Q&A: John Ruffolo on his plan to fund the next phase of the Information Revolution in Canada

In March, the influential investor John Ruffolo unveiled his new private equity firm Maverix, which seeks to fill a funding gap for large Canadian firms with the potential to become billion-dollar companies. As founder and CEO of OMERS Ventures, Ruffolo led investments in a series of highly successful tech companies like Shopify, Hootsuite, Wave and Wattpad. With Maverix, he's pushing into new territory with traditional businesses that are already at $100 million in revenue and are ready to leverage digitization to achieve much greater levels of growth.

Last September, Ruffolo was hit by a truck while he was out cycling, and the accident paralyzed him from the waist down. He says the near-death experience has, if anything, emboldened him to push forward with his new firm.

In this conversation, Research Money spoke with Ruffolo about the origins of his investment thesis for Maverix, why he's seeing "ridiculous" deal flow and what it takes to keep high-growth companies in Canada.

Mark Mann: You've written that we're entering a new phase of the Information Revolution, which you describe as the enablement phase, distinguishing from the phase we are now leaving, which was the creation of the application layer. Please elaborate on this distinction. What is this new phase that you perceive we're entering, and how is Canada positioned for it?

John Ruffolo: When we entered the information revolution, the 1990s were all about building and getting access to the infrastructure. If you think back, what were the most valuable companies? Nortel, JDS Uniphase, the telcos, etc. That went on from about the mid-1990s to the mid-2000s. So now it's built and the next phase started around 2008. This is where you actually have the application layer. Essentially, what is it that we're going to do on this damn thing? There were three enabling forces: mobility, cloud computing and social. Those three forces unleashed the application layer, whether it's B2B or B2C. You started doing real s---. Over last ten years or so, we've seen the rise of the toolset. SAAS [Software As A Service] businesses: the CRM [Customer Relationship Management] software, it's the ERP [Enterprise Resource Planning], etc. That's the application layer.

Okay, so now we're all able to do s---, so what's the next phase? The next phase is the use of that application layer by all industries. I started to see the glimmers of this in 2015, which gave rise to my ultimate thesis here. I saw the traditional businesses say, I better get those applications into my business right now and embed them. They realized they had to fight back or they were going to be disrupted.

This is going to be the biggest transformation we've seen, because it's the full digitization of all businesses and not just the tech sector. The tech sector is what, 10 percent of our GDP? It's the other 90 percent. These are the ones that I'd say truly create the wealth of society. And COVID has accelerated what's coming.

MM: So it's an adoption phase. I'm not inside big companies looking under the hood the way you are. I think it's hard for people that don't have your vantage to really understand where adoption is at among the big companies. But to someone on the outside, the B2B adoption rate looks like it has been really slow.

JR: It was really slow. Big companies will use Outlook or they might introduce Slack, but that's not what I'm talking about. Let's look at the banks. One of my buddies is a CEO at one of the banks. They had nearshored their call-center jobs, brought them back to Canada, and they wanted to improve the processes, to decrease the cost of it and make it effective. They had been told by their IT folks that it would take three years to digitize the call center process. Then COVID hit and they digitized in three weeks. The call centre is a big core functionality, right? So think about others like that: all of your accounting, all of your business dealings with other enterprises, etc. It's going to go deep into the stack to really drive the costs way, way down.

That's a big business. Let's talk about a small business. You're a retailer and you have a little storefront but you have zero capability to sell your goods online. Well, Shopify went completely nuts over COVID. Those small retailers always could have grabbed Shopify, but now it was through necessity. And now they're like, Jesus, maybe I don't need a storefront after all. That's what I'm talking about. It's getting across to every single business, where it might have taken five or ten years. It was frustratingly slow, but now it's like, Well, you better do it or you're not going to survive.

The deal flow that I'm getting is ridiculous. Why? Because they're all figuring out that they need to digitize right through and rethink their entire business models. And we're the only private equity firm out there that understands the world of the application layer and the world of using it. Because you need to combine the two.

MM: So you're not investing in the companies that are providing the applications. Rather, you're looking at companies that are already proven and they're coming to you and saying, Okay, we're digitizing. Are you helping them figure out how to do that? Or are you simply catching them at the right moment and making the right bet?

JR: Here I am for 10 years, the top investor in the application layer. It's a crowded space with valuations that have gone too high. I didn't make so much money because I was smart. It was good timing. Because, frankly, I was the first guy to do that. Now I'm going to be the first guy to see where the next trend is. It could be a SAAS business but I doubt it. When I go look at traditional businesses that are digitizing, there's no competition for capital. The prices aren't cheap, they're just fair. I'm going to where the puck is going to be.

You know how you can tell that the puck is going there? Look at the large US buyout firms that have all started growth businesses: TPG [Texas Pacific Group], Blackstone — that one shocked me a little bit — KKR. They're going, Uh oh, we better protect our flank. They're not afraid of the new upstarts, the tech-backed businesses, the sexy ones. They're afraid of the person who's been competing in their business for 20 years and knows it really well, and they are tech-literate and understand what tech can do for you. Those are the ones to really watch out for. The big companies don't like it when you kind of look like them, but you can do it better, cheaper, faster.

MM: So if your thesis is correct and everything goes to plan, you're going to be hosting a new party of big Canadian companies,

JR: That's the plan!

MM: That's what everybody wants, but the fear is that we'll just keep losing these companies, as we've lost so many already. What role can you play in keeping them here? 

JR: Think of the CEO who's built a hundred million dollar business in their particular industry and they're now at a crossroads. So they get an offer to buy them and they're going, God damn, it's a good offer, but I really want to build this into a multi-billion dollar company. I don't want to sell right now; I want to see if I can go for it. I'm going to have to raise a whack of dough. There's not a single Canadian firm doing that. But there are some really good US firms. So guess what happens? The US firm goes in there and then they start saying the market in the US is better, there are better executives. Then you see the slow migration of the business into the US, and ultimately the sale of that business. But if these guys had a chance to get a hundred million dollars, to get to the billion-dollar company, and get it from a Canadian, they will take that all day long. But there was no product.

I think that I had a very small role to play with ensuring Shopify was here for the long term. It was over a two-and-a-half-hour coffee meeting where we wanted Shopify to be the Canadian poster child and plant the flag here. That's how I beat Sequoia and Andreessen and all the names, not because we were better or smarter, none of that. I waved that flag so vigorously, and I think that is the defining moment. Because 21 months later, it went public, and boom! Shopify is going nowhere. How do we do that ten or twenty more times? Have that Canadian domestic capital, have a person who understands risk and acts like a US firm, but plant the flag here. That's what I want to do.

MM: Government wants you to be successful, of course. How can they help? And why do you think it has been hard for them to help growth companies at this stage in the past? 

JR: In a good time, the government should stay out of the way. We don't need the intervention. The best analogy is a farmer's field. So the role of government is to clear that field out: get rid of the rocks or trees that are in the way, fertilize the soil, have the irrigation systems available. That's the infrastructure side. But also pull the weeds out. These are the things that get in the way: red tape, bureaucracy. Clear the deck. The farmer is the entrepreneur. They determine when to plant, when to till, and when to harvest. The role of a venture capitalist or private equity investor is to be the sun or the rain. We just help it grow faster. That's the ecosystem.

The government's role is not to pick which seeds the farmer plants or when to harvest. They do the infrastructure-related stuff, and they might help with the rain and the sun a little bit, if there is a shortage of capital out there from LPs, which there is. Government may have to play a role from time to time to provide incentives for that capital.

Where we get into trouble is when the government starts to develop superclusters. I told them that's a f---ing disaster. There is zero coming out of that. It's horse s---. I told Navdeep [Bains], "Don't try to pick. This is where you guys get into trouble." I told government to focus on the government-related stuff, i.e. education. Public policy just needs to be very careful and focus on what they're good at. But where government gets themselves into huge trouble is everybody wants to be a venture capitalist. Everybody. Politicians, academics. It's quite fascinating to see it. The US has glamorized it so much.

MM: One of the issues facing Canadian growth companies is finding good executive talent. Does Maverix have any role there? Do you help your investees with that side of things?

JR: We help, but you've got to get the best people from everywhere, wherever they are. So we source a lot of the top talent, particularly from the US. But getting them to come up to Canada is a bitch. So really all we can do is help with the landing of these folks. They'll need US operations there and they'll work out of there. But having 54 percent tax rates, you think that's helping out entrepreneurs? Eliminating the stock option capital gains treatment, you think that helps?

The public policy people have been helping us with the visa stuff, which was very good, or immigration policy. That's government stuff, only government can help there. But only government can help on taxation policies and they're f---ing it up.

MM: How has your accident affected your outlook? Has it changed anything about how you operate? 

JR: Let me turn that back to you: Have you seen anything different about me? Or am I still filled with piss and vinegar?

MM: You strike me as exactly the same.

JR: I am. My head didn't get hit, thank God. With what I've gone through, and being able to still raise capital, it really just emboldened me. Have I lost years off my life? Probably. So I'm going to get this done. It will happen. I'm leaving a legacy for my kids. So it's just made me more determined.

This interview has been edited and condensed for clarity.

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