The Power of Private Markets in Driving Innovation

September 20, 2022

The Empire Club of Canada Presents

The Power of Private Markets in Driving Innovation

Chairman: Sal Rabbani, President, Board of Directors, Empire Club of Canada

Moderator
Jennifer Janson, Director of Communications, OMERS Ventures

Distinguished Guest Speakers
Damien Steel, Managing Partner & Head of Ventures, OMERS Ventures
Frederic Lalonde, CEO & Co-Founder, Hopper
Marko Trivun, Partner, Blake, Cassels & Graydon LLP
Richard Carleton, CEO, Canadian Securities Exchange, Board Director, Empire Club of Canada, Canadian Securities Exchange

Head Table Guests
James Black, Vice-President, Listings Development, Canadian Securities Exchange
Dr. George L. Cooke, Chair of the Board of Directors, OMERS Administration Corporation
Dr. Mohamed Lachemi, President & Vice-Chancellor, Toronto Metropolitan University
Dr. H. Ian Macdonald, President Emeritus, York University, Professor Emeritus of Economics and Public Policy, Schulich School of Business, York University, Past President, Empire Club of Canada
Karen McDonald, Vice-President, Finance, Clearway Group
Tamara Nachmani, Partner, Blake, Cassels & Graydon LLP
Sandra Odendahl, Senior Vice-President and Head of Sustainability and Diversity, BDC
Dr. Mark Peterson, Professor of Surgery, Cardiac, Aortic, Endovascular and Structural Heart Surgeon, University of Toronto
Andrea Wood, Chief Legal & Governance Officer, TELUS, Past President, Empire Club of Canada

Introduction
It is a great honour for me to be here at the Empire Club of Canada today, which is arguably the most famous and historically relevant speaker’s podium to have ever existed in Canada. It has offered its podium to such international luminaries as Winston Churchill, Ronald Reagan, Audrey Hepburn, the Dalai Lama, Indira Gandhi, and closer to home, from Pierre Trudeau to Justin Trudeau; literally generations of our great nation's leaders, alongside with those of the world's top international diplomats, heads of state, and business and thought leaders.

It is a real honour and distinct privilege to be invited to speak to the Empire Club of Canada, which has been welcoming international diplomats, leaders in business, and in science, and in politics. When they stand at that podium, they speak not only to the entire country, but they can speak to the entire world.

Welcome Address by Sal Rabbani, President, Board of Directors, Empire Club of Canada
Good afternoon. Welcome to the 119th season of the Empire Club of Canada. To our in-person attendees joining us at the Arcadian Court in Toronto, I'm delighted to be here with you in person. And our virtual audience, joining in live or on demand, thank you for your participation and support. This incredible community of colleagues and peers is the driving force behind our mandate to engage, debate, educate and advance the dialogue of important issues to Canadians. Welcome. My name is Sal Rabbani, and I'm the President of the Board of Directors of the Empire Club of Canada.

To formally begin this afternoon, I want to acknowledge that we're gathering on the traditional and treaty lands of the Mississaugas of the Credit, and the homelands of the Anishinaabe, the Haudenosaunee, and the Wyandot Peoples. We encourage everyone to learn more about the traditional territory on which you work and live.

This season, the Empire Club strives to bring you divergent and thought-provoking perspectives on politics, healthcare, technology, business, arts and culture. Opening our 119th season with themes of innovation and technology, and resilience in business, means we've successfully met the challenges of the past few years. I hope today's conversation will give you a positive perspective on what is possible to achieve when we look for opportunities and challenges. As President of the Empire Club, my goal is to extend our reach to include the rising stars of our generation. I have benefited professionally and personally through the influence of mentors and sponsors who introduced me to their networks and provided opportunities I may not have gotten on my own. I invite all of you in this room to consider ways in which you can mentor and sponsor young colleagues, friends and family to participate in this forum, so we may continue to support the development of emerging leaders through public dialogue.

Turning to today's program, I want to recognize the Empire Club's distinguished past presidents, many of whom are in the room today, board of directors, staff and volunteers. Thank you for your contributions to making this event a success.

I also want to acknowledge Her Majesty Queen Elizabeth the Second, whose funeral was yesterday. Queen Elizabeth made an address on June 26th, 1974, at the Empire Club's dinner in honour of the Toronto Scottish Regiment. She spoke graciously about Canada, and her sentiments reflect what the Empire Club is today, quote “people from all over the world, finding opportunities for full and rewarding lives. They're able to choose their various ways of being Canadian, respecting others, but not forsaking their own traditions.” As we recognize and reflect on the difficult history of the British monarchy in Canada, we acknowledge the historical and cultural significance of the contributions that Queen Elizabeth has made.

The Empire Club is a not-for-profit organization, and we'd like to recognize our sponsors who generously support the club and make these events possible and complimentary for our online viewers to attend. Thank you to our lead event sponsors, Blakes, the Canadian Securities Exchange; thank you to our VIP reception sponsor BDC; and thank you to our supporting sponsors, McCarthy Tétrault, TD Bank, TouchIntel, and Torys LLP. Thank you also to our season sponsor, Bruce Power.

For those joining us online, if you require technical assistance, please start a conversation with our team using the chat button on the right-hand side of your viewer. We're accepting questions from the audience for our speakers, and there's a QR code there found on your program booklet, or through Q&A under the video player.

It is now my pleasure to invite Marko Trivun, partner at Blake, Cassels & Graydon LLP, to introduce our speakers. Marko, welcome.

Opening Remarks by Marko Trivun, Partner, Blake, Cassels & Graydon LLP
You forgot your notes, Sal. Good afternoon, welcome. It's great to see you all. Do you remember five or six years ago, the Canadian tech media was all over the tech sector asking, why are you not producing as many unicorns as the US does? We're still not producing as many as the US on a per capita basis, but back then, we had about two. Today we have 27.

So, what's changed? What is what is the reason that we have this increase in the number of unicorns? Well, we've always had fertile soil for a startup hub. We have favourable tax policies around carried interest and equity compensation for employees, we have top universities producing top talent, and we have a government friendly to international investors and to immigration.

But lots of jurisdictions have that. So, what's really different? What's really driving the change? Well, I think that a part of the answer is that over time, we have produced many serial founders. Serial founders are extremely important to the VC ecosystem. They find a large market, they disrupt it, and in doing so, they hopefully create a good exit for their investors. But also, to create value for their employees and founders. This now means that these former employees can become mentors, advisors, angel investors, and even founders themselves, or start a venture capital fund. This further enriches that already fertile soil. And then, when you add venture capital on top of it, you create something that's truly bigger than the sum of its parts.

In 2014, VCs invested two billion dollars in Canadian startups. Last year, that number was 15 billion. In the last five years, tech companies raised thirty-eight billion dollars from the private markets, and only twenty-eight billion from the public markets. So, the private market clearly plays an outsized role in driving innovation.

There's a new book that summarizes the power of risk capital. Maybe some of you have read it: it's called The Power Law, by Sebastian Mallaby. It just came out a few months ago, it's a really great book, and instant VC cannon. And in that book, the author says, by forging connections among entrepreneurs, ideas, customers and capital, venture capitalists transform a mere agglomeration of smart people into an inventive network. At Blakes, my partners and I work with all the players in this inventive network, and we see time and time again how important it is to have this. To commercialize good ideas, and to help companies, specifically, startup companies that are software-based, find their product market fit. And today, we are very privileged to have with us today two key players in our very own inventive network, Damien Steel and Fred Lalonde. Damien started as a founder himself, having built and sold a digital dental laboratory startup. He's been with OMERS since it was formed in 2011, and has allocated a billion dollars’ worth of capital to startups around the world. Under his leadership, OMERS has expanded its Midas Touch globally to Europe and the US.

And one of their biggest investments has, of course, been in Hopper, which brings us to Fred Lalonde, the Co-Founder and CEO of Hopper. Fred is that serial founder I was talking about, having successfully grown his prior startup to be acquired by Expedia. We all know the travel industry was battered by the global pandemic—it’s almost trite to say that—but do you know what Hopper, a travel tech company did? They thrived. They did the seemingly impossible. I'm sure Fred will tell us all about it, but from the outside looking in, I think a big reason for their success is user obsession combined with a creative business model.

As an example, my favourite feature is freeze. It's a FinTech product, it's built right into Hopper. And just so you can relate to it, do you ever, when you're booking your vacation, I'm sure all of us get FOMO, because you—and this is probably the first time that the word FOMO has been used at the Empire Club, I’m aware of that—but when you're booking your vacation, because prices are always in flux, and maybe you're not ready to book yet because you haven't firmed up your plans yet, you're afraid of missing the lowest price, but you can't really do anything about it. Well, Hopper has you covered. You can lock in for a small fee that lower price and come back to book later when you're ready. An absolutely brilliant feature. It's insurance for travel prices. So, with such great speakers, Blakes is proud to support this conversation and the Empire Club of Canada. And I'm now going to turn it over to Fred and Damien. Thank you.

Damien Steel, Managing Partner & Head of Ventures, OMERS Ventures
Thanks, Marko. I appreciate you wearing the white sneakers for us to make us feel comfortable, but I left mine at home—I actually pulled out my dress shoes. First, I just wanted to thank the Empire Club for the invitation. It's an honour to be here, and I can't tell you how happy I am to be at an in-person event for really the first time in a couple of years, and so, thank you for that.

When Sal called me up about a month ago and asked if I'd come and talk about innovation, first I thought I was being pumped. I thought wow, this is pretty cruel; invite the VC to come and talk about tech after the greatest collapse in tech multiple since 2001. But, you know, when I look back and I think about the tech ecosystem as I was preparing for this, I realized—and I was mentioning at the table earlier—if you if you take any graph, and any graph for the last 10 years, whether it's, you know, dollars invested or multiples or anything, and you just take out 2021 and 2020, we're actually on a pretty good trajectory. And I'd venture to say, in Canada especially, we're on a great trajectory. You know, we mentioned a few stats earlier about dollars invested, but just as importantly, dollars exited. So, actual returns created follow a very similar path to what was said earlier. We used to generate about two to three billion dollars a year in exits back between 2013 and 2017. And 2018, that jumps to eight billion, and 2021 that jumps to eighteen billion dollars. And so, that that's the greatest stat I can show you in terms of a reflection of the value being created in Canada.

So, as I started thinking about this talk, and I started thinking about, well, how do I talk about, you know, tech over the last 10 years and everything we went through, I figured much better than hearing it for me is to bring somebody who's actually lived through it. And Fred is graciously agreed to join me. This is admittedly very special for me. It's the first time I've ever done one of these with Fred. I've worked with him for about 10 years now, I've looked up to him for 10 years. You know, whenever I talk about stories about founders and the great founders that we get to work with, inevitably, I ended up talking about him—and I'm sure my team at OMERS is sick of hearing me talk about Hopper.

So, what I hope today to do is really just pepper Fred with a bunch of questions, and hopefully get into a bit of the journey that Hopper has gone through. And I've had a privilege of having a seat and watching them do what they do, and I couldn't think of a better way of showcasing to what Canada is doing, you know what we're creating in this country on a global scale.

So, enough from me. Fred, thanks again, and maybe you could get things kicked off with just like the origin story of Hopper, and, you know, back early days before I was, before OMERS was even involved.

Frederic Lalonde, CEO & Co-Founder, Hopper
Sure, absolutely. So, it's funny, I was preparing for this, and I was reading the Figma exit, which I'm sure, so—company sells for twenty billion dollars and all that. And I read a timeline, and like a lot of tech companies, they had this like five-year block that they called the wilderness years, which basically means I don't understand what I'm trying to build, my company isn't working, and we're straying. And so, Hopper had a long period like that.

So, we were founded in Montreal, 2007, late 2007. And our seed round was done by Brightspark, which is, in my opinion, one of the better private venture capitalists; this is Sophie Forest and Mark Skapinker in Toronto. And our premise was that travel as a category had just not innovated at all. So, I'd sold my company to Expedia, I'd spent four years working for these guys that went on to do Zillow after that. And it was just, you know, two boxes, dates—it was the same thing over and over. And this is a, digital travel is at giant category, and big data was coming up. So, Facebook was just out, YouTube was starting, we just got the first iPhone; you’ve got to go back, like a lot of things were very different back then. And, you know, we naïvely thought, if we were able to build a big data platform like Google does for search, we could do things. And what things were, how we make money was totally unclear. So, we took five hundred thousand dollars, then we proceeded to invade Sophie Forest’s office in Montreal. And of course, we didn't have enough money to buy real computers, so we ordered the parts that gamers use to make those tricked out, you know, gaming stations.

And so, Sophie showed up at the office, and she saw like piles and piles, like we bought like five hundred computers and spare parts. And of course, we didn't have any cooling system, we didn't have a data centre, no security. So, we went to IKEA, and we bought 50 shelves that are used to put stuff in your garage, and plexiglass plates, because I heard that that's what the Google guys have done. And we started like with Velcro building this big data array. And the temperature in the office immediately soared to 170 degrees; there was no AC. So, I punched a hole in the ceiling without telling the landlord. And we tried to crunch big data with this. So, we basically built what it would have cost five million dollars with about, you know, a hundred thousand dollars' worth of capital and trying to make it work. So, at some point, an engineer from Sun came, and I showed him this. And when he finally stopped laughing, he said, why don't you at least incline the Plexiglass at 45 degrees, at least the heat will escape, and you won't blow out your computers.

So, we were started in this crazy idea that everything was possible, and you needed a lot of capital to do it. And honestly, I wasted five years of my life in that period. Not because we didn't have a good idea, but it's just the software to store big data was just not mature enough. So, I spent four years of my life rebooting a database every day, and we would just go home and make no progress. So, one of the things that you'll probably find in your portfolio is, founders are pretty weird. Like, we're wired differently. The ones that are successful, all the ones I know, they're all different. And I know quite a few billionaires that have you know, exited, and all that kind of stuff, and they're all driven by some inexplicable drive to get the thing done. And it doesn't matter if it doesn't work, and it's not logical.

So, we did that for a while, and we were just scraping stuff and figuring it out, and nothing was really working. But as we started accruing the data, we realized there's some cool things you could do. And our original idea was, it would be so much better if you could come in and say, find me a direct flight to a beach where there's good scuba diving for two hundred dollars, and boom, that would come out. And so, we tried to build that. And so, we had to aggregate data, indexing, all sorts of things. And we did this for a while.

We opened up in Boston because we realized that we were missing like a core expertise, and this is a theme that's paid out for us. And I say this on every stage everywhere: as Canadians, we should be looking to have the smartest people in the world work for our companies, right? So, we set up right next to the MIT and we started hiring MIT grads in Boston. And there were rumours that the company had left all this stuff—which has never been true—and we ended up with a talent pool that was a mix of Canada and Boston, then we opened up to New York, and the valley, and all these things. But one thing that we learned in this journey is we should have no shame in hiring the smartest people around the world. If they want to move to Canada, all the better, but it's all about the value creation, not the job creation short term. And this is something that I think the pandemic has helped us understand. So, long story short, we get this going, and we're about to launch this thing that can find you a direct flight to beach with scuba diving, and Google buys ITA’s software for a billion dollars. And in the press release, it says we're going to build an engine on Google that lets you find a direct flight to a beach for two hundred dollars. And I'm like, wow, like we're done. It's never gonna work.

And so, that was the genesis of it. And you know, we can get into the pivots and everything else, but of course, today what we do is very different. We're actually the second largest travel agency in North America, we sell about five billion dollars' worth of travel, the whole thing is growing, triple digits, as you know, and we have about seventy million mobile users around the world that do this. But that the transition from our original idea—which actually was stupid, even Google failed at that, there's a bunch of reasons why that doesn't work—and getting there is actually the real entrepreneurial journey. And, you know, there's tons of examples of this. YouTube was a dating site, Twitter was an enterprise platform, Shopify was selling snowboards, like almost all the good founder stories, except a few of them come from, you know, this art of actually pursuing what really matters for the customers and pivoting.

Damien Steel
Yeah, I mean it's funny, not many people know this, but when—so, the backstory of how I know Fred is there was a previous partner and mentor of mine, who's unfortunately passed away, he knew Fred. And at our previous fund, we actually tried to invest the round after Sophie invested, and you chose to take some money from a US player, who probably was sort of the right move then. Then we moved to another fund, and then tried to invest again, and couldn't. And then, when Derek and I were at OMERS, I remember Derek coming in and saying, ‘we're going to back Fred; I don't care how much money it costs, this is somebody special, and we just need to figure out a way.’ And the interesting part of the story is, the time that we invested, you were actually doing that what you now call a stupid idea—so, I'm not sure what that says about us as VCs. But you know, it sounds cliché when I say it, but we genuinely, in the venture business, we are absolutely in the business of investing in people, not in businesses. You know, you use that word pivot. I would rather put money behind a founder to figure it out, than to think that I'm smart enough to pick the business that's going to last for 10 years.

So, you know, help me as an investor. As we think about backing these founders, like, how do you even manage these pivots? How do you know when it's not working, and what have you learned along the way, as you've kind of weaved and dodged?

Frederic Lalonde
You're actually touching on something important that the Canadian ecosystem adopted late, you know, so maybe in the last decade. OMERS was actually leading this. By the way, all the things I'm going to say about OMERS, I say when he's not in the room. I even say them in Québec, in French, when this is blue behind me—and they don't like it when you talk about Toronto in Québec in a good way—so, this is actually fundamentally true. When you came in, OMERs is one of maybe two or three events that allowed Hopper to exist. And the story is, you guys said, I think there's two companies, us and Shopify, where you let the founder set the price at which you are investing. And for those of you who don't know, this was one of the first times, if not the first time, that a Canadian pension fund was going direct, instead of giving their money to other venture capitalists.

Damien Steel
This is 2012.

Frederic Lalonde
Yeah, this is 2012. And everybody was like, 'oh, these guys are gonna fail, they don't know what they're doing.' Like the entire venture capital industry was opposed, you know, thought that it wasn't gonna work. And, you know, some things worked, some things didn't, but you got Hopper and Shopify, and that's a lot better than what most people did in that period by, you know, an order of magnitude. So, you guys came in, and it was truly the team. I thank you for saying, founder, but it's actually we had a pretty good team back then. And so, there's a shocking number of investors everywhere, but especially in Canada, that don't get that. They're trying to copycat, like, the last thing that they saw a US investor do. And the trick is in this business, as you know, is you’ve got to find the people that are the outliers in a good way, and you got to back them and keep compounding your investment. So, what it did for us, by the way, is we didn't need the capital, but we ended up needing it because nothing worked. And because you guys had done that, we're able to continue to execute through the pivot, which was the thing.

So, the story of the pivot is, we were doing this search engine and it wasn't working. Nobody cared. And one of the things that I’d learned from my buddies at Zillow is that you could get the media to write about you as a startup, but in order to do that, you had to feed them something interesting. You couldn’t say, write about my startup. So, we were able at that point to predict the best time to buy a flight. Very simple thing. And so, we had this stuff that we pitched to journalists, to reporters that wrote about travel, which is what is the correct day to book a flight? And you could actually search for this. And so, you had a thing where you’d say, I want to go to Miami, and I’m leaving from Toronto. And it would show you a black and white bar chart with error bars on it that said, you know, there's an eighty percent probability that you'll save seven dollars if you book on a Tuesday. And obviously, this was not meant for consumers, right? It was in research paper that we would split up programmatically, so that, you know, when they write the papers about the upcoming season of travel—which they always do—they could get some data from us. And then, they had to attribute it to Hopper.

And we gave this to a reporter at The New York Times. And instead of writing the story—so, I remember at that point, Colorado had legalized weed, and it was the first state to do it. And we said, when Colorado did that, flight demand went up twenty percent. And we went, like, our story went viral around the world. People thought we were a weed startup. And I was like, no, we're actually in travel. So, it kind of worked, but in the wrong way. And so, this guy from The New York Times looks at it and says, actually, I'm going to write about your tool, the fact that you can tell me which day of the week to buy to save seven dollars. And he did without really telling us. And then, they put it in the digital edition. And within an hour, it was the second most emailed article of The New York Times, and it took all of our servers down. And it wasn't even on our homepage, because we were doing this other stupid thing, right?

And so, then they ran it in print on a Sunday, and the next thing I knew, like, I'm waking up on Monday, and we’re on Good Morning America. Like they're literally talking about us. And then, it got syndicated and it was running on the local news channels. And it just, it was a catastrophe, because we didn't, we weren't set up to do this. And this was a very important point because what we learned is that even though we thought this other thing was a great idea, and we told our investors—and by then, we'd raised twenty million dollars, a lot of it was from OMERS—what people really had deep anxiety around is how to save seven dollars. And if they could do that by booking on a Tuesday instead of a Wednesday. And as much as travel digital was like 20 years old, you’d think every problem was solved. Expedia was selling a hundred billion dollars of stuff. Nobody had ever addressed the question of when should I buy this ticket? Although, if you work in travel in any capacity and you go to any holiday party, and you talk to any of your relatives, the one question you hear every year is, Fred, when should I buy my ticket to Miami, right? And nobody had ever solved that. And so, that is what real product market fit looks like.

Long story short, we made it into an app, and we got a million downloads in the first month, which back then—this is 2014—was like a crazy, crazy number. And actually, this is the second part of this—and by the way, to do that we had to fire people, drop all this other stuff we were doing, this was a really traumatic event. But it was clear the signal was so strong. And so, when we launched the app, I’m with 20 people. We happened to do the launch party in Boston, and we get a call from somebody's cell phone. And it's my one Apple web engineer that wrote the app, and he puts his hands up and says, Fred, it's Apple. And obviously it's a launch party, so everybody's pretty drunk, because they're on the West Coast. And somebody goes, who takes this call? I said, I'll take it. And I'm one hundred percent sure what I'm going to hear is—because we're predicting when to buy the ticket, it was more sophisticated by then—I was going to get a thing that says, 'hey, this is Apple, we just got a cease and desist from American Airlines, or Delta, you have to turn the app off,' right?

And so, I pick up the phone and I'm like, wow, this will have lasted like one hour, and you know, my product is gonna get canned. I'm gonna have to explain this to the investors. And what I hear on the other end is, 'hi, this is so and so from the store, I need you to do me a favour.' I'm like, wow, that's not how I thought—and I'm like, okay, sure, what do you what do you need? 'Your app is only released in the United States; could you release it globally?' So, I say, let me check with our data science department. So, I put my hand on the phone, and I go to the one guy, and I say, hey, have you done any regression testing on the algorithms around the world, like, you know, if we, if I leave from Kenya, and I go to Australia. And he’s like, no. What will happen to the prediction, will it be accurate? And he’s like, I dunno. I'm like, could you turn it on? 'Sure.' I'm like, yes, we can do that.

And so, we opened the whole thing, like globally, in the middle of a launch party. And then, the guy's about to hang up, and I'm like, wait, wait, wait. Like, I have one question for you. And he says, thank you, I owe you one. Which I'm like, okay, but wait. Like, I have one question. Like, why did you call us to do this? Like, this is crazy. Why do you care, right? And he says, 'well, your app has gone to number one charts everywhere, and it's only available in the US. And everybody outside thinks there's some weird conspiracy to prevent non-Americans to save money on airfare, and that Apple is somehow complicit. And this is about to hit Tim Cook's desk, and I really don't want that to happen.'

And so, it was literally there was this Twitter and Reddit revolt, like around the world. And this is like less than and an hour before we launch around this. And that's when I learned the fundamental truth that all that matters is product market fit. In both cases, I had nothing to do with it. The users basically told us what they wanted. But that's the main thing we took away from that, that era.

Damien Steel
Amazing. All right, so let's switch gears a little bit. You know, Fred's probably the only founder that I've ever thought of actually working for. There was a point where—after we made the investment—where I considered leaving OMERS and joining. Looking back now it was probably a poor financial decision, but....

Frederic Lalonde
It's still early.

Frederic Lalonde
Yeah. But so, what I did instead is, I joke internally—it's not a joke, really, as I bet my career on the company. You know, I think there was early signs—although I'm pretty sure we were still losing money on every flight that we sold—but there were early signs that all this work, everything that your team had been working on, was about to pay off. And so, what we did at OMERS is at the time, we were into multiple funds. And you know, a lot of people don't know this, we do have some third-party strategic partners that we bring into our funds. I remember calling them up—some of them are in the room here today—and saying, look, I have this crazy story to tell you, I'm going to tell you about Hopper. I want to invest forty-five million dollars into the company, which at the time—well, still is—was the largest check we've ever put into any one company. Larger than what we put into Shopify. And I showed them all the data and I said, look, either you approve this, or OMERS is just going to do it all themselves. And, you know, thankfully, they're great partners, they all said, great. And we made the investment, all was good, and then the pandemic hit. And you know, most of you probably know this, but like most, the crazy thing with the pandemic—and I'm married to a nurse, so I got to live the dark side of the pandemic, and my heart goes out to anybody who is impacted by it personally, anyone who runs a small business. But the dirty secret in tech, is that tech actually thrived during the pandemic. Except if you were selling airline tickets.

Frederic Lalonde
Yep, that was a pretty bad thing.

Damien Steel
So, take us through that journey. Because I can tell you I lost sleep, so I can't even imagine how you got through it. But walk us through just that journey. Because incredibly, you actually raised what I think was the largest round of financing—post-the one I'm talking about—literally, during a global pandemic, where nobody was getting on planes. You convinced a bunch of investors to put in... how big was that around?

Frederic Lalonde
It was 80.

Damien Steel
Eighty million dollars into the company. Like, how....

Frederic Lalonde
It was an up round. It was an up round.

Damien Steel
Right.

Frederic Lalonde
That's the craziest part.

Damien Steel
How is that even possible?

Frederic Lalonde
So, the story there is we, right before the pandemic, we had started looking at our risk-based products. So, I had a very nice plug for price freeze, I appreciate it, everybody should try it. Today, half of our revenue comes from these financial services, because selling travel is okay, but the margins are kind of ehh, and it's a commodity. So, originally, the idea was, we predict prices for you. Ninety-five percent of the time, up to a year in advance, we can tell you the best time to buy your ticket. And so, we tell you to wait for months, and months, and you save a lot of money, except five percent of the time we get it wrong, and the price goes up on you. And so, we were wondering, it’s like, well, so we hosed five percent of our customers, and like, what if that moves around in the population and eventually everybody gets hit, right? Which by the way it does. And so, we were like, oh, the original idea for this was like, let's everybody pitch in five bucks. And when we get it wrong for Damien, we'll just pay out the difference, right? Like as a risk pool.

And so, we started around this idea, like how could we build up margins. And the reason we did this is because we had negative unit economics on everything we were doing, we literally could make money. After having raised a hundred million dollars, we had no path—forget profitability—to like zero, breakeven unit economics. And that wasn't cool. Softbank hadn't started doing its crazy stuff, right? That's still, that was before it was cool to do that. And so, we looked at these products, and we're like, well, what can we do? And like, oh, maybe we can, you know, ensure the forecasts, like, you know, underwrite it on our P&L? Or what if we allowed you to just change your ticket, even if the airline didn't make it changeable, right? So, we started working on algorithms to do this, because we're pretty good at knowing the future at this point, and so why don't we underwrite it? And it turns out, these price-hedging products are not regulated like insurance, you can just do them. You know, you don't have to—and you can use math, and you can personalize the pricing. And so, we started building this, and of course, we didn't tell the board about this, and we accrued more liability on these products than we had cash in the bank. And then the pandemic hit.

So, the first thing is, everybody denied that it was going to be a thing. It was something in China. Only China would close their economies. The idea that anybody in the West would be prevented from going to work was just like unthinkable. And then Italy hit, and then—and so, when you were in the airline industry like we were, you could see the planes getting grounded. Like, we had these maps we used—there's fifty thousand airplanes in the air right now, by the way, just so you know, and at any time day or night, there's fifty thousand airplanes up there—and you can see there were none over Asia, and then there would be like none over this part of Europe. And in the news, you were still seeing Prime Minister saying, 'no, it's fine, go have a glass of wine.' And I'm like, but there are no airplanes over anything past Germany right now.

And so, we could see this coming two weeks ahead. Everything was getting grounded; all the economies were getting shut down. And I remember sitting in one of these soundproof boxes in our office thinking, by Friday, we're dead. It's over, right? Because like just paying out the liabilities would—and so fundamentally what happened, why we didn't die, is that we had worked into our products the thing that said, well, if the airline gives you your money back, we won't. Right? So, we'll give you the, you know, we'll refund the change or the ticket, but if the airline says, no, no, no, you can get, you know, either future travel credit or anything, you can actually just use that. And the reason we built that in is because of hurricanes. You'd had these black swan events, which was the worst thing that usually happened, where you know, all the flights on the east coast would get grounded. So, our models were hurricane-proof, and so we're at contracts.

And then, what happened, you know, in the second week of April, third week of April, like, everything got cancelled. So, imagine everything bought at Amazon being returned on the same Tuesday. That's what happened in the airline industry, and in the hotel industry. It's like everything would break; all their logistics would break, all the warehouses would break, all the systems breaking. That's exactly what happened to us. So, we had to process five hundred and eighty thousand cancellations, right? This is what we had pending. And the other guys had this too. And so, back then, to give future travel credit, that's not a thing that airlines ever did, right? That either a ticket was refundable, or not.

So, I don't know if you ever seen this, like there's a Dilbert joke about this: when you go to an airline and you ask for a complicated change, they start like typing away, and typing, and typing. And then they're like, then you can see the sweat, and then they're holding keys, and they're doing stuff, and it's a green screen, and it's really hard, and they don't remember how to do this. And so, we had calculated that it took 20 minutes of these archaic green screen commands per refund, and that we would be ready, like done with the backlog, if we didn't sell a single ticket in 75 years. And we had a thousand people. Like, nothing worked. And of course, the airlines actually ended up building the technology to do this programmatically, like in a panic. But it took them six months, and every airline had a different thing. And in the meanwhile, people thought that we had their money. And so, they're like, give me my money back. And they were suing us, and you know, calling the evening news. My cell phone got leaked, my email got leaked, I got ten thousand angry voicemail messages. Like, it was just complete pandemonium.

Damien Steel
I was getting emails, weekly.

Frederic Lalonde
Investors were getting emails, it was just—and this happened to every travel CEO. And fundamentally there we realized, one thing is that we can build a sustainable competitive advantage if we automated more than the other guys. And today eighty percent of everything we do, like there's no, there's, you’d never talk to somebody at Hopper. So, for example, one product that we sell a lot of now is disruption protection—you should always buy this right now, by the way, like just, even if I didn't work at Hopper, I'd say this—you add this. It's 40 dollars, on average. If your flight is late for an hour in a connecting city, every flight leaving that airport is free. You open the app, at zero dollars, you tap you get a boarding pass, you get on, right? It took three years to build the tech to do the last part, but it's one of our best-selling products. We realized fundamentally, because of the pandemic, that we could start to make money off of the inefficiencies.

And then, you know, things started up again, they stopped, there was Omicron, there was this, there was that. It was all over the place. Fundamentally, in this six-month period where there was no product. After having laid off a third of the company—which we did, because we didn't know how long this was going to last—we innovated more in that one year than we’d done in the previous four years, five years. And actually, even though our transactions were down eighty percent, we more than doubled our revenue. And that's one hundred percent through this realization that we had survived the apocalypse, literally, and that we could actually innovate our way into a better product. Then when demand came back, we went up five hundred percent, and that's how you end up with these numbers today where we're, you know, like, in the billions of sales and global and all that kind of stuff.

But the pandemic actually gave us a focus on the customer that we wouldn't have had otherwise. And the round that we raised was basically, because by then—by the way to answer your question, we are probably going to close a two hundred-million-dollar investment led by Goldman Sachs. And so, I went to New York to do this. And this was a week before everything closed. And Goldman Sachs says we're going to give you a term sheet, we had a bunch of investors lined up, and when I came back, I’d caught COVID in New York. This was before that was the first the first case. And so, instead of giving me a term sheet, Goldman Sachs gave me COVID. And of course, they all pulled out of the round, all the American guys did. And this is a case where we were supported by Canadian institutions.

So, the BDC, which is a sponsor here, and CDPQ, their Québec arm. Had those funds not been there to support the company, the layoffs would have been sixty percent, seventy percent, and we would have lost all muscle reflex. So, this is another reason that I liked the Canadian ecosystem. There are fewer companies. When things go dark, you know, because we have a social democratic tendency, we tend to bail out our companies in a smart way. And I know of dozens of companies that wouldn't have made it through that. Because if you were able to survive the first six months, then you would thrive if you were smart. And a lot of that has to do with the uniqueness of our ecosystem.

Damien Steel
Yeah, I love that. And I hope people understand, you know, Hopper today is one of the fastest growing tech companies in Canada. So, I know we're talking about a lot of challenges, but the reason I love talking about it is it highlights—and tech world, again, all these things sound cliché, but it's never a straight line up to the right, right? There's always bumps along the way. Which brings me back to my previous comment, which is why it's so important to invest in the right team, and the right founder, and the right supporting team. And really, the truth is, then get out of their way. So, another thing I hear a lot about in the Canadian ecosystem—and I'm interested in your opinion on this and how you've navigated it—is there's this kind of, there's this tone out there that suggests that Canadian tech companies sell too early. You know, you're, I mean, OMERS is 10 years into this journey with you, and I know it started much before we got involved. So, have you run into that problem? How have you said no, and what's your general thoughts on that comment?

Frederic Lalonde
I think it's generally true, still. It was very true 10, 20 years ago, when I started. So, I dropped out of school when I was 19, so I started really young. And my first company was doing connectivity for hotels. It was just this random thing we did. And it was bought by Expedia, because the CEO of the time was from Montreal, and he was back at McGill for a reunion football game, and somebody told him to come see us. And we sold our company that way; completely random. And so, I ended up working at Expedia that bought us. And it wasn't, you know, a hundred million dollars, but it was enough money to stop working. And, you know, back then, when you sold your company for 4x, you were doing better than anybody else. And the venture scene, especially in Québec, was kind of like, broken. Nobody was really making any money, and nobody knew what they were doing.

And so, when they bought my company, it was about a hundred people. I was 24, or something like that, some obnoxious age. I went to work for the guys at Expedia, and I ended up integrating my company within the P&L of hotels, which is what we're doing. And so, I saw the P&L. And then, we turned our thing on, that we worked on for three years, and our tech that we'd sold for this much money. And, you know, everybody was like, Fred, you did great, you created jobs, you've done a good job. And I saw how long it took for them to generate payback on their entire purchase price: 12 days.

So, I was staring at this dashboard going well, A) I am an idiot, but B) we're doing this wrong. Like why did I sell, right? And so, that was my initial foray into this. And so, what happened in 2016 is I got a call from Laurence Tosi who was the CFO of Blackstone, CFO of Airbnb, and is now a large investor and a friend, and he says, hey, I'm Laurence Tosi, are you ever in San Francisco? And he’d just joined Airbnb. And I’m like, yeah, I'm actually, weirdly, I'm going to be there. And he says why don’t you come over to Brannan Street. And I walk in—and Airbnb is this giant complex back in the day—and we walked in, and they were doing, I think they were doing about twenty billion dollars, something like that. And he says, hey, I'm Laurence. And he brings me to this room and everything, and he says, you want to see our deck? And he pitches me or the Airbnb deck, which is amazing. And he says, what do you do? And I'm like, I shared that. He's like, great, I'll give you fifty million dollars of earnest money, if you like, engage in an M&A with us. And this is—I've known the guy for an hour. And if you don't know what earnest money is, you get to keep it if the deal doesn't go through. And I'm like, A) I'm not taking fifty million dollars of your money for no reason, and B) like, we're not for sale. And he says ah, come back, come back in a week.

So, Airbnb was—like they did with a company in Montreal that Joe Poulin founded—was trying to, you know, aggregate a bunch of things back then, and they probably would have paid a couple hundred million dollars for us, right? And that's when we came back, and we went to CDPQ, but also you guys, and we said, hey, like, we need to do like this properly, we need to raise the money. And we did an all-Canadian round.

And so, we turned down the acquisition offer. You know, like back then, it was probably enough money to buy an island and clone dinosaurs, or like, personally for me, I mean, right? Like, so it's like you're in that kind of range. Like my wife didn't speak for like a month after that. But we're like, no, we got to build it up, right? And you know, maybe we would have gotten half a billion. Now we're at 5 billion US. And so, it's just, if you're going to build a hundred-billion-dollar company, you're gonna turn down a ten-billion-dollar offer. And if you're gonna build a ten-billion-dollar one, you're gonna turn down a billion. And the question is, what you want to do?

And in our case—and I was saying this before Shopify had its real ascension—we're like, look booking.com is a hundred billion, there's no reason we couldn't have that in Canada. And people were looking at me weird. Then Toby went and did what Toby did, and now it's like, oh, yeah, Shopify can do it. And I'm like, no. Like, there's dozens of companies that could be a hundred billion dollars. We just have to have the capital, the patience, and the commitment to do it. Which means, leaving money on the table in the build up to that, the same way Zuckerberg did when he didn't sell to Microsoft. It's really that simple.

Damien Steel
And listen, I'm here to tell you as somebody who follows the Canadian ecosystem extremely closely—well, not everyone matches up to this gentleman right here. There are more high-quality, passionate founders out there starting interesting businesses than I've ever seen before in the 15 years of venture. So, we've already gone over a little bit of time. So, I'm gonna invite Jennifer up here, because I think we had—we're using a little bit of technology, so we'll see if it works—for some Q&A.

Jennifer Janson, Director of Communications, OMERS Ventures
We do have some questions. The first one, Damien is actually for you. OMERS seems to be the only pension company that's jumped into very early stage, direct-tech investing. Why do you think that is?

Damien Steel
Let's keep it short. I just think it's really hard. I think there's—you know, most of you are finance people—there's a big J curve in venture. You know, you need to be able to have the foresight and the stomach to take on three, four, or five years of investment. And I give all the credit to OMERS for that for stepping up. But here's the secret, and this is why that's no excuse. And I'm here to tell you, if there's any other pension plans in the room, you should all be doing early-stage venture. I walk in, I sit down with George, I sit down with others of the board, I say, our job is to create income off of two percent of assets. And more importantly, it’s to have an impact on the other ninety-eight percent of assets. And no matter what investment class you're in, if you don't think innovation is coming and going to disrupt you, you're sadly mistaken. You show me an infrastructure investment, and I'll show you a tech that can disrupt it within 10 years. And so, I think for us, it was a much broader decision than just investment returns. And listen, we're 11 years in, and the early signs of results are positive. But it's it takes a very, very long-term view of the world.

Jennifer Janson
Thank you. The next one is, you've both talked about incredible volatility, not just over the past two years, but the market today. So, the question to both of you—maybe we can start with you, Fred—is, what's the one thing that keeps you up at night right now?

Frederic Lalonde
That's a good question. Right now, it's global recession. Basically, inflation rates will completely change, and so there's a couple of things baked into that. First of all, this is actually a Bill Gurley quote, he basically says, like, ventures are really crappy business—that's not the word he used, if you know Bill Gurley, but like, I'm gonna tone it down—because cyclical collapse is built in, right? Every seven to nine years, everything is supposed to fall apart. And so, the problem this time is twofold: one is, it got a lot bigger, and also it was that this collapse cycle was stretched out by two or three years, because of the pandemic, all the money that we printed and everything else. So, you had a whole generation of founders that never realized that there's actually a point where everything collapses and every IPO goes underwater. And I'm lucky enough to have lived through three of these things in 2008 and 2001.

And so, we actually understood this, and it is often tied to the macro-economic cycle. And right now, typically, inflation rates are supposed to be at four to six percent. You know, and so I remember my dad paying 18 and 21 on our, you know, when I was a kid, that's too high. And, you know, there's been this like, one percent rule where money was just too cheap. And then, a lot of this capital concentrated privately, and there's still over three trillion dollars of dry powder out there. And then, a lot of it ended up in the hands of people like Masa, who's brilliant, but pretty reckless. And so, what actually happened is this crazy party where the money was flowing freely from 15, probably to 20, and then the government's piled on all of this cash. And so, you look at the US saving rate—which you can actually get, the ticker is called PSAVERT—it was a thirty-five percent, and it's supposed to be at five. And it's been going down since the peak of the relief funds in the US, on a 45-degree angle. So, already eighteen percent of homeowners in Canada are reporting that they cannot make their payments. And so, you're going to continue to see inflation rates go up.

A lot of it was the structural, you know, supply chain, but they're going to have to maintain it higher because of the war on Ukraine, because of climate change, because of everything that's coming our way. And so, we are probably going to end up in a decade where money's expensive, consumers are pinched, the middle class is losing purchasing power. And so, if you're selling a commodity like we are, that's not great. If you're selling a dishwasher, you're in a lot of trouble, if you're selling a digital product, you can do a lot around that. But that is the thing that overall, on a 30-year cycle worries me the most. And I think a lot of tech founders that are younger don't get it, that the world is changing, and to what extent. And I'm sure you're walking around explaining this over and over and over again to 35-year-olds that like, what does he know? Which is the theme that I've seen a lot of tech companies.

Damien Steel
Yeah. For me, it's a mixture of exactly that. And the fear that our existing companies don't clue into exactly what Fred said. And then, the second is maybe glass half full, which is I am, I'm scared of missing out on the next couple years. Because I truly believe that the next two to three vintage years for us as investors in tech, there will be incredible companies created and funded over the next two to three years, on the backs of the euphoria of 2020 and 2021. Everyone was a genius in our business and 2021. The real players will prove their worth in the next three years. And that's my, one of my only focuses.

Jennifer Janson
Do I have time for one more? We'll go with one more. Fred, this one's for you. You've raised consistently over the last 10 years from a whole array of investors. And so, I guess the final question is: what advice do you have for Canadian investors in the broader investment ecosystem?

Frederic Lalonde
So, this is what I've been doing with my own family office. And the investors I respect the most—Damien is one of them, and we have a couple of US ones—it turns out that there's only two things that really matter if you do a regression on portfolios. One, you got to pick the right founders, right? And so, you’ve gotta invest in them in every company they do, you’ve gotta follow them. You also have to invest in the people that work with the right founders if they're also smart, because there's really a network effect there. So, that's the one thing. So, it's about relationships, it's about doing the right thing, it's about thinking long term, not screwing the founders for a one percent. The best investors I know, think long-term that way, in terms of relationships.

And the second thing: it turns out, it doesn't matter so much the price you pay to enter. It matters how many times you put new money in the winners, and that you don't sell. And this is the curve that Damien was talking about. You do venture from a traditional finance standpoint, you do, you put some money in, it takes 12 years, and you get 30 times your money. And you're like, wow, we've made a killing, right? And then, five years later, that would have been three hundred times. And you sold, right? And this is true for the founders, this is true for the investors. And so, a lot of the funds still in Canada are thematic, which doesn't make a lot of sense for my first statement. But the second thing is they go oh, I've put money in your [indiscernible], and that is my investment thesis. What you should do—and this is mathematical, and I can show you data that proves this—is continue to compound. Do special vehicles, get the family offices involved, get whatever source of capital is to go directly. And the Americans, Sequoia are leading this, have figured this out. Now Sequoia tried never selling—that's probably too far on the other band—but it's basically, pick the right people, always do the right thing by the founders, and they'll do the right thing for you. And compound, compound—just keep putting money at every stage. By the way, for the founders, that's way better, because you're not introducing new people. The relationships hold. It actually is a saner way of deploying venture capital in my opinion.

Jennifer Janson
Great, thank you. With that, I'll turn it over to Sal.

Sal Rabbani
I’d like to just invite my fellow director Richard Carlton, the CEO of the Canadian Securities Exchange, to offer the appreciation remarks. Richard.

Note of Appreciation by Richard Carlton, CEO, Canadian Securities Exchange
Thank you very much, Sal. On behalf of the members and directors of the Empire Club, today's event sponsors, and of course the audience present and virtual—and yes, I’ll echo everybody’s sentiment, it is great to be back in person, isn't it? In any event, it's my pleasure to thank Damien and Fred for their timely and insightful conversation today.

Our audience might think it's strange that a public markets operator with a focus on early-stage companies, and ourself, a 20 year old overnight success—which is how it always happens in this space, isn't it, Fred—is one of today's lead sponsors. But the fact of the matter—and Fred and Damien have spoken about this—the ecosystem in Canada for the provision of capital to entrepreneurs is literally one of the best things that we do as an economy. Not only do businesses compete for capital, but we have other—the sources of capital themselves compete.

So, whether it's venture capital, angel investors, private equity, and in fact, public capital, are competing to provide capital to entrepreneurs who need the money to grow their companies, at the lowest possible cost. And our capability in this regard is really the envy of most economies in the rest of the world. And I think—and again, Fred underscored this point—we really are all partners in the investment process. It's a continuum, not a contest. And we really are supporting innovation and growth across all facets of our economy. So, thank you again, Damien and Fred. And Fred, if you ever decide to take that company public, I'll take your call, I guarantee it. Thank you very much, everybody. It's been a great afternoon. Cheers.