Difference Capital’s Managing Director Tom Liston, interviewed on BNN, discussed the plight of investors searching for bright spots in Canada’s economy as oil prices tank and the resource sector experiences a post-boom hangover.
Mentioning OpenText, CGI and Catamaran, who have hit all-time highs during the last five years, Liston points out that from 2003 to 2008, tech companies didn’t have much access to capital. That has changed. Those companies that have managed to reach revenues between $50-$100 million have done so basically through bootstrapping.
However, as the shift away from resources does appear to be an actual sector rotation, more and more VC money has sought out the country’s best tech companies, leading to healthy valuations and good support for a robust sector, perhaps the healthiest tech ecosystem that Canada has ever seen.
“If we look at our own portfolio, just Canada in general, there’s a good nine names that are IPO-capable,” says Liston. “They may not, but they’re certainly in that realm. And many of them would be in the top 25, in terms of size, if they went public today. So the quality is bubbling up. Whether they go NASDAQ or get acquired or go TSX or what have you, time will tell, there’s a lot of really strong companies in Canada that there’s going to be a demand for, because you see the larger cap names doing very well in Canada.”
Emphasizing that tech’s resurgence is not a zero-sum game of one sector gaining from another’s retreat, Liston insists that the money is there because the tech sector’s fundamentals are sound and that a confluence of venture capital and exciting market disruptors have created an atmosphere of companies set to go public.
When asked for a favourite, though, Liston looks west to Hootsuite.
“They’re Number 1 by a landslide,” he says. “They have 74% of the Fortune 1000 customers. When you’re a brand, monitoring your brand, and releasing news and content marketing, they’ll manage it better than anyone and do the analytics behind it, as well.”
He goes on to sing the praises of Vancouver as arguably Canada’s tech hotspot.
“Four out of the first five investments I made were in Vancouver. Hootsuite is the biggest of those, but there’s a number of others,” naming BuildDirect and Vision Critical.
Asked why Canada has suddenly become a favourable climate for tech companies, particularly in the context of the year-2000 tech bust, Liston replies that it’s a combination of factors.
“The University of Waterloo is one of the best engineering universities on the planet,” he says, before adding that the layoffs that resulted from the collapse of Research in Motion have spun out dozens of new companies created by ex-RIM employees. All that talent had to go somewhere. Meanwhile, BlackBerry has transformed itself and seems poised for a renaissance.
And while it used to be the case that BlackBerry automatically harvested the brightest students emerging from the University of Waterloo, a lot of those graduates are heading straight into start-ups themselves through incubators like the Communitech Hub or Velocity Foundry.
When asked whether he can name one potential BlackBerry coming down the pike, Liston is effusive. “I think we’ve got a few, and I just named three that I think are Number 1 in their category. So whether they get to $30 billion or not, they may get taken out by then, but they have that ability to be a market leader in disrupting that industry.”
On the subject of privately held companies heading towards an IPO, Liston echoes the chant repeated by the markets over the past year, watching the interminable “Will they or won’t they?” dance performed by companies like Hootsuite and Shopify, while investors turn blue from frustration.
“The pent-up demand on the public markets is quite strong right now,” Liston says, understating only slightly. “Some of them, we want that core base of revenue to be quite strong. Some of them are software-as-a-service, so they have that recurring revenue. It’s very good for public markets, very predictable. It depends on if you want to go NASDAQ-led or TSX-led. If you want NASDAQ-led, you probably want to be in that $100 million-plus range. I hope most of them dual list because there’s very good support from the analytical community here. And they’re desperate for the next group of names to come out.”
A series of IPOs seems inevitable, though, and pointing to the success of Kinaxis, which is up 40% since it went public, Liston is hopeful. Pressed on a time frame, however, he is coy in discussing the Difference portfolio, but believes that IPOs may ripen in the period from March to July, with “a few for sure in the fall.”
BNN anchor Catherine Murray wonders, a little skeptically, whether some of the companies under discussion, many of whom have origins in the start-up world, are truly ready to be embraced by the public markets. Will CEOs who favour hoodies, beards, mountain biking and office dogs really jibe with the values of Bay Street?
“We’re doing a lot of that work right now, prepping those companies to go public,” says Liston. In the end, money talks. How a CEO looks is his or her business, as long as their revenue is recurring.
Liston again points to the SaaS model favoured by the best performers at the highest peaks of Canadian privately held companies and how recurring revenue works to calm the fears of risk-averse investors, pointing to a strong sequence of market disruptors about to enter the public market.