Silicon Valley North #26 December, 2000

The Way I See It… by Michael C. Volker

Going public early has its benefits

"When should we go public?" That's the question asked by many growing technology companies.

Traditionally, companies raised capital from family and friends, business angels, venture capitalists and merchant bankers with the goal of 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 at least partially cash in on their sweat equity and investment by selling stock to the public at large.

Going public much on a junior stock exchange such as the CDNX, the Canadian Venture Exchange, is seen by some, especially the traditional venture capital (VC) firms, as going public "too early". In essence, 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. 

There are horror stories about small companies going public. Some get hyped by promoters who drive the stock up and then cast them adrift. It’s also true that more of these ventures fail as compared to those listed on senior exchanges, but that's that’s normal for emerging ventures. On the other hand, those that succeed provide handsome returns to their backers.

Staying private by raising VC money can have its downside, too. Venture capitalists can drive a hard bargain on valuations which are generally lower than public valuations. They can also exert major control and influence and they’ve been known to take over poorly performing companies.

For junior companies, the main advantage in going public early is the access to a much 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 nine months of 2000, technology ventures on the CDNX raised more than $1.1 billion, more than ten times the amount raised on IPOs! In comparison, this would equate to roughly one-third of total venture capital investments in Canada.

Investors are more likely to invest because of the liquidity factor. They no longer need to worry about an 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 risk takers). 

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.

There’s another benefit from being a public company: proper governance. Most emerging companies are sloppy in managing their internal affairs, i.e. financial and legal records, board and advisory roles, business planning and so forth. By being public, smaller companies start to think and behave like larger companies.

If you look at the top 20 tech companies British Columbia, 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.

As to choice of junior exchange, there's only one: the now one-year old CDNX. Some companies, heaven forbid, 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. Since the going-public process can take a year to complete, my own view is that it's never too early to go public, but it can be too late!

Michael Volker is a high technology entrepreneur and director of Simon Fraser U's University/Industry Liaison Office. He is a former executive director of the BC Advanced Systems Institute and chair of the Vancouver Enterprise Forum. He may be reached at mike@risktaker.com.