Technology entrepreneurs, employees, and investors are hungry for liquidity, but geopolitical and macroeconomic uncertainty has made accessing it a tall task.
At NACO Summit in Ottawa on Wednesday (which NACO supported BetaKit’s travel to attend), leaders from Dentons, HarbourVest Partners, and TMX Group unpacked the current state of Canada’s exit markets, and some of the approaches that businesses have been taking to turn some of their investments into cash.
David Little, Dentons Canada
A cool IPO market and “slow going” M&A have made secondary deals “ordinary course.”
Canada’s tech initial public offering (IPO) market has remained cool. Amid these conditions, some Canadian deep tech businesses have recently turned to another means of going public: special purpose acquisition companies (SPACs). This group includes Toronto quantum computing firm Xanadu, which debuted on the Toronto Stock Exchange (TSX) and the Nasdaq in March, and Richmond, BC-based fusion power developer General Fusion, which is set to join the Nasdaq via SPAC in the coming months.
HarbourVest managing director Senia Rapisarda said on stage she has been surprised by the amount of strong IPO candidates that have opted to stay private over the past 12 to 18 months. She hopes they eventually make the leap, but is also uncertain some ever will.
Joining public markets via reverse takeovers has emerged as a viable path to liquidity for some private tech startups. Fellow panellist Dani Lipkin, managing director of TMX Group’s global innovation sector, noted that the TSX Venture Exchange (TSXV) could be one such avenue. She singled out NL-based marine tech firm Kraken Robotics as a successful example of this approach. Vancouver defence tech startup Juno Industries is currently preparing to do the same.
On the mergers and acquisitions (M&A) front, transaction size has increased over the past year, but this is largely thanks to mega deals, according to fellow panellist David Little, leader of Dentons Canada’s venture technology and emerging growth companies group.
This has “been great for the stats,” but also raised questions about what is going on with the rest of the sector, Little said. For “non-differentiated,” mid- and low-cap firms, “it’s still slow going.” While liquidity for this group is available through M&A, it is often not at the deal terms or valuations that companies and investors are seeking, Little noted.
These conditions have “completely entrenched” venture capital (VC) secondary transactions—which involve startup founders, employees, or existing investors selling their shares to new backers—making them “ordinary course,” Little said.
Big sales by Jane Software, which sells practice management software to health and wellness practitioners, and Toronto adtech firm StackAdapt drove $1.3-billion CAD in domestic tech secondary activity last year, per the Canadian Venture Capital & Private Equity Association.
Rapisarda noted that secondaries can come in multiple forms, from single asset sales of shares in specific companies, to sales of limited partner interests in VC funds with a larger portfolio, which she described as “the most common.” Lately, single continuation vehicles, which let investors extend holding periods for winners unable to exit within the typical fund lifespan, have become “incredibly popular,” she said.
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Rapisarda emphasized that secondary sales are not a path that is available to all tech firms, only “some of the best.” Within the VC secondary market, Rapisarda said it has been “a tale of two cities,” with top-performers typically taking smaller discounts and other businesses who raised during market peaks forced to stomach much steeper haircuts.
At the moment, Canada’s VC secondary market remains thin compared to the US, with few dedicated participants, including Northleaf Capital Partners, Plaza Ventures, Portage, and the True North Fund. Investors BetaKit heard from at CIX Summit in March said they hope to see more such vehicles materialize to provide the ecosystem with the liquidity it needs.
Feature image courtesy NACO.