High-tech firms riding a market wave
Investors are no longer afraid to support web-based companies
While there’s no way of knowing if a modest resurgence in Canadian tech IPOs will grow into a wave of new publicly traded Internet companies, investors say the stars are aligning for a breakout year.
“What we have in the Canadian marketplace are investors in the private companies who are willing to invest in every stage of growth and that is a relatively new phenomenon,” said Jim Orlando, managing director of the venture group of OMERS, the Ontario municipal employees’ pension fund. BMO technology analyst Thanos Moschopoulos said institutional investors have noted the strong performance of tech stock indexes on both sides of the border and have been impressed by Canadian successes.
He cited software-maker Kinaxis, which gained 90 per cent since going public last year, and e-commerce platform Shopify Inc., which attracted big institutional investors and reached a billion-dollar valuation after an initial public stock offering last month.
Canadian tech startups have matured since the launch of the Apple and Android mobile operating systems and many are profitable, Moschopoulos added. As well, a long-term decline in commodities has shifted the focus to technology, which accounted for just 1.6 per cent of the value of the TSX last June.
That was down sharply from 41 per cent in 19992000, when the index was dominated by companies such as Ottawa business intelligence software giant Cognos Inc., acquired by IBM in 2008.
This year, the TSX IT sector is nearing a 52-week high versus a 22-per-cent decline for the materials index, with data showing Canadian venture capital investment at it highest level since 2002.
The overall market for initial public offerings in Canada bounced back in the second quarter, with $2.1 billion raised on the TSX, according to the quarterly PwC survey of Canadian equity markets. Five new issues have each raised $100 million or greater, including the $1.4-billion PrairieSky Royalty Ltd. issue.
The change in fortune for the IPO market suggests a window has opened for new equity issues from quality companies from across industries, said Dean Braunsteiner, national IPO services leader at PwC.
“The stars have aligned for companies with sound businesses and a good story to tell,” he said.
“There is growing optimism in the market, there is the expectation of reasonable economic growth and there are investors seeking opportunities in companies with both growth potential and established revenues,” Braunsteiner added.
Canadian lender Mogo Finance Technology Inc. could complete its IPO in weeks, while Vancouverbased social media management provider Hootsuite has said Shopify might move ahead its offering plans.
Analysts and traders say rising valuations create a draw for investors and mitigate against takeovers by U.S. incumbents, although the surge in available capital could allow companies to stay private longer.
Still, some warn of excessive prices for unproven companies. Chris Sacca, an investor in Twitter and Uber, said too much money is flowing to tech startups that will fail in a coming industry slowdown.
“Bad deals are being done,” he said in a Bloomberg interview Thursday. “It’s kind of inevitable that the funds right now that are putting a lot of this money to work here aren’t going to see it all back.
“I think there are naive investors with no discipline, throwing out term sheets at nine figures right now, with no diligence,’’ Sacca said.
Data from CBInsights showed more than 110 U.S. companies have reached a private valuation above $1 billion (U.S.).