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Copperleaf Technologies CEO Judi Hess at the company's office in Vancouver on Oct. 25, 2019. Copperleaf's shares jumped in their first few days on the Toronto Stock Exchange, closing 38 per cent above the IPO price on Wednesday.Rafal Gerszak/The Globe and Mail

Canada is awash in technology sector initial public offerings for the third time in a year, and once again investors are desperate to buy these deals even though most of the new issuers do not turn a profit.

What’s different this time around is that potential buyers have the benefit of calculating the shareholder returns from last two waves of tech IPOs, which tend to be lacklustre, yet investors continue to clamour for these deals.

The average return for a tech sector IPO in the past year is minus 2.4 per cent, according to a Globe analysis that accounts for when each stock was listed, while the corresponding average stock market return is 16 per cent. In other words, in most cases, investors would have been much better off buying a low-cost fund that tracks the S&P/TSX Composite Index than buying and holding IPO shares.

Yet since Labour Day, five technology companies have filed to go public, including Copperleaf Technologies Inc. , Q4 Inc. and D2L Corp. Of these, Vancouver-based Copperleaf has already started trading. Investor demand for the IPO was so intense that Copperleaf priced its deal at $15 per share, above its $11 to $13 marketing range, and its underwriters received roughly $1.4-billion in orders for a $140-million deal.

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Copperleaf’s shares also jumped in their first few days on the Toronto Stock Exchange, closing 38 per cent above the IPO price on Wednesday. The gains will likely help convince investors to put money into the other four tech deals that are still being marketed, especially with major stock indexes in Canada and the U.S. setting or nearing record highs this week.

However, many previous tech IPOs also saw similar early bumps, only to watch their share prices fall over time. In the worst cases, Canadian tech IPOs have lost between 60 per cent and 70 per cent of their values in less than a year.

What explains this disconnect between early IPO fervour and longer-term market performance? “The average retail investor invests on hope and the story rather than fundamentals,” said Bruce Murray, chief executive officer of the Murray Wealth Group.

Software companies have seen extraordinary demand from investors ever since the COVID-19 pandemic erupted, based on the assumption that their technology will help fuel a more virtual economy. Because there is so much hope that the companies will grow rapidly, investors don’t seem to care that most of these issuers don’t make money.

From the start of the pandemic through this past summer, 15 sizable technology companies went public in Canada, but just four of them made money. Of the new batch of IPOs this fall, four are bleeding red ink, and the fifth, Sharethrough Inc., eked out only a US$696,000 profit over the past three months.

The current euphoria for money-losing companies emerged in the aftermath of the 2008-09 financial crisis, when disruptors such as Facebook and Netflix prioritized scale and global reach over profits. Because they were so successful at it, many investors became desperate to latch onto the next big thing, and by the middle of the past decade, private startups were often considered sexier investments than many publicly traded companies, no matter how much money the startups lost. These private companies are now going public.

At the same time, investors have been encouraged by the stellar trading performance from the first two Canadian tech IPOs to go public last year. Dye & Durham Ltd. , which provides software for legal and business professionals, was the first to test the market after the pandemic erupted, and Nuvei Corp. , which handles payments, followed two months later.

Dye & Durham shares have jumped 405 per cent since their IPO, and Nuvei’s are up 499 per cent. When these two deals are included in tech IPO performance, the average shareholder return for all Canadian deals since the start of the pandemic jumps to 58 per cent.

However, investors may not realize that at the start of every IPO cycle, it is common for investment banks to test the market with their highest-quality deals. Not only did Dye & Durham launch right after the first pandemic lockdowns were lifting, it was one of just a few Canadian tech IPOs to launch over the past two decades, dating back to the dot-com bust.

“The first IPO issues are usually winners, because nobody’s been able to launch,” Mr. Murray said, “and then the quality deteriorates.”

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