Size matters: The importance of BIG tech companies

I was flipping through the 1st half M & A stats yesterday and came across a $ 391M exit for two local investors (CDP and FTQ) which could only have been the sale of Oz Communications to Nokia (UPDATE: Thanks to a reader who shall remain nameless, the exit in question turns out to be Virochem Pharma).

Exits of this magnitude don’t happen every day, especially in smaller tech markets like Canada. It got me thinking about how important these big wins are for our industry.

The hub effect

Big companies (especially public ones) create centres of gravity that pull in many important elements that make the ecosystem stronger:

- Talent
- Universities
- Smaller startups
- Retail and institutional buyers of public technology stocks
- Experienced entrepreneurs and managers (more on this below)

Long term thinking / policy

As startups we’d like to invest in long term talent development and we’d like to do more to make sure our universities are teaching the right skills and producing the most relevant grads. But let’s face it, our timeframe is pretty short and we have more pressing and immediate issues like survival, making sales, etc, etc, etc. Bigger, established companies can play a much bigger role in establishing policies and programs that will create the right environment for long-term startup viability.

Operators who have seen scale

The weakest link from an investor’s stand point is finding entrepreneurs and managers who have seen true scale. Think about all of the execs behind Oz’s $ 391M exit. The experience they have is invaluable to the local community. We need many more people like them.

There’s a 2nd benefit to these bigger exits. Success is rarely a straight line. Oz was a long story in the making. Originally founded in 1991, it took almost 2 decades to hit this milestone with several bumps along the way. The same was true with Platespin (another big Canadian exit), which actually was a complete restart. These battle scars make the people here even more valuable.

Virtuous circles

The presence of big local tech companies creates a virtuous circle which feeds local startups (which then get bought), feeding local investors with returns, producing more experienced entrepreneurs and creating bigger tech companies that eventually can be big enough to appeal to institutional investors and big stock analysts. I’m grossly oversimplifying the domino effects here and probably am missing a bunch of them. But, I hope you get the picture.

The Canadian situation

Slowly but surely we have lost our biggest tech companies here in Canada. Cognos, Hummingbird, Nortel, Q9 are just a few names. We have no real market for public tech companies in Canada. And yet, without major brand presence in the US and with the bar so high to be relevant to institutional investors in the U.S. ($100M revenue run rates and up) a US offering on a major exchange like NASDAQ or NYSE may not be successful even if we could qualify.

I don’t have the answers. I guess all I hope is that some of our bigger companies double down and go for it. Radialpoint is one possible candidate. It brought in private equity last year and is clearly on a growth path. With later stage funds like Tandem Equity coming online and with VC and PE generally (hopefully) returning to form, lets hope we see some big Canadian tech IPOs and Canadians buying Canadians in the near future.