Gerrit De Vynck, Bloomberg News (March 13, 2014) – Social media and online-education startups are poised to lead a resurgence in technology initial public offerings in Canada as investors burned by a slump in the commodity industry turn to more lucrative markets.
Hootsuite Media Inc., Desire2Learn Inc. and Vision Critical Communications Inc. are among technology companies that will be ready to go public within two years, according to John Ruffolo, who has invested in all three through the venture capital arm of the Ontario Municipal Employees Retirement System pension fund. Canaccord Genuity Group Inc. forecasts that more than US$400 million will be raised through technology IPOs in Canada this year, which would be the most for the industry in more than a decade, according to data compiled by Bloomberg.
The market still seems to be fairly open. They’re quite hungry for growth products versus commodity-resource-type products.
Canadian investors are turning to technology for growth after three straight years of declines for mining and materials companies, which along with energy account for more than a third of the stocks on the nation’s benchmark equity gauge. Meanwhile, technology companies in the country rose 36% in 2013, the biggest gain in four years and returning more than comparable U.S. firms. Entrepreneurs are choosing to stay in the country instead of moving to the U.S. because of the increasing availability of pre-IPO funding, said Ruffolo, chief executive officer of OMERS Ventures.
Hootsuite, Desire2Learn and Vision Critical “certainly are big enough and the markets are ready enough,” said Tom Astle, head of strategy at Toronto investment firm Difference Capital. “The market still seems to be fairly open. They’re quite hungry for growth products versus commodity-resource-type products.”
Astle, who oversees $185 million of assets, estimates the three companies are among Canadian firms that could raise at least US$50 million each in IPOs. Difference Capital invests in media, e-commerce and software startups.
Hootsuite helps companies manage their social-networking activity with software to create and monitor advertising campaigns across Facebook Inc., Twitter Inc. and other sites. The Vancouver-based company, whose customers include PepsiCo Inc. and Sony Music, raised US$165 million in August from venture capital firms including Accel Partners, Insight Venture Partners and OMERS Ventures.
Desire2Learn is an educational software maker with more than 1,100 clients including grade schools, colleges, health care, government and corporations. The company is based in Waterloo, Ontario, the birthplace of BlackBerry Ltd.
Vancouver-based Vision Critical, which was founded in 2000, creates software for market research that helps brands survey customers and get feedback in online forums.
The resurgence of the technology industry in Canada comes after Nortel Networks Corp.’s 2009 bankruptcy and the steady decline of BlackBerry’s global smartphone market share to less than 1%. After its stock price fell more than 90% in five years, BlackBerry has rebounded 42% since John Chen was named CEO in November.
Last year’s 31% decline in the Standard & Poor’s TSX Composite Materials Index, which measures 51 Canadian stocks, is giving investors a reason to shift their money to technology companies. The TSX index for Canadian information technology companies rose 36% in 2013, fueled by Constellation Software Inc. and Open Text Corp. The index’s climb compared with a 26% gain for the S&P 500 Technology Index of 65 U.S. companies.
“We’ve had a 10-year bull cycle on the resource mining side and that’s quickly shifted over,” said Sanjiv Samant, the Toronto-based head of technology, media and telecom investment banking at Canaccord. “We’ve seen some small signs of life in the mining sector recently, but generally speaking it looks like the investors are gearing up for a bigger cycle on the technology side right now.”
Only 10 basic materials companies went public in Canada last year, the fewest on record, according to data compiled by Bloomberg going back to 2002. The IPOs raised only US$32 million in 2013, the lowest in the industry since 2003, the data show.
Five of the technology companies OMERS has invested in will be ready to sell shares to the public within the next two years, Ruffolo said.
“We have the deepest IPO pipeline that we’ve ever seen,” he said in an interview at his Toronto office. In addition to Desire2Learn, Hootsuite and Vision Critical, e-commerce company Shopify Inc. and BuildDirect, an online construction-materials store, may soon be ready to go public, he said.
Mark McQueen, CEO of Wellington Financial, said in a January blog post that “the Canadian IPO window is open” and will be for the remainder of 2014. Desire2Learn, Vision Critical, Shopify and BTI Systems are “all on the speed dials of Canada’s tech investment bankers,” he wrote. Wellington first invested in Vision Critical in 2006 and has also given funding to BTI.
Virginia Jamieson, a spokeswoman for Desire2Learn, declined to comment on the likelihood of an IPO. “We’re poised for rapid growth and great innovation over the next few years,” she said in an e-mail.
Scott Miller, Vision Critical’s CEO, declined to comment specifically on the company’s prospects for an IPO. “When the time is right, we’ll make the best decision for our business and our shareholders,” Miller said in an e-mail.
Sandy Pell, a spokeswoman for Hootsuite, declined to comment on future financial plans.
“I personally would love to take this company to an acquisition or an IPO,” Hootsuite CEO Ryan Holmes said after raising funding in August. “That being said, my goal right now is building an amazing business. I think this raise takes some of that pressure off.”
Shopify’s goal is to go public, but the company can’t comment on the timing of an IPO, Mark Hayes, a spokesman for the Ottawa, Ontario-based company, said in an e-mail.
Bryan Grillo, a spokesman for BTI Systems, wasn’t immediately available for comment, while Wendy Kubota, a spokeswoman for BuildDirect, didn’t respond to an e-mail message requesting comment.
Samant of Canaccord still sees this year on pace for “well over” US$400 million of Canadian technology IPOs and even more in 2015. Declines in resource-oriented stocks have investors hunting for growth, and more technology companies are reaching the maturity level where they can access the public markets, he said in an interview.
The closest Canada has come to US$400 million in technology IPOs was in 2006, when Corel Corp. and Excapsa Software Inc. raised the bulk of the year’s US$392.2 million, data compiled by Bloomberg show.
For years, a lack of private capital meant Canadian technology companies had to go public too soon, said Ruffolo during an interview in his Toronto offices.
“You have a miss and you have a second miss and all of a sudden it becomes stranded,” he said. “I would say, the IPOs of the last ten years, that companies went all too early.”
Private funding may top US$100 million before a company is ready to IPO because they need to list on both the TSX and a U.S. exchange like the Nasdaq to be successful, Astle of Difference Capital wrote in a March 10 blog post.
That commitment is allowing more of Canada’s innovating entrepreneurs to stay at home instead of packing up for the U.S., Ruffolo said.
“We were hit pretty hard in the dot-com bust, but all these great entrepreneurs that want to live in this country, they’ve been building in their basements and they’ve been bootstrapping,” Ruffolo said. “We had fortuitous timing that by the time they popped around, we were the deep pocket out there to actually fund them.”