Technology IPOs On the Horizon

Brent Holliday

| February 7, 2011

With a mini "bubble" in the tech sector, will technology IPOs be flooding the market?

Within the technology community, there is a little party going on that seems disassociated with the rest of the world. If you talk to the Silicon Valley types or tech insiders in Vancouver, there seems to be a boom happening in sectors such as Internet media, mobile applications, cloud computing infrastructure, social gaming and enterprise software. Many are calling it a mini “bubble” as investment valuations and M&A transactions are atmospheric. Development engineers are getting signing bonuses in California. I am not kidding. Signing bonuses. 

If this is indeed a bubble, one would expect that the froth would naturally lead to that magical wealth creation machine: the initial public offering. You remember 1998-2000, don’t you? The IPOs that skyrocketed every day, making billions in the process? The IPO was the biggest wealth creator for early shareholders in technology companies. 

If we are indeed in “silly season” in some technology sectors, it has not led to a robust IPO market. If we ignore a couple of Chinese company introductions to the U.S. financial markets, the technology IPO has all but disappeared. In the three-year period from December 1997 to December 2000, 549 technology IPOs by U.S. and Canadian companies raised at least $15 million in equity each. Over the same three-year period a decade later, there were 47 tech IPOs. 

A closer look at the numbers shows that only five of those occurred between December 2007 and April 2009, a disastrous time in financial markets. Starting with the successful IPO of San Francisco’s OpenTable in April 2009, a “flurry” of 10 happened that year, followed by 32 in 2010. So things are improving but not within a light year of what happened 10 years ago. 

It’s even worse for Canada. In the past three years, there has not been one technology IPO raising over $15 million on the TSX. (TSX Venture Exchange IPOs don’t count; they’re typically early-stage financings akin to an angel or VC investment and don’t create the liquidity of a TSX or NASDAQ IPO.) The last TSX tech IPO was Montreal’s 5N Plus in December 2007. Two large Canadian technology companies have gone public in 2010, but on the NASDAQ with U.S. underwriters: Mitel Networks of Ottawa and Smart Technologies of Calgary. 

In fairness to the TSX, it is not a technology market. Canada is very good at commodities, financials and services, and the TSX reflects that. The analyst coverage and investor interest is high in those broad and deep sectors. As for technology, it struggles. Add the fact that the revered NASDAQ has only had 46 North American technology IPOs in the past three years and, well, it is hard to go public these days.  

As the tech IPO market trends upward (in the U.S., at least), one might ask what kind of a technology company qualifies for the big IPO lottery. At Capital West Partners, we have advised local rapidly growing technology companies to wait until they can muster a valuation over $250 million and then go to NASDAQ. At that valuation level, analysts and institutional buyers will pay attention. Companies might co-list on the NASDAQ and TSX, but the primary focus needs to be the biggest stage in the world for public technology companies. Many of the local success stories that are public have gone the co-listing route: Creo (now Kodak) listed on both exchanges as did Pivotal (now CDC Software) and Sierra Wireless. 

Most early-stage investors and founders are hoping the IPO window for technology companies will continue to open wider. With a crop of emerging local companies that will soon meet the criteria for a successful launch, B.C.’s technology industry is hoping that all of this froth in the technology industry will spill over to the public markets in New York and Toronto. In the meantime, the party rages on, whether the IPO wants to join or not.

 Brent Holliday heads the technology practice for Capital West Partners, a Vancouver-based investment bank.