Illustration: Josh Holinaty

Illustration: Josh Holinaty

Ever since it launched in 2011, Payfirma Corp. has been on an upward trajectory.

Until recently, anyway.

The company was formed during the heady infancy of mobile payment systems. Square Inc., which launched a couple of years earlier, was a rapidly growing darling of investors. And there was nothing like it in Canada. Michael Gokturk, an entrepreneur who had just ushered a payment processing company he co-founded through a successful IPO, decided to jump on the trend and turn his attention to mobile.

He co-founded Payfirma in Vancouver and raised an initial seed round of $13 million to bring mobile payment systems to Canada. The company expanded quickly, building a multi-channel platform that allowed businesses to collect payments through mobile and websites, and in-store, all on the same account. IDC Canada estimated Payfirma’s 2013 revenue at $20 million.

In May 2015, the company announced a $13-million Series A funding round (the stage that follows a seed investment, which gets the company off the ground), along with plans for hypergrowth that included a push into the American market and a possible IPO as early as 2016. “We decided—let’s raise, let’s pour more fuel on the fire, let’s grow more quickly,” says Gokturk. “We started hiring and hiring and hiring.”

Payfirma brought in a senior leadership team that included veteran growth manager Yves Millette, formerly of Intuit, as chief operating officer, and Robin Jones from QuickMobile as chief marketing officer. Overall, the company nearly doubled its workforce to about 80 employees, scaled its sales and marketing teams, and grew and diversified each department.

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But by last fall, things were starting to look a little different. The Canadian IPO market was cooling off. Oil prices were rock-bottom. Markets were at levels that hadn’t been seen since the 2008 recession. “Everything was at an all-time low,” says Gokturk. South of the border, Square’s November 2015 IPO appraised the company at less than half the $6-billion valuation ascribed to it a year earlier. “We started realizing that the financing market in 2016 might be a little bit slow,” says Gokturk. But even a tepid funding climate can carry big consequences for startups: Payfirma decided it would be prudent cut 30 positions, more than a third of its employees.

Payfirma isn’t the only Canadian startup to have altered course. In January, Toronto-based Craigslist rival VarageSale laid off 26 of its nearly 90 employees after a stretch of rapid growth. Smartwatch maker Pebble, which is Canadian-founded though based in Silicon Valley, cut about a quarter of its workforce in the face of a chilly investment climate. And in March, Vancouver-based Hootsuite, one of only two Canadian companies to have been valued at $1 billion, was kicked out of the “unicorn club” when Fidelity Investments, which led its 2014 $60-million funding round, wrote down its investment by 18%.

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Venture capital dollars are still flowing, and in some ways, the funding ecosystem is the healthiest it’s been in years. But there’s a growing consensus that sobriety is kicking in. Valuations are coming down, and venture capitalists are getting more careful about where they put their money. “There’s a new sort of economic reality that’s hitting home,” says startup consultant Mark Evans. Startups are going to have to up their games to lure investment dollars—and play it safe with what they’ve already got.

This tightening of the purse strings has been a long time coming, says Owen Matthews, a general partner at Wesley Clover. The 2008 recession ground fundraising to a near-halt, which in turn led to a surfeit of funds closing a couple of years later when markets picked up again. “There was a glut of money during that period, and investors have to put that money to work,” says Matthews. “[Investors] start competing with one another, which drives up the value of the deals that are closing.”

MORE TIGHTENING: Why Venture Capital is Getting Harder to Land »

Now that glut has largely moved through the system. Canada’s venture capital industry had a banner year in 2015. Canadian companies saw $2.3 billion invested (up 12% over the previous year) in 536 deals (an increase of 24%). Fundraising was up too, with 30 funds garnering $2 billion, up from $1.2 billion in 2014. In the U.S., however, the last quarter of 2015 saw a drop of almost US$6 billion in investment over the previous quarter, while the total number of deals fell 13%. The average deal size went down by nearly US$4 million.

Canadian startups aren’t immune to a crunch coming from the south, warns Janet Bannister, general partner at Real Ventures, the most active early-stage venture capital firm in Canada last year. While seed and early-stage investments in Canadian companies have steadily increased over the past three years, later-stage financings have dropped. In 2014, there were 78 deals worth $931 million; in 2015, 64 deals totalled just $530 million. “A lot of Canadian startups, particularly when they get to Series A and onward, are funded by U.S. venture capital,” says Bannister. “As the market gets soft in the U.S., it affects Canadian companies.”

Bannister says venture capital firms on both sides of the border are taking more time to make investment decisions, adopting a wait-and-see approach before diving in. “They’re being much more cautious in terms of how they deploy capital,” she says. Part of that is due to uncertainty in the markets, Bannister says, and firms are holding back more reserves in case companies already in their portfolios need more capital to get to the next fundraising round. And, because competition for startups isn’t as hot, there is simply less pressure to make a deal.

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