HootSuite, led by CEO Ryan Holmes, is a likely candidate for an IPO in the next 24 months.Rafal Gerszak/The Globe and Mail
Canada is about to have a lot of big technology companies go public, and Canada's capital markets need them to go public here.
The stakes are high. Having the latest crop of large, successful Canadian technology companies shun this country's public markets would be a telling blow. Complaints that domestic public markets are too thin on technology stocks are long-standing, but are of more concern now that tech is hugely in favour. Plus, what does it say about a nation when its emerging leaders choose to list and finance elsewhere? Nothing good.
Given that, it is good to hear there is plenty of hope that some of the most heralded names will be coming to Canadian markets.
In the coming 24 months, companies such as Shopify, Vision Critical, HootSuite, Desire2Learn and BuildDirect are likely IPO candidates (though there is every chance one or two will be bought before an offering). All would be big enough to go south of the border and find a receptive audience. However, TMX Group Inc. is working hard to ensure they list in Canada as well, and there are other promising signs that Canada won't be shut out.
"We're pretty optimistic about getting our fair share," Ungad Chadda, who oversees the TSX listings business for parent company TMX Group, said in an interview. He argues companies should choose to list at home in Canada and in the U.S. "We see [a TSX listing] as a supplement versus a substitute."
It's a wise strategy for the TSX. Pitching a Canada-or-bust listing strategy would be asking for disappointment. U.S. markets are bigger, more liquid, and receive more analyst coverage.
Double listings cost more, but Mr. Chadda argues that Canada offers advantages. Investors here are more long-term oriented than in the U.S. Also, there are simply not enough technology stocks in Canada to meet demand, so investors are likely to snap up what comes their way.
That's turning one of the TSX's potential weaknesses – a lack of peers in the tech sector – on its head. A big enough company going public in Canada could even warrant inclusion in the TSX Composite Index, something that would be almost impossible in the U.S. Membership in the index means extra visibility and extra demand from investors who mirror the benchmark.
Of course, Mr. Chadda is paid to say all this. Don't take his word on it. His comments are backed up by those of John Ruffolo, who runs OMERS Ventures. He matters because he is a big investor in most of the top companies believed to be in the IPO pipeline – including Vision Critical, Shopify, HootSuite and BuildDirect.
"My personal view is I would like to see all of ours go jointly on a U.S.-based exchange, whether it's Nasdaq or New York, and TSX," Mr. Ruffolo said at a recent conference put on by Cantech Letter, an online magazine focusing on Canadian technology.
Investors in Canada are "thirsting" for tech companies and are "far more forgiving" of hiccups in financial performance, he said. Meantime, "the U.S. part of it keeps the valuation and liquidity up so we don't have this big difference between pricing issues between both sides of the border."
Historically, tech companies have tended to trade at a discount on the TSX. That may be less of an issue now, with investors seeking out technology in Canada, instead of focusing all their energy on resources. Seeing where the fees and interest are, securities firms are adding technology specialists who can promote stocks. All of that should go some way to close any valuation gap.
The companies going public in the next year may also simply be more attractive than their predecessors. Canadian tech companies have often gone public too early, before they are big enough or successful enough to draw a wider audience.
For that reason, OMERS Ventures is pushing the companies in its portfolio to stay private until they have $100-million of revenue and have a solid "steady state" business, Mr. Ruffolo said at the Cantech Letter gathering. That makes such companies "very good product, particularly for the institutions that would typically buy," he said. To enable companies to stay private longer, OMERS has been aggressively writing cheques that would replace the proceeds of an offering.
Given that, OMERS will have a big say in where the companies end up. But so will other venture capitalists who have backed the companies. To the extent these firms have raised VC money from people in the U.S., or who have had better experiences on U.S. markets, there will be pressure to go there.
For example, OMERS Ventures is said to own 10 per cent of Vision Critical, which helps companies build communities of customers and bounce ideas off them. So Mr. Ruffolo will have a say, but not the only say, in where it lists.
For the sake of Canada's capital markets, let's hope he is persuasive.