Will 2017 finally be the breakout year for Canadian tech initial public offerings?
After the successful public debuts of Kinaxis Inc. in 2014 and Shopify Inc. last year, 2016 is set to pass into the history books without a single tech IPO here.
"We've gone from a bit of a dry spell to an enduring drought," said Alex Graham, head for communications, media and technology investment banking with RBC Dominion Securities Inc.
That reflected broader trends: IPO activity in the United States, Canada and globally was down sharply, while proceeds from U.S. tech IPOs fell 54 per cent from 2015 levels, according to Renaissance Capital.
But U.S. tech IPOs have made a comeback since Labour Day, and 15 of the 19 tech firms that went public in 2016 have traded above their offering price.
That bodes well in Canada, where several Canadian tech firms should be "IPO-ready" next year – though not all are expected to go public in 2017."We would expect to see a couple [of tech IPOs] in 2017, perhaps more," said David Wismer, head of technology investment banking with BMO Nesbitt Burns Inc. John Ruffolo, chief executive officer of OMERS Ventures, which has backed many of Canada's most promising tech firms, said that "about a half-dozen" tech firms have the right characteristics to go public. "Whether they decide to go public in 2017 or 2018 remains to be seen."
Venture capital has been gushing into Canadian tech firms at a pace unseen since the dot-com boom. For example, there have been eight deals each valued at $75-million or more in 2016. That's more than the number of deals that size than in the previous six years combined.
There also appears to be healthy investor appetite for Canadian tech stocks – which account for just 3 per cent of the S&P/TSX composite index – after two well-received equity offerings by Open Text Corp. and Shopify this year. James Obright, managing director of equity capital markets with RBC, joint book runner on both deals, said "we simply haven't been able to supply … that investor appetite" for new Canadian tech issues.
So who are Canada's tech IPO hopefuls? They include six software firms that are either close to or have surpassed $100-million in revenue and are profitable at an operating level, or almost there. Some need to show continued steady growth to be IPO-ready, observers say.
Leading the way is health-care software firm PointclickCare Corp., which filed to go public in September, 2015, on the TSX and Nasdaq just as the market went cold, but has yet to follow through. A company spokeswoman said "we're in a quiet period, so we have really nothing to speak to regarding our [IPO] plans." RBC is set to be joint book-runner.
Another top candidate is Markham, Ont., online mortgage services business Real Matters Inc., with $88-million in revenue in the year ended Sept. 30. Its board has green-lighted the profitable, acquisitive company to proceed toward an IPO on the TSX, with BMO Capital Markets as lead underwriter. CEO Jason Smith said he's constrained about what he can say. "What I can tell you is we have been going through a public readiness process … and we look forward to coming to public markets in due course."
Observers also believe Vancouver cancer drug developer Zymeworks Inc. may go public in 2017 after raising $61.5-million (U.S.) last January from U.S. and Canadian investors including pharma giants Celgene Corp. and Eli Lilly & Co. to fund clinical trials.
Three other firms setting the stage for an IPO – but maybe not in 2017 – are D2L Corp. of Kitchener, Ont., and Vancouver firms Hootsuite Media Inc. and Vision Critical Communications Inc.
"Next year for the first time we're aiming to be IPO-ready," said D2L CEO John Baker, of the $100-million (U.S.)-plus revenue education software company, which recently hired Cheryl Ainoa, previously a top executive with Intuit and Yahoo, as chief operating officer. "That doesn't necessarily mean go public [in 2017], but be ready if the timing is right."
Hootsuite, whose software is used to monitor social media, has reached the two milestones that CEO Ryan Holmes said were necessary before going public: hiring a chief financial officer and becoming cash-flow positive. The company declined comment.
BMO is advising Vancouver-based Vision Critical, which sold its opinion research and consulting practice this year to focus on its fast-growing market research software business. Negotiations are under way that could see long-time shareholders sell some of their holdings. An IPO will likely follow, but probably not before 2018, observers say. Vision Critical said it was unwilling to discuss timing or details on company strategy.
Also unlikely is a 2017 IPO from BlueCat Networks Inc., a Toronto information technology security firm often mentioned as a public markets candidate. Co-founder and executive chairman Michael Hyatt said that while BlueCat is both "the right size" for an IPO (industry sources place revenues in the high eight-figure range) and profitable, an IPO would be "a distraction … we don't see the need to do it."
Indeed, with huge pools of capital chasing venture capital deals, lofty private market valuations and low interest rates, many attractive financing options remain. But if the market for tech IPOs continues to heat up in the U.S., expect the conversation to shift. "We're hearing a lot more companies talking about when they'll go public, not if," said Michael Kousaie, head of business development for technology with the Toronto Stock Exchange and TSX Venture Exchange.