Public Venture Capital

 

 

Entrepreneurs & startups in general tend to default to venture capital and private money to get financing, and, while this maybe the shortest route to access capital it's not necessarily the best one or the most appropriate.

 
 
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'Serial' entrepreneurs

Silicon Valley has the highest density of Serial Entrepreneurs in the World, which nicely correlates with the availability of venture capital sources, as expected. However, equity based growth or financing your company by selling equity comes with dilution and ultimately risk of losing control of the company (hence 'serial' entrepreneurship). Many startups, by the time they reach Series B have suffered already too much dilution (giving equity away in seed, post-seed and Series A rounds in exchange for money) and founders find themselves with only 1 or 2 seats in a typical 5 seats board governance configuration. At that moment, your investors become majority and CEO & founders can be kicked out of his/her own company at investors' will.

One solution to this problem is to look for alternative financing mechanisms, and public venture capital is one of them:

The tech sector in Canada has been getting a lot of attention recently – and for good reason. There are some fantastic companies being built and funded in this country, and many of these companies appear to be on-track to reaching celebrated “unicorn” status. There is no doubt that a big driver of this success has been the record level of venture capital (VC) funding (originating from Canada and the US) and the important role that VCs play in supporting and building their portfolio companies.

However, it turns out that recent success in the tech sector is not just coming from VC-backed startups. In fact, Canada currently has more than 40 tech unicorns and “centaurs” (startups worth over $100 million) that were not incubated through traditional VC channels,  but instead grew by accessing a different source of equity funding.

Surprised? Don’t worry, you’re not alone.

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Who are these companies and how did they realize their success without traditional VC funding?

The answer to the first part of this question is easy: the companies are software, hardware, service and R&D startups from coast-to-coast, involved in verticals like fintech, adtech, insurtech, gaming, cleantech, and healthtech/life sciences. Some of these companies were founded in the last five to seven years like AcuityAds and Knight Therapeutics, while others are 20-year overnight successes like Solium and TIO Networks.

In other words, their journeys and timelines to scaling look very similar to those of other tech companies.

What is different about these companies is their choice of funding. Rather than tapping traditional VC funding, these companies all went public as startups and raised public VC funding from individuals, family offices, and small institutional asset managers.

Did these early-stage companies really go public as startups?  Yes. Here’s how: Canada is one of only a few countries in the world that offers this path and our country’s leading equity markets, Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSX-V), are home to hundreds of early-stage tech businesses. TSX and TSX-V are recognized globally for their two-tiered market structure. The “senior” tier, TSX, is home to large, global companies like Shopify, Kinaxis, CGI, OpenText and many others, while the “junior” tier, TSX-V, is just for early-stage companies. Consider these numbers:

  • There are more than 280 early-stage tech companies using TSXV today

  • These 280+ companies have an aggregate value of $7.7 billion and average revenues of approximately $8 million

  • More than 60 of these companies went public in the last two years

  • Of the 280+ tech companies, more than 210 (75%) raised growth capital over the last two years

  • The 210+ tech companies that raised capital in the last two years raised an aggregate of $1.6 billion (approximately $8 million per company)

 

So, while traditional VCs are playing a critical role in building successful tech companies in Canada, it turns out that public venture capital is also funding a lot of companies and effectively incubating a lot of successes.

Is public venture capital right for every company, though? Absolutely not. All options have pros and cons, and founders owe it to themselves and their shareholders to evaluate all of their funding paths. For some, the traditional VC path will be the best option, especially for founders who are looking for the really important value-add that strong VCs can bring with their money.

Other companies, though, are not well-suited to VC funding, or simply don’t want VC funding. For these businesses, the public VC option can be extremely compelling, especially as it offers:

  • Access to capital from a broad investor base (typically with no large/controlling third-party investor)
  • Enhanced profile and credibility among customers and employees
  • A “currency” for acquisitions and acquihires
  • A tool to attract, retain and motivate leaders/employees
  • Liquidity for shareholders
  • Public company discipline (governance, reporting, etc.) which can strengthen businesses

Are there downsides? Absolutely. Just as there are issues with other funding options, public venture capital is not for everyone. However, it’s hard to argue with the results of the 40 tech unicorns/centaurs that have grown via this path or the hundreds of other venture-stage tech companies that are successfully raising billions of dollars in public venture capital every year to fund their growth, build their teams and scale their businesses.

These companies have clearly found a different recipe for breeding unicorns.

For more information, talk to us or visit www.tsx.com


This article is reproduced with permission from the author:

Michael Kousaie
Head of Business Development, Technology, TMX Group

Original article can be found at:

https://www.l-spark.com/different-recipe-breeding-unicorns/