“The onset of the pandemic, in particular, has been a major catalyst in making the IPO process more efficient (e.g. virtual roadshows), which in turn has made it easier for Canadian tech firms to access public markets.”
Whether it is an appointment with your doctor, a get-together with friends, or exercising from home, the COVID-19 pandemic has brought a sea of change to our relationship with technology, highlighting the significant value of these innovative businesses to a wider audience.
This year, we saw Dialogue Health Technologies, a Montreal-based virtual care startup raise $100 million in its initial public offering. Its shares jumped on the first day of trading at the end of March and has remained above its debut price. It comes after payment processing firm Nuvei Corp made history in 2020 with the biggest tech IPO ever on the TSX. In all, more than 20 Canadian companies have announced IPOs in 2021, a number of them coming from the tech sector.
Within the thriving Canadian tech ecosystem, the “pandemic effect” has resulted in emerging tech companies turning to the public market for growth. Those who already made the leap into the public arena are seeing it pay off with strong valuations. While these companies are headquartered in Canada they are truly global businesses competing on the world stage. They may have gone public on the TSX in Canada, but are now attracting some of the best investors from around the world, putting them on the same competitive footing as international peers.
All this stands in contrast to the private market boom of the last seven to 10 years when an abundance of private capital flowed in, driven in large part by deep-pocketed U.S. investors and the emergence of growth equity funds. That robust funding environment presented an opportunity for young companies to grow privately instead of selling publicly. Flush with unprecedented liquidity to scale up, going public seemed like an unnecessary route for many tech firms. Making the leap from a $50 million revenue company to a $100 million one seemed far less daunting. We saw this play out in the number of IPOs the Canada tech sector produced over the last decade: an average of just one per year.
But the pendulum began to swing the other way over the last 12 months. It was inevitable that these private investors would seek an exit and that public markets would become a viable option.
The onset of the pandemic, in particular, has been a major catalyst in making the IPO process more efficient (e.g. virtual roadshows) , which in turn has made it easier for Canadian tech firms to access public markets. The increasing number of conversations we are having with companies about going public is a possible foreshadowing of many more IPOs to come should the market environment remain robust and positive.
LOWER THRESHOLD, HIGHER VALUATIONS
Companies where COVID-19 is a tailwind, in particular, have done extremely well. The value of Dialogue, for example, was made abundantly clear throughout the pandemic as countless appointments with doctors went virtual. But it’s not a “COVID bump” -- this is not a temporary technology fad that will dissipate once the pandemic is over. These businesses are here to stay. The pandemic simply accelerated the adoption of new technologies and highlighted the companies’ worth and sustainability much sooner.
Another aspect of this acceleration is seeing the threshold change for when a business might go public. There was a time when companies would only consider it after reaching $75 to $100 million in revenue. Today, we are seeing firms with half that amount -- $50 or $60 million, sometimes even as low as $30 million -- making this kind of move and succeeding. The TSX is a great listing venue for Canadian companies to go public at an earlier stage compared to its U.S. peers, while still attracting high quality investors on both sides of the border. In addition, what was once considered a healthy 25 to 30 percent annual revenue growth expectation for publicly traded tech companies has now jumped to 50 or even 100 percent growth. A confluence of other factors combined with the pandemic are driving these healthy multiples: They include macro events like interest rates hovering near record lows and more money flowing into public equity markets due to low bond yields.
Scarcity is also an important factor. Public market multiples have expanded significantly and we are seeing a lot of capital chasing fewer and fewer assets and even fewer private tech opportunities. It’s becoming more expensive for venture capital growth equity to invest in these fields when there is a credible alternative where these firms can go public. Throw in the enormous popularity of SPACs in the United States chasing private companies as well, there is even more money on the table, and more competition for exits than there has been for a long time.
Alongside this trend are more sizable M&A deals in Canada and other lucrative exit alternatives and opportunities too, with some companies choosing to stay independent for much longer before making a decision to sell due to the robust funding environment.
At the same time, publicly traded companies are capitalizing on their public currency to grow through M&A. We’ve seen Lightspeed, for example, buying businesses with a mix of cash and their public equity. In the last half year alone, Lightspeed acquired Vend, Upserve, and ShopKeep.
As more companies go public, we will likely see this play out more often as well. Investors are looking at both organic and inorganic growth, and acquisitions are another tool to expand into the kind of multiples we are now seeing.
When you put all these varying elements and factors together, the strong valuations - both at IPO and in the after-market - are no surprise. Unlike a more bearish market, where both profitability and growth are key to valuations, growth is the greatest driver in this kind of bull market.
Market trends are constantly changing though; there will always be varying degrees of oscillation between public and private markets. Right now, everything is firing on all cylinders. But down the road, companies that went public today might get taken private as M&A deals become more prevalent, as the cycle changes and macro factors shift. It is a part of the natural evolution of the markets.
Yes, there may be additional tech IPOs coming but as the current cycle matures investors will become much more discerning in where they put their money. This is the busiest we’ve ever been and this has been one of the most constructive markets I’ve ever seen in Canadian tech. We have not experienced these kinds of conditions at any point over the last decade. Whether you are an investor or an entrepreneur, always be prepared to pivot when the market is agreeable -- like it is now. This means doing your due diligence, knowing your market, knowing your companies so when the chance comes, you are ready to act quickly. You never know when the window is going to be “open” again or for how long.
