Tech Futures:
July 28, 2000
By Michael
Volker
When to go Public,
CDNX Tech Financing Stats, IPO Watch, & Capital Pool Corps Update
When to go Public
"When should we go public?" That's
the question I often get asked by young technology companies seeking to grow and
expand. I believe that all companies have a common goal: to be sold. Sometimes
smaller, innovative firms are gobbled up by larger firms reaching into new
areas. Others merge to form larger organizations and others go public (i.e. a
piece-meal selling of the company).
Being a public company has its advantages and
disadvantages. Among the advantages are: liquidity for investors and founders,
the easy use of stock options to attract new talent, prospects for higher (less
dilutive) valuations, the ability for founders to retain a high degree of
control, a higher profile - useful in gaining credibility with customers,
suppliers and employees, and perhaps most importantly - on-going access to the
public market for subsequent financings. The disadvantages include: rigorous
reporting requirements, forfeiture of privacy - especially with respect to
financial results, additional costs associated with being public, and the
requirement to pay attention to shareholders (there are now two categories of
customers - the normal ones and the shareholders) which can be a
distraction for management and employees.
Traditionally, companies raise capital from
family and friends, business angels, venture capitalists and merchant bankers
with a view to ultimately doing an IPO - Initial Public Offering - on a senior
stock exchange like the TSE or the high-tech favorite, the NASDAQ. Founders and
investors often refer to this process as their "exit" strategy, i.e.
it gives them the chance to cash in on their original investment turning their
ownership interest over to the public at large, mutual funds and institutional
investors.
In this case, companies usually go public after
they have started to produce revenues (or strategic partnerships in the case of
many biotech firms) or when they have reached a certain critical mass in terms
of assets (e.g. $10 million) and a market value of at least $50 milllion. The
public offering is generally in excess of $10 million.
However, companies can also go public much
earlier on a junior stock exchange like the Canadian Venture Exchange (CDNX).
Many folks, especially the traditional venture capital ("VC") firms,
view this as going public "too early". This is, of course, because an
early public offering competes with these firms. Instead of being an
"exit" for investors, such an offering presents an "entry"
opportunity for smaller investors. As Bill Hess, CDNX president and CEO has
said: "The public market venture capital alternative plays a vital role as
mentor and incubator to start up companies."
Indeed, there are horror stories about small
companies going public, getting hyped by promoters who drive the stock up, then
cast adrift only to flounder. And, it's also true that more of these ventures
fail as compared to those listed on senior exchanges, but that's just a normal
Darwinian process. On the other hand, those that succeed provide handsome
returns to their backers.
There are also horror stories about companies
staying private by raising VC money. Venture capitalists can drive a hard
bargain on valuations which are generally lower than public valuations. They're
also not that forgiving if mistakes are made and they may not make ideal
partners. Via a shareholders' agreement, they can exert far more control than
that which they'd have merely from their voting rights. If you run into cash
flow problems or other hiccups along the way, they can take over your company.
There are no hard facts as to what is the best
time for a company to go public. It's really a judgment call by each company's
board given that both avenues are available - which is not often the case. In
reality, companies may not be able to attract traditional venture capitalists
(there aren't that many of them, either) and those which do may not come to
terms on the valuation question. If there is a choice it may best be made by
basing a decision on the quality and reputation of new people (directors,
financiers, etc) that accompany the investment.
For junior companies, the main advantage in
going public early is the access to the public markets, i.e. a larger investor
base, for on-going financing. It is an established fact that emerging companies
raise far more capital via private placements and public offerings than they do
on their IPO round. In the first 6 months of 2000, technology ventures on the
CDNX raised more than $600 million on private placements - more than ten times
the amount raised on IPOs! Investors are more likely to invest because of the
liquidity factor - they no longer need to ask: "what's your exit
strategy". Also, there are just too many deals that traditional VCs won't
touch because they perceive them as being too risky (remember that most VC funds
consist of other peoples' money managed by professional venture investors, not
risktakers).
The public markets provide companies with a
valuable currency: their stock. When the price of the stock is up, companies can
benefit by raising extra capital or using stock to acquire other companies -
smaller or larger -for expansion. Private companies are at a greater
disadvantage in this regard. Even if a public company isn't in need of capital
or isn't actively looking for an acquisition, a hot market may provide some
unplanned windfalls.
I can't help but wonder if a company's
survivability isn't improved by being public. I've seen many cases where private
companies get themselves into serious cash flow crunches by being off a little
on their revenues or by missing some milestones. When they've painted themselves
into a corner, it may be very difficult and painful to get out. Very few
investors want to throw money into what may appear to be a sinking ship.
Public companies have more options in this
regard and because of liability concerns around so-called forward looking
statements, these companies have an interesting advantage. Being public is like
living in a fishbowl - but only with respect to the past and present. The future
is rarely disclosed or predicted in any great detail. This turns out to be an
advantage in that investors aren't disappointed by missed targets because they
don't know what the targets are. Valuations may drop and financings may be very
dilutive, but at least they are still possible.
If you look at the top 20 BC companies in the
T-Net20 list, you will see many companies that went public "early" and
have used this approach as their primary financing strategy. These include: Westport
Innovations Inc (TSE:WPT), QLT PhotoTherapeutics (TSE:QLT), Burntsand
Inc. (TSE:BRT), Infowave Wireless Messaging Inc (TSE:IW),
Inflazyme Pharmaceuticals (CDNX: IZP), StressGen Biotechnologies (TSE:SSB)
and Micrologix Biotech Inc (TSE:MBI). Although many now trade on the
TSE, these companies all went public via the VSE - the CDNX's progenitor.
Going public early seems to work well for firms
where future earnings are more distant and where the risks and rewards are much
greater as is typically the case with biotech ventures.
Westport Innovations went public via a
reverse-takeover of a junior capital pool ("JCP") company on the
former Alberta Stock Exchange and started trading at less than $1.00. Today,
having progressed to the TSE, it now trades in the $20 range giving it a market
valuation of $600+ million.
Burntsand Inc also went public on
Alberta via a JCP. It, too, started under $1.00 and is presently trading around
$7 with a market cap close to $500 million.
The JCP program has been so popular that the
CDNX has introduced its rendition, the Capital Pool Corp (CPC ) program. This is
a low-risk way for companies to go public early, often inheriting new board
members who are knowledgeable in the public arena. CPCs provide a vehicle for
business angels and others to provide venture funding to the firm while
guaranteeing liquidity to the investors.
I believe that CPCs on the CDNX are the best
way for junior companies to go public. The other two ways are reverse takeover
("RTO") of an old, defunct, listed company or by initiating an IPO.
CPCs are really like RTOs, but with a "clean" shell, better escrow
terms (i.e. longer hold periods), committed people, and less prone to quick
promotional flips. IPOs, on the other hand, are ideal in principal but in
practice they tend to be risky, slow (lots of red tape), and expensive for
novices.
As to choice of junior exchange, there's only
one: the CDNX. Some companies are traded on the U.S. over-the-counter market,
and they mistakenly refer to this as a NASDAQ OTC listing (which is simply not
correct). This is not a "recognized" exchange with any degree of
scrutiny. Interestingly, a goal of the CDNX is to see its companies graduate to
the TSE or NASDAQ.
There's no simple answer to the question of
when a company should go public. My own view is that it's never too early to go
public, but it can be too late!
CDNX Technology Financings
Having just talked about one of the advantages
of being a public company - raising additional rounds of capital - here are some
facts released by the CDNX.
In the first six months of 2000, CDNX listed
technology companies raised $667 million - more than half of the $1.142 billion
total raised by all companies. Of the 20 largest financings, 14 were completed
by internet, software, telecommunications, life science research and other
technology companies.
The B.C. companies on this list include:
Micrologix Biotech (CDNX:MBI) $40.0
million
eDispatch.com Wireless Data (CDNX:EWD) $31.5 million
ACD Systems (CDNX:ASA) $22.5 million
stox.com (CDNX: URL) $14.0 million
Sideware Systems (CDNX:SYDu) $11.0 million
International Sales Information $10.4 million (CDNX: ISI)
Kast Telecom (CDNX:KST) $10.0 million
Private placements dominated the equity
financings accounting for 94% of all financings (921 companies!). Initial public
offerings for all CDNX companies - tech and others - accounted for only $60
million and an additional $11 million was raised via secondary public offerings.
How does the money raised by junior public
technology companies compare to venture capital raised by private companies? According
to Macdonald & Associates Limited, $2.7 billion in venture capital was
invested in Canada last year. That's in the same ballpark as the $1.14 billion
raised in the first half of this year by the pubcos.
Conclusion: there's a relatively healthy flow
of capital going to emerging public companies (i.e. those who went public
"too early").
IPO Watch
CST Coldswitch Technologies Inc (CST) is
moving forward with its IPO (refer to my column of June 30th). CST is offering,
through it's agent, Canaccord Capital Corp, a total of 4 million common
shares at $1.00 per share. This represents just over 22% of the company on a
fully diluted basis. The offering is now being subscribed and the IPO will
likely be completed within the next two weeks.
CST's primary product, The Coldswitch™, is a
practical and inexpensive fibre optic switch that uses light instead of
electricity to provide an elegant solution to many electrical switching
problems.
John Kidder, CST's tenacious founder has
put together a good board of directors. Perhaps because of this, I've heard that
the offering is "over-subscribed" - words that IPO CEOs love to hear!
Chromos Molecular Systems Inc(TSE:CRH),
a Burnaby-based Biotech firm founded in 1995, closed (July 17th) its initial
public offering consisting of a new issue of 3.75 million common shares at a
price of $8.00 per share for a total offering of $30-million - just as planned.
The stock has traded in the $8.05 - $10.95 range.
Alistair Duncan, president and
chief executive officer of Chromos, said the successful initial public offering
will enable the company to accelerate the development of its unique artificial
chromosome expression system, called ACes, in the fight against gene-based
disease. "The advances being made by the Human Genome project and
other breakthroughs in the genomics field bring great opportunities for our
technology -- and the proceeds of this financing will help us meet these
opportunities," said he.
Chromos is pursuing two strategic
business paths, both involving co-development of multiple applications of the
technology with large biotechnology and pharmaceutical companies -- and
receiving royalties on sales of the products. The first strategy is to license
its technology to partners for the development of their protein-based products.
The second is to in-license or otherwise acquire therapeutic gene targets -- and
then apply the ACes platform to the development of the company's own
protein-based products.
MacDonald Dettwiler &
Associates Ltd (TSE:MDA)'s completed its IPO on July 11th and started
trading on July 12th. In my July 14th column when I said that the "IPO is
getting closer", I didn't realize that it was that close (that's the
trouble with trying to write these columns ahead of time in order to take some
vacation!). The stock was offered at $14 and in the first few days traded up to
$15.25 in the first couple of days - which to me is a sign of a well placed IPO.
Recently, the stock went as high as $20 and is now trading around $19.
Of the 6 million shares offered on
the IPO, 2 million were offered by other shareholders (likely VCs and founders
looking for their "exit"). Orbital Sciences (NYSE:ORB)
continues to hold majority control in MDA - slightly more than 50%.
You can get a full prospectus on
any of these companies on the Sedar website at http://www.sedar.com.
Capital Pool Corporation (CPC)
Update
In this column, I keep track of
Capital Pool Corporation ("CPC") companies (see chart below) as
defined by the CDNX because they may provide funding and management to, and in
the process acquire, technology companies. CPC's are the continuation of the
former VCP and JCP programs on the Vancouver and Alberta Stock Exchanges.
I like CPCs from an investment
perspective. Although one may regard them as speculative (indeed, they are),
they are also an inexpensive way of getting in early and inexpensively. You can
pick up 10,000 shares of a typical CPC for less than $1.00. And when it does
what is expected, you can reap a nice reward. On average, CPC share prices have
appreciated over 200% from their IPO pricing. The real money, though, will be
made once they complete their acquisitions of real operating companies.
New additions to the list since
the July 14th update, are ADR Global Enterprises Ltd., Clarity Telecom
Networking Inc., Coastport Capital Inc., Corra Capital Corp., e-Quisitions
Inc., Goose River Capital Inc., PanGlobel.com Inc., and QIS Ventures Inc.
These CPCs all originate from
Alberta, except for ADR Global and Corra Capital.
Since the previous update, the
following six companies have come to trade: Advanced Sensing Systems Inc.,
Belltech Ventures Ltd., Diversaflow Corporation Ltd., New Xavier Capital Corp.,
Norstar Ventures Corp. and Trinity Ventures Ltd. (scheduled to begin
trading today).
Also since the previous update,
the following companies have been deleted from the list because they have
completed their Qualifying Transactions: Bellwether Capital Corp., Ex Fund
(A) Capital Corp., and IX Capital Inc.
Check our
Capital
Pool Corporation chart for a complete updated list of the CDNX's CPC and VCP
companies, thanks to David Ing of Pacific International Securities.
An introductory article explaining CPCs may be
found at www.bctechnology.com/statics/mvolker-
Footnotes
Information on local tech events
may be found on-line at http://www.vef.org.
For a convenient printable version
of this column, click
here.
Michael Volker is the
Director of the University/Industry Liaison Office at Simon Fraser University,
Chairman of the Vancouver Enterprise Forum, and a technology entrepreneur. He
owns shares in many of the companies he writes about. Contact: mike@risktaker.com.
Copyright,
2000.
What Do
You Think? Talk Back To Mike Volker
Tech Futures is a bi-weekly column that
focuses attention on new and emerging BC publicly listed technology companies.
Mike Volker is the Director of the University/Industry Liaison Office at Simon
Fraser University, Chairman of the Vancouver Enterprise Forum, and a technology
entrepreneur. He owns shares in many of the companies he writes about.
Contact: mike@risktaker.com
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