Is the IPO option “back” for Canadian tech companies?
By Michael Kousaie, Head of Business Development at Toronto Stock Exchange
Bringing a company to market is arguably one of those seminal moments in its history. The listing day — the initial public offering (IPO) — is the start of a new phase and marks a company’s arrival in the public financial markets with a celebratory ring of the opening bell. The event is the culmination of much hard work and effort, but by no means the end of the journey. This is particularly true for many tech companies, which often kick-off with humble beginnings and an inspirational story. Consider the journey of Canadian tech companies like Shopify Inc. (TSX: SHOP), which went public in 2015, and Kinaxis Inc. (TSX: KXS) in 2014. Given their experiences, is the IPO path an option for other Canadian tech companies?
Before I outline the public listing option in particular, let’s do a quick industry health check.
Canada’s Tech Ecosystem
On the whole, Canada’s tech ecosystem is thriving and it is a great time to be a tech entrepreneur in Canada. Accelerators and industry associations are providing great support and mentorship to promising founders; government programs at the federal and provincial levels are encouraging innovation and entrepreneurship; angel investors and venture capitalists from Canada and the U.S. are backing exciting companies; management teams are executing their growth strategies; public market investors are providing attractive exit opportunities; and strategic buyers are stepping up with worthwhile valuations.
This translates into clear momentum within the tech and innovation sector on Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV). Since the start of 2015, this sector has been the most active on TSX/TSXV based on the number of IPOs and new listings, with over 50 companies (ranging from startups to unicorns) going public during such time. Moreover, tech and innovation companies on our Exchanges have raised over $15 billion in equity capital during this period.
IPO as Part of a Tactical Growth Strategy
So who should consider going public? It may not be suitable for every company, but for some an IPO can be an important option to consider as part of a tactical growth strategy. Here are four reasons to consider taking the IPO route:
- To raise a new kind of capital
Going public can provide a company with financing opportunities to grow its business — from expanding operations to making acquisitions. Issuing public shares will expand your investor base and help set the stage for follow-on equity financings. Importantly, going public gives companies access to a deep and differentiated capital pool with asks/expectations that are different from what venture capital investors look for. - Obtain liquidity for investors
Becoming a public company establishes a market for your company’s shares, providing your investors with an efficient and regulated vehicle in which to trade shares. Greater liquidity in the public market leads to transparency and can often support a better valuation than would be achieved as a private company.
- Enhance your company’s profile
Going public can increase your company’s visibility. Greater public awareness gained through media coverage, publicly filed documents and coverage of your stock by sector investment analysts can provide your company with a higher profile among employees, investors, and customers.
- As a currency to acquire other companies
As a public company, your shares can be used as a currency substitute to acquire target companies. Using shares for an acquisition can be a tax-efficient and cost-effective vehicle to finance such a transaction. This can also improve a company’s ability to complete mergers and acquisitions in a more timely and cost-effective manner.
What to Consider
Going public is absolutely not for everyone, and preparing to be a successful public company will take time. There is also a financial cost to going public (though in Canada, this cost is typically lower than in the U.S.). Perhaps more importantly, there is heightened day-to-day scrutiny on your business with a focus on how a company is managed. This includes a focus on your company’s track record, management team, board of directors, corporate governance controls, and financial reporting. And while great execution can be rewarded by investors, the opposite is also true.
If the benefits of an IPO seem appealing, the key is to be well prepared. Going public is a major milestone for any company and the decision requires careful consideration and expert advice.
To learn more about the tech and innovation sector on TSX and TSXV, visit http://www.tsx.com/tech-is-back, follow us on Twitter at @tsx_tsxv and join the conversation using the #TechIsBack hashtag, or contact Michael Kousaie, Head, Business Development, Technology at +1 416 947–6626 or michael.kousaie@tsx.com
This information is provided for informational purposes only. Neither TMX Group Limited nor any of its affiliated companies guarantees the completeness of the information contained in this article and we are not responsible for any errors or omissions in or your use of, or reliance on, the information.
This article is not intended to provide legal, accounting, tax, investment, financial or other advice and should not be relied on for such advice.
The information provided is not an invitation to purchase securities listed on Toronto Stock Exchange and/or TSX Venture Exchange. TMX Group and its affiliated companies do not endorse or recommend any securities referenced in this article.
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