CVCA H1 2017 Quarterly Exclusive: Behind the Robust Return of VC Exits

This article is part of a new series, CVCA Quarterly Exclusive, written and published by the Canadian Venture Capital and Private Equity Association. This series provides an analysis of the CVCA’s most recently published VC & PE Canadian Market Overviewthrough expert commentary and perspectives.

Last year was undoubtedly a huge year for venture capital investment activity in Canada. While 2017 numbers are indeed on pace to match 2016 numbers, one element driving the VC ecosystem so far this year that’s particularly worthy of discussion is the healthy reappearance of exits Canada’s VC market has witnessed in the first two quarters of 2017. In fact, in the first half of 2017, Canada’s seen 21 exits totaling $900M, compared to 32 exits totaling $584 in all of 2016, which was also a record low year for IPOs in Canada.

Of the 21 exits, the largest was the $393M acquisition of Montreal-based Luxury Retreats International by Airbnb. Additionally, there were two VC-backed IPOs signalling a rebound of the IPO market through the first half of the year: Real Matters Inc. (TSE: REAL) and Zymeworks Inc. (TSE/NYSE: ZYME).

The Zymeworks IPO was the first VC-backed Canadian tech IPO since Ottawa-based Shopify (TSX/NYSE: SHOP) went public in 2015. Lumira Capital was one of a handful of Canadian VCs that backed Zymeworks. According to Managing General Partner, Peter van der Velden, timing was only part of the equation when deciding to exit through an IPO.

van der Velden explains that pursuing an IPO is about both strategy and timing. In terms of building a successful biotech, he says chasing an IPO is rarely about liquidity in and of itself, but more typically is about positioning the company for long-term growth and access to deeper, broader pools of capital as the company continues to successfully execute its product development plans.

“This IPO was all about positioning Zymeworks for continued growth and success.”

On the other side of the coin, the Real Matters IPO marked an end to a two-year dry spell for information technology IPOs. Wellington Financial LP was one of the firms invested in Real Matters. Mark Usher, Partner at Wellington Financial, explains that going public requires a unique combination of company characteristics and profile.

Usher explains that IPOs aren’t for every company. In fact, it is a truism that most VC-backed companies end up getting sold and only a small per cent have the required profile and characteristics – like significant historical growth, future growth prospects, and differentiated products – to go public.

“It takes time to build a company to be able to go public and I am confident that there are a number of Canadian companies have those characteristics and going public will be a viable option for them in the near future,” he says.

VC Exits & The Future of the Ecosystem

According to Mike Woollatt, the CVCA’s Chief Executive Officer, VC exit performance in H12017 is a good signal for the investment ecosystem.

“We are now seeing a much-needed rebound in exits against increasing investment levels,” Woollatt says. ​“This bodes well for fundraising, and investment levels in the future – particularly as the new VCCI program comes on line.”

In speaking to the future of what Canada’s exit landscape looks like, CVCA Research Director, Darrell Pinto, explains the VC exit environment is a lot similar to teenagers growing up to face adult responsibilities.

He explains the ​“let’s stay private a bit longer” option means there is plenty of private money available to mature, promising VC-backed companies and VCs are writing bigger cheques at higher valuations. On the contrary, the ​“need to move out” option (AKA the IPO option) may be attractive, but offset by significant public company responsibilities, like reporting and governance, take time away from the actual business.

And then there’s the ​“let’s move in with a roommate” option, which refers to how the strategic and private equity buyers are fueling a hot M&A market. This, inevitably, continues to be the most common exit vehicle by VC-backed companies.

In short, VC-backed companies will continue to be opportunistic.

To read more about venture capital activity in the first half of 2017, read the full CVCA H12017 VC & PE Canadian Market Overview here.