Last Wednesday, the financial press declared the impending initial public offering of U.S. cloud-based payments company Square a disaster: It was priced at a lower-than-expected $9 (U.S.) a share following a cool reception by institutional investors. That was below the $15.46 private investors paid in its last venture financing a year earlier – the latest in a string of U.S. tech IPOs to take markdowns on their public debuts. Then, on Thursday, the shares popped by 45 per cent as the company started trading, and suddenly the IPO was winning praise.
Watching all this intently are backers, bankers and executives of a raft of pre-IPO Canadian startups. So what does the Square IPO mean for those Canadian tech firms hoping to make their debut on exchanges in the coming year or so? The news is mostly positive.
It has been a tough market: U.S. tech IPOs and overall U.S. IPOs to date are down by more than 50 per cent from last year. Two other U.S. tech IPOs priced last week at the low end of their marketing ranges: online dating site operator Match Group and e-mail security provider Mimecast Ltd. That contrasts with the robust market for private market deals in earlier-stage companies in recent years, which has raised concerns of a startup financing bubble.
But all three ended the week up from their issue price. "Investors in public markets still crave new tech investments – at the right price," The Wall Street Journal reported. That suggests the market for tech IPOs is not dead and the bubble isn't bursting – but perhaps the buoyant valuations awarded to some private tech firms need to be deflated a bit before they're ready for public investors. (Not that many pre-IPO Square investors are crying. Only those who bought into the last private round were under water in the IPO, but they got downside protection in the form of millions of shares issued to them as compensation in the IPO, so they don't really suffer.)
When the dot-com bubble burst, it all but shut the door on tech IPOs for a long period in the early to mid-2000s. The fact that tech IPOs are going ahead at all now, given the overall market uncertainty, China's questionable economic outlook and the likelihood of a late-year U.S. interest rate hike, suggests investors are still keen on tech innovation plays. That, Bay Street investment bankers say, will rub off on Canadian tech firms looking to go public.
One positive sign this month was the well-received IPO of Salt Lake City-based Instructure, a learning management software company. One of its main competitors is Kitchener, Ont.-based D2L Corp. (formerly known as Desire 2 Learn). A good stock market showing by D2L's unprofitable rival could bolster the case for the Canadian company to go public, too. Meanwhile, emerging Canadian tech companies are hearing positive messages from Bay Street: Investors in Canadian public markets are still looking to deploy capital outside the decimated mining and oil and gas sectors, and will be drawn to promising tech companies that do much of their business in the growing U.S. economy. And companies that stick to long-term fundamentals in growing their businesses will be rewarded.
Taking a markdown on an IPO may not be the end of the world, as influential venture capitalist Fred Wilson, co-founder of New York-based Union Square Ventures, wrote on his blog last week about the Square IPO. "Sometimes you just need to get the deal done," he said, noting that an IPO is not an endgame, but a step along the way to building a business.
As for Ryan Holmes, chief executive officer of Vancouver-based social media management software firm and IPO candidate Hootsuite Media, he saw nothing but good news from Square's IPO: "I feel hugely optimistic," he said. "I think it give me confidence in the perception of the market in terms of rewarding companies that are disruptive."