Shopify headquarters in Toronto.Tim McKenna/The Globe and Mail
Going public used to require having a good reason for raising capital, and many tech companies just don't seem to need the capital for growth. So why is Shopify Inc. doing it – and will other likely candidates among Canadian firms follow suit?
For a venture capital darling such as Shopify, whose initial public offering has been hotly anticipated for months if not years, the appeal is obvious.
"For acquisitions and visibility, it helps their brand," said Mark McQueen, chief executive of Wellington Financial LP. "The best, most successful technology companies in the world share two key attributes: VC backing and being publicly listed."
These IPOs offer transparency as to the health of a business for customers, as well as providing M&A currency and helping with employee retention, he said.
Lately, however, startups from Snapchat to Airbnb – and in Canada, from Vision Critical to Desire2Learn – have resisted the urge to go public. This reflects something new, beyond the usual caution: the growth of an unusually large and sustained private market, particularly for stakes in high tech companies. That has enabled them to remain off stock exchanges for years longer than in the past. Dozens of companies valued by private investors at $1 billion (U.S.) or more are still private; companies such as Uber Technologies Inc. have been able to reach massive valuations thanks to the ability for institutional and wealthy investors to buy in without waiting for an IPO, and enabling some insiders to cash out.
Also, being public not only draws the extra public scrutiny for fledgling companies, but also involves a great deal of extra paperwork. "Going public is not necessarily the best thing that could happen to a company for a long time because of the cost, and the amount of time you spend on regulation," said Senia Rapisarda, principal of investment firm HarbourVest Partners LLC's new Canadian office. "As a private equity professional, I would advise to really build the business solidly before you consider an IPO," she said.
But an IPO remains the easiest way for a startup to reward its employees and early backers. And as the Shopify deal – which is being led by Morgan Stanley, Credit Suisse and RBC Dominion Securities – shows, it can be done without ceding control.
In its registration statement filed Tuesday with the U.S. Securities and Exchange Commission, Shopify revealed it plans to have two classes of shares: existing investors, including venture capitalists and company insiders, will have Class B multiple voting shares, which carry 10 votes apiece, while the public only gets to buy Class A subordinate voting shares, with only one vote each.
Shopify isn't itching to follow in the footsteps of Canadian dual-class stalwarts such as Magna International or Bombardier, but rather join the ranks of some of the world's most successful tech companies that have gone public in the Dot-com 2.0 era. Google Inc., Facebook Inc., LinkedIn Corp., Alibaba Group Holdings Ltd. and Groupon Inc. all have two classes of shares, unapologetically so.
Many institutional shareholders don't like dual class shares because they leave minority investors voiceless while leaving power in the hands of those with relatively little capital at risk. (The counter argument is that founder-entrepreneurs protected by multiple voting stock can act in the long-term interests of the company without fear of fending off short-term vultures.)
Enough tech companies have figured out they can go public with dual class structures because investors will forgive the less-than-ideal structure to get a piece of a hot investment.
The structure of this IPO may prove attractive to fellow Canadian private outfits such as Hootsuite Inc., because as the prospectus notes, the dual class structure "may discourage transactions involving a change of control." For firms that are concerned about Canada's insufficient regulatory protections to prevent cheap, predatory takeover bids, such arrangements may finally coax them into the public markets.
Yes, this means warding off hostile takeovers, which is not good for investors in the short term. But it's great for the Canadian tech ecosystem and establishes a new benchmark for Canadian companies looking to break out and become global giants. Perhaps that is the price of building tech giants here in Canada: if we want companies to grow and thrive and, in the words of Shopify CEO and chairman Tobias Lutke, live to see the next century, public shareholders might just have to accept a seat in the back.