Barely a day goes by without a report of yet another Canadian tech company filing papers for an initial public offering (IPO). The recent rush of tech IPOs has been so swift that its development has been variously referred to as a surge, a frenzy and frothy.
Public market interest in after Canadian digital companies wasn’t always this strong. Which is exactly why it’s worth highlighting what’s happening right now and why it matters.
From IPO drought to bout
Post tech bubble, Canada had been experiencing what some called an IPO drought. By some measures, from 1993 to 2000, there was an annual average of 43 IPOs on the Toronto Stock Exchange (TSX) every year; but since the turn of the millennium that number dropped by more than 60% to around 15 a year. When it came to major tech offerings in particular, a little over a year ago there had been only three in total over the previous four years. There were so few IPOs that a Globe & Mail headline in early 2020 actually read “Private is the new public”.
However, jump to December 2020 and Canadian firms undertook 74 IPOs across all exchanges with a total value of $7.41 billion, according to Bloomberg. The numbers speak to a significant shift in public market interest resulting in newfound liquidity options for Canadian tech companies. The trend has the potential to encourage long-term thinking and entrepreneurial ambition, and will ultimately lead to many more benefits for Canada's economy. But to understand where this is going, we need to explore what has happened to get us here.
Rekindling the lost romance between public markets and innovators
Between 2016 and 2019, while the Nasdaq was soaring, Canadian public markets were sputtering. The number of Canadian companies that were considering going public as a way for shareholders to liquidate and/or raise capital for future growth had shrunk significantly. And when you crunch the numbers, the reasons for the lackluster enthusiasm on both sides of the Canadian table seem obvious.
As I outlined in my post from November 2020 [link], major US exchanges had raised over USD$180 billion for 373 technology companies in the traditional IPO process since 2010. This was in comparison to only $3.6 billion for 25 companies in Canada, or 50-times less than our US counterparts. However, these numbers alone don’t tell the full story when it comes to public market technology investing in Canada.
Due to a low currency, coupled with depressed valuations, public market firms in Canada have been fertile hunting grounds for international acquirers. Since 2010, over $35 billion in market capitalization across 86 firms has been “taken-out” of Canadian technology public markets through acquisition. Last year, this was 10-times the amount that had been replaced via IPO.
Public market buy-in for Canadian tech
It’s clear that Canadian public technology companies have the potential to create value, as we assume the acquisition capital of more than $35 billion was placed to generate a positive return on investment. Nonetheless, for over a decade, Canadian public market investors have provided little support for home grown businesses. As well, private Canadian tech start-ups have avoided asking Canadian public investors for their money. But recent public market activity – and notable successes – suggests views are rapidly changing on both sides. Canadian investors are recognizing the opportunity to invest in what is perhaps the highest growth category – emerging technology.
Last September, Nuvei Corporation raised the largest technology TSX IPO in history at $805 million. That record followed other successful listings over the prior two years including: Lightspeed ($240M IPO), Docebo ($75M IPO), Dye and Durham ($150M IPO), Shopify ($159M) and Thinkific ($160M).
This recent spate of successful IPOs signals renewed strength in Canadian public markets and an increased set of options for Canadian tech entrepreneurs. Vibrant capital markets can lift entrepreneurial ambition and promote long-term thinking – two key ingredients for success that Canadian firms could arguably always use more of. Of course, not all companies should or will go public. But it’s clear to see that it can be a great option for those companies that are ready, willing and able to do so. Public markets have shown that they can provide an avenue for growth capital; and what’s even more important is that Canadian entrepreneurs now have a slate of successful examples to follow.
Ultimately, this lays out the blueprint for a new generation of companies to start, grow and scale globally – leveraging the IPO route to scale – all while remaining homegrown in Canada.
Kenndal McArdle, CFA
First published in Vancouver Tech Journal, May 14, 2021.