, and it was very unique. And I am beyond lucky that it was fortuitous that I had that encounter with Kevin. And that was, you know, 15 years ago.

Mike Pinkus: Wow. Yeah, that's incredible. Did you have an interest in it before, um, before that interaction?

Alex Baker: I mean, I had an interest in technology like every younger person does—especially, you know, kind of our generation with the internet emerging when it did—and an interest in, you know, hardware. And I knew of some venture-backed companies, but there was very little in Canada at the time that you could pin your finger on, and almost nothing happening in financial services.

And the closest thing that I had was work that I had done as a consultant at PayPal. So I kind of immersed myself in that culture a little bit. That was post them IPO-ing. But no, I mean, I didn't—again, early stage companies were like… I didn’t realize this at the time, Mike, but you know, if I look back in 1997 when I got my first job at the Loyalty Group, which ran the Air Miles program—that was a startup. It was a technology startup. I was probably, you know, employee number 90 or 95 in that company.

Mike Pinkus: Mm-hmm.

Alex Baker: I didn’t realize it was a startup at the time. But, so I—you know, I guess what goes around comes around. And I ended up funding companies that looked like that when I joined.

Mike Pinkus: That's awesome. At Relay, you typically enter in at the pre-seed or seed stage level. What are some of the benefits and challenges of you entering so early into these businesses?

Alex Baker: Well, I mean, it's mostly challenges—let's be clear—because the businesses are not formed, the ideas are not fully formed. It's really a bet on people and their ability to build and execute and raise more money, generally speaking, and then build and execute, raise more money, and it's a flywheel.

But at that point, it's also a benefit because we've been doing this for 15 years together. We have the benefit of a partnership that's been doing this together for 15 years. So all of us have been together for 15 years, and the benefit of different opinions around the table to help formulate what can make that business successful and who might be able to help make that business successful alongside the founders. That could be from a commercialization standpoint, could be from an executive standpoint.

So, I mean, I don't think I answered your question directly, but I think you get a sense that while it provides the most risk at that stage, I think about the relationships that we build with our founders and our founding teams, which is extremely important to me. And I think that those benefits of that long-term understanding—of where their strengths are, how to build some teams around them—the long-term benefits of that relationship, they help mitigate some of the risks at the earliest stage.

But it is, you know, that's what venture's about, which is business formation. And so there is a place for capital at that stage of business. And, you know, of course, we want to be very involved—not like hands-on, but I would say involved. We want to be the first phone call. We want to be regularly updated on what's happening. We want to be involved in how contracts are being negotiated because we bring good perspective into that, but we don’t want to be writing the contracts.

Mike Pinkus: Right, right.

Alex Baker: So kind of—no noses in, fingers out.

Mike Pinkus: Yeah. And you mentioned the founders, meaning this could be at a place where product-market fit is starting to form. How important is the relationship, or your spot, on the founders in terms of picking the winners?

Alex Baker: I mean, that's the key for sure—to get a company into some type of revenue territory where it's a meaningful product and people on the street know it, in whatever industry it is they're selling into. So Seven Shifts, you described before—to a point.

Now, Jordan’s amazing. Okay? Like, amazing. And I remember meeting him actually not long after—not long before—I met you. I met you in 2017. I look back at—

Mike Pinkus: It's been that long, eh?

Alex Baker: So Jordan was like 2016. But he—Jordan was developing—maybe he had four or five hundred restaurants at that time.

Mike Pinkus: Mm-hmm.

Alex Baker: But he became a brand that was very well known in the restaurant industry. And you certainly want a founder who's capable of delivering far beyond that, which Jordan has been able to do. But you want a founder who is that expressive, that much of a cheerleader, that much of a spokesperson—that they’re the ones who can create that market, or they can create the hype within their market that it becomes so well known.

And founders—you know, founders to me are the keys to the castle. You look at our most successful exits, particularly those in the last few years: John and Benjie Levy, both founders of The Score, took it through to exit and continue to operate.

Stewart at ecobee—Stewart Lombard at ecobee—same thing. Founder of ecobee, took it through to exit. He recently retired. But he was the culture, he was the product, he was the sales, he was the engineering. The same thing is true for the Levys. The same thing is true for Jordan. The same thing is true for Tim and Johnson at Greenlight. I mean, the list can go on and on—Roger, Desai, Payfone—the list just keeps going on and on and on. And it's proved now—sorry, not Payfone—but you get the point.

Mike Pinkus: No, that's incredible. And those companies that have scaled, like the Seven Shifts, that have really, really grown and gotten product-market fit—do you have that gut instinct early on? Like, you probably get presented with so many opportunities, and I'd imagine it's a difficult task to—we talked about how so much is in the founders—but in the actual business concept or idea that they're formulating in the early days of it, do you get this gut instinct now that you've been doing this for so many years, of which companies have a greater probability of product-market fit? Or is it still very, very heavily weighted on—you’re betting on the horse, the founder—that they are the ones that take it to the promised land?

Alex Baker: Second. Second for sure. You're betting—you're betting on the founder, for sure. The product changes so much.

You know, can you move from a feature-based product to a platform—that's the big question. Can you make that transition? In Jordan’s case, can you make the transition from being a shift management platform to more of a labor management, employee engagement platform—which is what they've become—and sell payroll and tipping and a whole bunch of other modules that make it much broader than just shift scheduling?

For Tim and Johnson at Greenlight, can you move beyond a debit card for families and make yourself effectively a banking platform that sells not only a savings program, but also sells an investment account, and also sells some insurance products that are relevant to their customer base?

Alex Baker: So that’s a huge bet. Can you take this from—what are the—what are… I like to look at it and say, like, what are multiple vectors of growth that the company can scale on? And if I can visualize them—one and two—that the founder has the ability to articulate them without me sort of poking and prodding them, then they're thinking about this much more broadly.

Jordan was always thinking about Horizon Three and Horizon Four of this business. Always. He was never happy, and has never been happy, with where we are today in the current state—ever. Like, he’s a product person. He just keeps moving the ball forward on product and understands what people want to buy. And that’s true for people that come from both within industry or are trying to solve a problem that they themselves have experienced.

Mike Pinkus: I think that's so critical, what you just explained there—where you almost expect the founders to iterate and pivot and change strategies and add on features and new revenue models as they go through these different inflection points. And to your point, it’s almost hard to know what those are going to look like. So you have to believe in that leadership team.

What happens when things are going off track? Or let’s say the investors maybe have a difference of opinion of where a company should head. Does that ever happen, and what do you guys do?

Alex Baker: Well, it happens, for sure. And, you know, I don’t think it just happens overnight. My approach is always to be as candid and open with the founders as I feel like they should be with me.

And the benefit—you talked about it before, right? So the benefit of starting early and dealing with founders in their most vulnerable time—getting paid particularly well—they’ve risked their entire livelihood on this business. People think that they’re nuts for doing what they’re doing. You know, could have gone from a very well-paying, stable job to something where they’re like three people or four people. It is, and they might be at a stage of their life where it’s difficult to do.

But I think open and transparent communication, which I try to breed myself—and tell them, like, I could tell you I’m not going to judge, but I’m going to judge. Like—

Mike Pinkus: Mm-hmm.

Alex Baker: That’s what the role of a board is. The role of a board is to be judgmental of the decisions that you’re making at a certain level. The board should not be judgmental of, you know, what I would say are non-material decisions that are around who you’re going to hire. It’s important to you, and it could be material to the business, but it’s not—that’s not the board’s job.

But the board’s job might be to help you understand what that individual is lacking that you might need, as an example—but not be explicit about hiring and firing decisions.

And I think taking an approach—it’s like you can’t really quantify it or put your finger on it—but, you know, being transparent and honest and upfront over time helps you build that relationship. Where as things start to get derailed, you can have a conversation—a very non-confrontational but engaging conversation—about how to change things.

Which might mean bringing new people in. It might mean suggesting to the founder that it’s time for them to find a person that can scale to the next $10 or $20 million of revenue—or $50 million of revenue, whatever that marker is.

But also, honestly, Mike, it takes time to understand that as well. And so you can’t—it’s hard to… The benefit of being in this for 15 years is that I’ve made a lot of mistakes. And so the real benefit comes from trying to not make those mistakes a second time, from my perspective.

Yeah, that’s—it’s hard. It is exceptionally hard. And yes, we’ve had to replace founders. And by the way, that’s like the hardest thing to do.

Mike Pinkus: And I think to your point, it’s—I think it’s incredible that you are in a relationship, and you’re aligned in terms of your goals and objectives. And the fact that Relay has been around as long—going all the way back to 2008—there’s a lot of lessons learned. And those being transparent and open, I think, is incredibly valuable.

And that brings me to my next question, which is: when the markets are a little bit more challenging, how are you aligned in the same goals as the founders? You’re in a relationship, you’re working together to achieve an outcome. How do you navigate the waters when there’s hyperinflation, recessionary undertones in the market? What do the board meetings look like behind the scenes during a time like this?

Alex Baker: So it—well, I mean, look, I was around in 2000. I joined in 2008—I mentioned it earlier. And I talked to a friend of mine about this about a month ago, and I said, like, I just don't get it. It didn't seem so bad in 2009 as it is today, right?

And his point was, we were kids then—we’re adults now. And, you know, it was everyone else around us that was taking care of the problems. So we didn’t experience them. Like, we weren’t in the board meetings the same way they were in the board meetings. We weren’t having the conversations the same way they were having the conversations. So now it's a totally different scenario.

And I will tell you, a lot of them—they’re very difficult conversations.

Alex Baker: The whole idea of nine to twelve-month funding cycles is dead. They're totally dead—even for the best companies. And the funding cycles are like 21 to 24 months away, in many cases from last March, let's call it.

So we've got companies that went from hypergrowth of 150% to 200% to kind of 60% to 75%, and in some cases, 15% to 30% growth, with a much, much closer—or much tighter—view on how they’re spending their money. And an understanding that you need to keep an arsenal for when things come back, and be a fast follower instead of trying to stay ahead of the curve and overpay for acquisition for customers that likely won’t stick.

And work on other things now. Work on improving parts of the product. Let’s not work on what a product roadmap looks like two years from now. Let’s work on fixing the deficiencies that exist today and trying to secure the customers that we have and reduce the attrition that we have.

That’s what the conversations have been.

Alex Baker: And those that have the capacity—the capital capacity—to withstand what's happening right now are. And in some cases, you know, there have been instances where unfortunately businesses have been recapitalized and we haven’t participated—not many, but they’ve happened. And others where we’ve had to sell the businesses for something that is less than what we thought they were worth a year and a half or two years ago.

The situation is complicated out there right now. And I think any Canadian—let’s say any North American VC—should be saying the same thing. I'd be shocked if they said otherwise.

The benefit we have is we have several portfolio companies in each portfolio. So several companies, I should say, in each portfolio where the magnitude of the value of those assets overshadows the ones that are not as strong.

Mike Pinkus: Mm-hmm.

Alex Baker: And those ones are still doing exceptionally well.

Mike Pinkus: That’s great.

Alex Baker: It’s lucky—it’s lucky. Maybe it’s not lucky. Maybe it’s the way we operate. But the funds themselves are in good shape because of the drivers.

Mike Pinkus: And those—and I think that’s always been the model: that you’re going to have those outlier, really big home run type investments, and not all of them are going to work. In fact, it’s unrealistic to expect any venture firm to go a hundred for a hundred. Like, it’s just not… There’s a batting average, right? Not every business is going to succeed.

Do you think this is the new normal, though? Like being more conservative with cash flow, looking at the unit economics, not burning as much, and being a little bit more finger on the pulse on those expenses?

Alex Baker: You think that's the new norm? Absolutely—for the next, call it, three or four years. Right? It's a cycle, right?

The way the cycle works, if you think about it, is: we fund companies, companies cycle themselves through a process where they can hire and hire—they raise money, they hire people, they improve their product and their top-line growth, they raise more money—and that’s a flywheel. Eventually, they exit. That exit gets distributed to our investors—our LPs. LPs invest in our next fund. Our next fund invests in companies. That’s how the cycles work together.

So if you think about it from that perspective, what we’re in right now is a cycle. M&A is, you know, back to 2017–2018 levels—if not even earlier than that. There are a few reasons you and I can talk about during the call, if you want. But M&A is down considerably, which means that money’s not getting cycled back to LPs, which means that money’s not getting cycled into new funds, right?

Alex Baker: And so we have to wait for the cycle of valuations to go back up, for exits to happen, so that LPs invest back in GPs, who invest back in companies, right? And that’s why I think you’ll see this defensive stance for the next, call it, three or four years—because there was a ton of money put into new funds, new vehicles—not necessarily new fund managers, but new vehicles—in 2021 and 2022.

This year has been, again, one of the lowest fundraising environments for funds that we’ve seen in a long time. So the money has to get cycled through, returns have to start coming back—and all of this takes time. Like, we don’t invest in companies and have successes overnight.

You know, the shortest—we just sold a company called Playmaker, it was listed on the TSX. It was a very unique structure that we did. We incubated the company here with my partner at the time, Jake Cassaday. Jake and Jordan Gnat went, and Jake joined Jordan Gnat to run the company. And we just exited that company to Better Collective. It took three years. That is very unusual—particularly for the return that we drove. I think that’s extraordinary for this market.

Alex Baker: And so I think that’s why we’re in this for another three to four years. Companies take, on the short end, six to eight years to get to exit. That’s what we were seeing in 2021—but it was unusual. Prior to 2021—in 2019, 2018, 2017—those businesses were, kind of, minimum nine, average I’d say thirteen years old upon exit.

Those cycles—I don’t know if I’ve explained it properly—but those cycles have got to start to come back before you start to see aggressive, offensive ball happening again. We’re in a defensive… a total defensive stature right now.

Mike Pinkus: That’s an incredible explanation. In fact, I now understand it better—because if the GPs are not raising, which then is being deployed, there just might not be capital to raise another round. So if you burn through your last round, there’s risk there because that flywheel you just explained has to—there’s got to be liquidity there.

Alex Baker: Especially since—like, who do you think is most likely to support the company through their next round of financing?

Mike Pinkus: Right. Right.

Alex Baker: It’s got to be people that are around the table—that are a part. Like, board members can never forget, right? I was a part of the decision when you made it.

Mike Pinkus: Yes.

Alex Baker: I still believe in the management team. I still believe in what the product is doing and where it’s headed. And I can see the results of our acquisition and our retention and our utilization and everything else. Now, provided those things still continue to happen, I think we should be comfortable continuing to invest in companies.

But if one or two of those things don’t seem to be working out—I mean, imagine that—the companies are going to have a hard time.

Mike Pinkus: Mm-hmm. And I wanted to ask you one more question here, Alex, which is—I’d be remiss not to ask you about this—AI. Some people I speak to say a lot of it’s noise and early days. Other people are saying that software that's solving really big problems, they need to just look at the roadmap to see whether it should be part of that roadmap or development roadmap. Where do you sit with your portfolio companies and how AI plays into their future—or doesn’t—and it’s just maybe noise?

Alex Baker: Okay, well, in almost every situation—no matter the company—we have people with artificial intelligence backgrounds working in the product and development groups. It could be what you think is the most simple product to the most complicated product, but it exists everywhere. And you cannot get away from having an AI strategy, whether or not it’s simplistic.

It could have to do with the way you interact with the customer, or whether it has to do with the efficiency of how your code is written, or the uniqueness of how your code is written. It exists everywhere. And it's tantamount to how people looked at open-source technologies—kind of like 13–15 years ago—when they started to enter into development cycles more rapidly.

You know, Mike, what happened was, we got to much more rapid product development cycles than people were used to in the past—much less expensive.

Mike Pinkus: Mm-hmm.

Alex Baker: And I think the same thing is true here. This is about efficiency, and it’s about uniqueness. And so if you can address both of those things in a company using AI—and you can do it for far less than what your competitors or legacy companies have been doing it for—then yeah, you stand to be very, very, very successful.

This is not… this is a typical cycle that you see in the market. History repeats itself.

Mike Pinkus: It’s so interesting that you bring up the efficiency that AI can… like, to your point—I think engineering costs have always been astronomically high to businesses. And now you're seeing that AI’s not replacing engineers, but it's assisting in coding and all these things.

Is AI also a tool, maybe, that can be used by some of those portfolio companies to cut down—not on engineering talent per se—but maybe they can do more with less? Meaning, instead of needing eight engineers, they need five in order to build out a feature set?

Alex Baker: Yeah, I mean, that's not just AI. I think it’s a modern tool stack. I think it has a lot to do with using the cloud. I mean, there’s a lot of things that are going into what is reducing development costs these days. APIs have everything to do with it.

And being able to identify partners early on whose technology you can leverage, or whose backend you can leverage in order to get a product into market—to see if there’s adoption—and then, you know, you worry about the code kind of afterwards.

That, to me, is like—we’re seeing that far more regularly now. Which is: I’ve stitched together this solution, I want to see if it has product-market fit. I’m going to give you examples of product-market fit and how I acquired customers and what their retention is like.

Alex Baker: And I want to take some more capital into the company to acquire more, and then deal with some of the technical debt that I’ve built by building something—some unique IP that I’ve been thinking about all along.

That is very, very, very common. It just—it allows you speed. You’re rapid prototyping it much, much, much faster.

You know, a great example of this is Cookin—you mentioned it earlier.

Mike Pinkus: Mm-hmm.

Alex Baker: When Morley and Michael first developed their prototype, I mean, they stitched it together. Not dissimilar—probably a little bit more complicated than what I just described—but once we identified that there was product-market fit, that there was interest from chefs and there was interest from consumers—once we did all that work and saw the fruits of the labor of the early prototyping—they have built quite a robust backend engine today that serves both chefs and customers in multiple geographies.

So that’s—I think that’s how the cycle works. And, you know, you're catching up with tech debt faster than you used to. But at the same time, you're using third parties like it's never been used before.

And then this is all complimented with AI that’s not only helping with your efficiency of your code build, but it might be helping with the efficiency of how you communicate internally, how you complete processes, how you do some machine-to-machine information transfers, and also how you communicate with your customers.

Mike Pinkus: Amazing. So Alex, if someone wants to get an investment from Relay, how do they impress you? What is Relay looking at over the next five years? Where are you guys looking?

Alex Baker: So we’ve been pretty consistent the last few years. Every quarter we kind of revisit our thesis areas, but I’d say the last three or four years we’ve been consistent in the areas of financial services—pretty common. But we’re actually looking mostly at software that has financial services enabled inside of it.

So financial services, proptech—we’ve got a team dedicated to property tech that is called Delate, and we work very closely with them. It’s sort of like a sister fund. We’re doing urban mobility. That would be like, how does the future of mobility look inside of—well, let’s just call it urban tech. What does the future of a city look like?

And then sports technology. And that ranges from some of the successes we’ve had in sports gaming around The Score and Playmaker, to consumer-type products where you can wear something on your wrist and measure your fitness, to what is the future of broadcasting, as an example.

Alex Baker: So that’s a whole range. And those four areas are the areas that I’d say we spend 100% of our time investing in—and probably 80% of our time prospecting. The other 20% is spent looking at other categories, making sure those thesis areas are still current and relevant, and figuring out where we should be expanding to. Because it’s about where the puck is going.

So I would say if you’re in one of those four areas, that’s going to be of interest to us. And we have a long view on each and every one of those categories.

Then I would say also, if you’re at the seed, pre-seed—you might be anywhere from a three-person team to a ten-person team—and you might have… you would have, today, in today’s market, everything that we’ve funded has revenue at the time of our investment. At the time that our investment closes.

So I would say that seems to be very important to us right now.

Mike Pinkus: That’s incredible. And I would say to anybody who’s watching this, that Alex is someone you want to have in your corner. He can add a ton of value to any business that’s at that level and looking to raise.

And Alex, I want to thank you so much for taking the time—because I know your time’s valuable—and I appreciate you hopping on with me.

Alex Baker: Yeah, Mike, thank you too. And you know, this has been—I think I said it earlier—our first meeting was 2017, and you know, you’ve done work with some of our companies, and I know they’ve really benefited from it. So I thank you too.

Mike Pinkus: I appreciate it, Alex. Thanks so much. That was Alex Baker, partner at Relay Ventures.

Two of the main insights I took away from the conversation with Alex were:

Number one: When making an investment, you are ultimately betting on the founding team. You have to expect that so many things are going to go wrong in the scaling journey. And since it's impossible to predict what will happen, there's nothing more important than the competence, entrepreneurial spirit, and the leadership of that founding team.

Number two: Market shift. There are booming times with sky-high valuations, and there are recessionary times with depressed valuations. There’s a time for spending, and there’s a time for being conservative and carefully monitoring cash flow and burn. The key is to not get caught up in the macro state of the economy.

As Alex noted, in good or bad economies, there will always be great businesses and unique opportunities. This same advice could be applied to business owners who might overreact to a poor macroeconomic environment. At the end of the day, all you can do is get up, push forward, make the best decisions possible, and execute. And that’s regardless of the external factors that are out of your control.

Just remember, no good or bad market lasts forever.

That’s it for today. As always, keep scaling up and breaking barriers.