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public versus private

The screens at the TMX Broadcast Centre in Toronto show the closing numbers of the TSX on July 11, 2012.Matthew Sherwood/The Globe and Mail

Biotech company iCo Therapeutics Inc. says it made the right decision when it pursued its listing on the TSX Venture Exchange for small-capitalization stocks.

The Vancouver-based developer, which sells a drug for diabetic eye disease as its core product, went public in 2008, and it is now the top-performing life sciences company on the junior exchange. Its market cap growth – more than 300 per cent from April, 2012 to December, 2012 – as well as its share price appreciation, trading volume and analyst coverage were second to none.

"I am confident that iCo Therapeutics has benefited enormously from its relationship with the Venture Exchange," president and CEO Andrew Rae says. "I have no doubt some of the capital we raised would not have been raised had we not been public. It is hard for me to imagine raising money privately for a Canadian biotechnology company post the global financial crisis of 2008/2009."

Mr. Rae says he believes that for small Canadian companies with great ideas – especially those that are not in the private investor hot zone of natural resources – the exchange can provide an excellent source of capital and be a catalyst for growth. But for many entrepreneurs, going public isn't a no-brainer. It is expensive, it's time consuming and it adds a layer of bureaucracy.

Is going public the right decision for your business?

Two CEOs with a great deal of experience on the Venture Exchange, as well as an expert on entrepreneurial affairs who is a former exchange executive, tackle the questions entrepreneurs should ask themselves if they're considering going public.

What are you aiming for?

One good reason to join the Venture Exchange is that it's a stepping stone to greater things. "Graduating to the big boards (TSX, NYSE) to me is the ultimate goal," says Sean Wise, a professor of entrepreneurship at Ryerson University in Toronto, and a former ambassador to the Toronto Stock Exchange (TSX). "Getting to a point where the company is cash-flow positive, growing strong and has a strong engaged shareholder base is the key to that success."

Since 2000, the Venture Exchange has incubated 563 companies that ended up on the TSX, says Kevan Cowan, president of TSX Markets and group head of equities at Toronto-based TMX Group Ltd., which operates the exchanges. "Lots succeed and lots don't. Most companies that thrive in the public market have a very good growth story. It's about their ability to execute on growth."

The average market capitalization of Venture Exchange companies is $17.8 million. To graduate to the big board, where average market cap is $1.4 billion, companies need to demonstrate stable production and a solid track record of business management.

Use of the Venture Exchange by entrepreneurs ebbs and flows with confidence in the market. In 2002, there were 208 new listings, and the number increased gradually to 375 by 2007. After a big dip (there were 202 in 2009), listings started to rise again, to 334 in 2011. Last year was quieter, with 240 new listings.

How much does it cost?

Dr. Wise estimates the cost of going public to be between $50,000 and $150,000. "Going public is a big deal," he says. "If you are raising less than $5 million through the process, you may find it extremely cost inefficient. The lawyers, accountants, the brokers all do well when you go public. The same can't always be said for the founders."

Is your team up to the challenge?

Preparation is key. Having a great team, not just of professional service providers but at a management advisory level, is necessary. "You really want someone who has been there, done that," Dr. Wise says.

In the case of iCo, the co-founders – Mr. Rae and CFO John Meekison – came from a capital markets background. Mr. Rae is a former biotech equities analyst and Mr. Meekison was an investment banker. "We had a very clear understanding of the going-public event and how to position iCo as it went public," Mr. Rae explains.

Is your company ready?

If you are prepared for growth and you are confident your idea will resonate on Bay Street, with analysts and with consumers, going public on a small exchange is helpful. For instance, you can use shares as currency to make acquisitions. Mr. Rae says it's important to have a fantastic story to tell, and to be ready for the long haul. "To go public on the Venture Exchange, you need to be poised not just to become a public company, but to stay as such.

"Be prepared to take your game to a new level. You'll need to be in the top 5 per cent to 10 per cent of opportunities in your sector to be able to fully access the benefits of your public listing and attract significant investor attention. Do not be academic about your undertaking. You may have a great technology but if you do not understand how to position your product to an investment public, you will find yourself terribly disappointed."

When the time is right to make the plunge, your bankers can help you decide the initial share price, in agreement with your broker or investment dealer. The calculation takes into account many factors, including the true value of the company, its future growth prospects, past earnings, economic climate and, of course, what amount will be seen as attractive by investors.

Why not stay in the private realm?

It is less expensive these days to start a business, so raising enough capital privately is easier, Dr. Wise says. The typical cost of launching a startup has fallen from about $5-million in 1997, to $500,000 in 2007, to about $50,000 in 2013, he says. "Since you need less, there are more sources (of capital). For example, most friends and family could cover a $50,000 round, but few families could cover a $5-million round, at least at my house."

Today, he adds, there are new options to raising seed capital, including client-funded innovation and crowdfunding.

According to Dr. Rae, your ability to access venture capital depends on your type of business and expected liquidity. Venture capital in both Canada and the United States is contracting and consolidating. "As a result, alternative sources of capital in the form of high net worth angel investors has become increasingly important and the likelihood of attracting this kind of capital is directly proportionate to how quickly liquidity may be achieved."

Do you have time to manage this?

Being public means your small executive team's work load will skyrocket. "To stay public," says Dr. Wise, "you need to invest at least 50 per cent of your CEO's time and 50 per cent of your CFO's time to running the public side, rather than running the business."

"Be prepared for 18-hour days and run with leadership with unwavering perseverance as a key element," says Jeff Ciachurski, who was president and CEO of Western Wind Corp., until it was purchased by Brookfield Renewable Energy partners in early March, 2013. Mr. Ciachurski has 27 years of experience in the public marketplace, mostly on the Venture Exchange. His new flagship is Greenbriar Capital Corp.

"As you grow, you will have to grow your team, but never overhire. It is better to run hard with a lean team than to staff a little heavy in the beginning," he says.

Is transparency a good thing for you?

Another possible "con" is that going public opens your business up to transparency, which for some industries isn't a good thing. "Public companies have to share their margins. Perhaps you don't want your customers knowing that you charge them 10 times the actual cost of goods sold," Dr. Wise says.

Do you want more oversight?

Mr. Ciachurski reminds entrepreneurs that going public means having another layer of bureaucracy to deal with. "The Venture Exchange has policies that go beyond traditional and appropriate securities legislation, such as the exchange acting as a 'fourth' director overseeing your business judgment on transactions, directions and opportunities.

"It's another party in addition to the management team and the board that needs to be consulted and in turn provides unwanted advice," he says, likening it to a critical mother-in-law.

He also warns that going public means dividing your time between running the company and addressing the needs of shareholders. It also inevitably dilutes ownership.

Do these benefits apply to you?

Joining the Venture Exchange has challenges, but it also has tremendous benefits, Mr. Ciachurski says. "The pros are the accessibility to a large group of investors who have experience in investing in a Venture company, an established framework for raising funds, and a potential springboard to a bigger exchange.

"This is not for the faint of heart," he adds. "My main advice is, 'do not seek to go public with a venture or business that cannot make it on its own as a private company.' Your projects or ideas must be able to succeed as a private venture. A real company only lists to get bigger and to enjoy the public spotlight of sharing the success to a bigger audience."

Dr. Wise echoes this sentiment. "Unless you have a great story that the general public will not only understand but be interested in, I'm not sure this route is as attractive as it once was."

One final thing to keep in mind: Normally when a placement on the Venture Exchange goes south, the founders suffer the most, financially speaking.

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