There’s been a lot of focus in the tech community on start-up and scale-up capital. And this is good.
Growing Canadian private tech companies now have access to an improved domestic and U.S. VC environment, partially due to the government-sponsored VCAP program, a weak Canadian dollar, but also the recognition that Canada has good talent and opportunities in areas like AI, fintech, marketing-tech, and media-tech.
But eventually VC investors need exits. And an exit is usually either 1) a sale to a large strategic (M&A), or 2) an IPO.
An M&A sale almost always results in the Canadian start-up being bought by a larger U.S. player. The start-up’s technical team may continue to reside in Canada as a division of the U.S. buyer, but it’s typically the end of the story for that Canadian name. Who will remember the names of Recon (Intel), Maluuba (Microsoft), Radian6 (Salesforce), Bit Stew (GE) a couple of years from now?
In contrast, an IPO is a continuation of the Canadian story. The company remains independent and with some success can scale to be a global player. Think Shopify and Kinaxis. These names then anchor a growing Canadian tech ecosystem.
But as a VC I completely understand the appeal of the M&A path over the IPO path. It offers immediate return of capital that can be deployed into new start-ups and often a strategic buyer will value a start-up higher than a public market investor. Whereas an IPO these days requires scale, is a long process with uncertainty and, even when it is successful, large VC investors have a lengthy hold period which adds more uncertainty. However, the VCs in Shopify have to feel proud that they helped create a Canadian based global world-beater.
So if Canada truly wants to have a full tech ecosystem, we need to eventually have a return of the tech IPO. Otherwise we are just building the divisions of global tech players.
Unfortunately the tech IPO market in Canada (and the US for that matter) has been very weak for years. Why? We can think of a few reasons: private money is available with less headaches, very few institutional small cap investors exist, the scale hurdle for an IPO has increasingly gotten larger, and fewer public investors (at least in Canada) have tech expertise that lets them properly value a tech name.
What can we do to fix the public part of the tech ecosystem? We tried things like Labour Sponsored Funds with limited success. And the TSX and TSXV have been very supportive of tech listings.
Things like flow though shares helped the other risky sectors like Mining and Oil and Gas. My colleague Tom Liston has written about the potential here
What about a VCAP model or some other incentive for small cap public innovation investors?
Or maybe a variant of the SPAC model would work to make going public as attractive as M&A?
Any other ideas?