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A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
June 15th, 2007


By Brent Holliday
Greenstone Venture Partners

IPO Dreams A Reality?

 

“Well you can do something,
If I could do anything-
Well can you do something out of this world?

Dreamer, you know you are a dreamer.”
Supertramp, Dreamer

When venture capitalists go to bed at night, and their dreams are good, they dream of the initial public offering.  Night sweats, sudden awakenings and plain old nightmares come more often, so it’s nice when a happy place is reached, soothing the crusty buy-side vultures.  Yes, the IPO.  Where riches are made and new funds follow.  Sure, the M&A route has been very positive for some of the investments.  Look around BC: Abatis, MDI, Crystal Decisions to name a few good acquisitions.  But the IPO is where the real money is: Aspreva, Creo, Sierra Wireless, Pivotal, Ballard, QLT, Angiotech and Xantrex to name some lucrative ones.

I wrote last year about the AIM market in London England as a place where some successful technology companies in Canada were trying to find a vibrant, liquid market to raise money and allow shareholders to cash out.  Since I wrote about that, the AIM has cooled a little bit.  But the NASDAQ and TSX have heated up for technology companies.  In Canada, the only significant technology IPO for two whole years was Sandvine (AIM listed).  But, as we will see in a minute, the tap seems to have turned back on again for Canadian companies.

First, look to the US and its bellwether technology market, the NASDAQ.  From 2006 to 2007, the tech IPO registrations in the US have more than doubled and a few notable IPOs have left the barn and done well.  There are twenty technology IPOs registered so far in the second quarter on NASDAQ to go with the 24 from Q1.  Compare that to 35 tech IPOs in each of 2005 and 2006!  Some recent successes are Cavium Networks, a semiconductor company, trading at $20 today after going out May 2nd at $13.50 and Bigband Networks going out in April at $13 and trading today at $15.50.  Just to give you an appreciation of what the market is thinking… Cavium did $34M in revenue in 2006 and has a market capitalization of $821M today… that’s 24x last year’s revenue.  Intel trades at 4x last year’s revenue.  In other words, Cavium is getting pretty good multiples. The market likes their growth prospects…

A quick scan of the US filings shows that most of these company’s did $20-40M in revenue in fiscal 2006 and have pretty good growth trajectories.  The exception is biotechnology and alternative energy companies that have very little or no revenue and are still getting market traction based on their potential.

In Canada, after a death valley of technology IPOs, I scanned the SEDAR filings and came up with this list of technology IPOs for the past 9 months:

Dragonwave - Raising $30M on $20M 2006 revenue

Genesis Worldwide - Just filed, had $20M in 2006 revenue

Hostopia - Raising $25M with $18M in 2006 revenue

RuggedCom - Raising $40M with $30M in 2006 revenue

Datacom Wireless - Raising $10M with $7.2M in 2006 revenue

AlterNRG - Raising $30M with no revenue

Espial - Raising $25M with $10.6M in 2006 revenue

Consonus - Raising $20M (co-listing on NASDAQ, US company)

A couple of these jump out at you if you are a Canadian technology company growing to double digit millions of revenue.  Datacom Wireless out of Quebec is a competitor to local success Webtech Wireless.  Webtech enjoys a $190M market capitalization on $16.3M trailing year revenue.  Datacom is going public on the TSX with less than half the revenue.  They are only raising $10M, but it still bears watching if you are doing similar or higher revenue in your own company.  Espial just started trading last week and is above its $7 IPO price.  With just $10.6M in trailing revenue, how were they big enough to deserve a $72M market capitalization, or 7x revenue?  Their IPTV deployment and navigation solutions have grown at 180% annual growth and will make up 100% of their revenue going forward, so the growth story is what sold, not their overall revenue which included old legacy products.

Currently in our neighbourhood there are a few companies that fit the bill already or will soon as an IPO candidate, especially if these desirable conditions hold up.  It might be time to talk to the bankers and see if your company fits the bill.

Of course, in this frothy capital market, private equity is still the biggest driver of shareholder liquidity. Although the IPO may be the dream exit for your early investors, the partial or complete buyout by private equity firms is also very real today.  Technology companies have had a harder time getting the attention of the private equity folks, but that situation is also changing.  I talked about the dearth of investment capital at the early stage a few weeks ago.  I suggested that the only short term fix for this was successful exits to help attract US capital.  It seems the table is setting itself for some near term successful exits, either through IPO, buyout or the ever present M&A route.  I like BC’s chances of some near term exits.  It makes for nice dreams.  Let’s hope we see the results soon.

Letters From Last Time:

Judy Bishop and I have written about the e-mail overload problem and it generated, well, a lot of e-mail.  I’d like to think it was productive use of the technology to let me know what you thought of the issue.  I think that e-mail’s utility (we call it the killer application of the Internet) is well established.  Like any technology it will grow and change to meet new needs and new uses.  But most of you correctly said that, like anything addictive, the user must consume it wisely and not become a slave to it.  Rather than post the responses, I thought I’d end this meme with these thoughts and move on.

What Do You Think? Talk Back To Brent Holliday



Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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