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Why going dark makes sense for some struggling B.C. tech companies

Public markets continue to be bearish for tech stocks
Don Short, head of Venture Equity at InvestX Capital, which counts Hootsuite among its portfolio of late-stage private equity investments.

In the fall of 2021, it was rumoured that Hootsuite Inc. was planning – finally – to go public. 

Betakit and Kalkine Media reported the company planned to raise $200 million with an initial public offering before Christmas of 2021.

Hootsuite was founded in 2008 and had long been considered a prime candidate for becoming a public company. 

The IPO never happened, however, as a post-pandemic high-tech bubble had started to deflate around the time Hootsuite planned to go public. 

Just as well, perhaps, because a number of B.C. companies that did go public between 2020 and 2021 may now be regretting it.  

Some are struggling with stock values so low that they may be at risk of delisting for failing to meet minimum listing requirements. 

Coming out the pandemic, a lot of low-interest money flowed into technology companies, and then started drying up later in 2022 and early 2023, as inflation, higher interest rates, fears of a recession and the bankruptcy of Silicon Valley Bank popped the tech bubble. 

At least five publicly traded B.C. tech companies have seen their share values plummet on the major exchanges by more than 80 per cent since going public: Loop Energy Inc. (TSX:LPEN), D-Wave Quantum Inc. (NYSE:QBTS), BBTV Holdings (TSX:BBTV), ElectraMeccanica Vehicles Corp. (Nasdaq:SOLO), and Thinkific Labs Inc. (TSX:THNC). 

Some of them probably had no business going public in the first place, said Don Short, head of Venture Equity at InvestX Capital, a venture capital company in Calgary that focuses on late-stage venture equity, with Hootsuite, Uber Technologies Inc. (NYSE:UBER), Lyft Inc. (Nasdaq:LYFT) and Spotify Technology SA (NYSE:SPOT) among its investments.  

And now some of those companies that did go public may have no choice but to go dark, as their stock continues to languish. 

BBTV Holdings recently announced plans to return to being a private company. Others may have to follow that same route. 

Earlier this summer, Brent Holliday, founder and CEO of Garibaldi Capital Advisors, said he though D-Wave should go back to being a private company. 

“I think they have to,” he said, “because at some point you get stuck in a public market where you can’t raise money because your valuation makes no sense.” 

D-Wave was among the North American companies to go public via a “blank cheque” Special Purpose Acquisition Company (SPAC). Its share price has fallen from US$10.41 per share on Dec. 31, 2020, to US$0.77 per share as of Nov. 7, 2023. The company has been warned twice now this year that it was not meeting the NYSE’s listing requirements. 

“I thought that whole SPAC wave that we saw, in my opinion, did a tremendous disservice to investors and companies alike because they took companies public that had no business being public,” Short said. 

“You need to have an aspect of sustainability in your company before you go public. You need to be able to fund your operations internally and not be reliant on external sources of capital before you should consider being a public company. And I think there were a lot of companies that chose the SPAC route because there were a lot of SPACs out there offering premium prices and high valuations to companies that were still venture companies. They were still burning cash flow.” 

But D-Wave is not the only B.C. high-tech company that has seen its stock plummet. 

Loop Energy’s share prices have dropped from $16 per share on Feb. 25, 2021, to ten cents per share as of Nov. 7, 2023 – a stomach-churning 99.4 per cent decline in value. 

ElectraMeccanica, which went public in 2018, has seen its shares drop from a high of US$10.81 per share on Nov. 16, 2020, to today’s price of US$0.44. And Thinkific’s shares have fallen from $15 per share on April 26, 2021, to $2.32 per share. 

Some companies may be able to weather the current public markets drought and come out the other end with stronger stock prices. 

“If your company has got to the point where it can fund its own operations, you can stay public and you can grow from cash flow and you can turn the ship and start to grow again,” Short said. 

“But if you’re still burning cash, you don’t have that option. They’ll either go bankrupt or they’ll find somebody with private capital that wants to take the company private and fund it to the point where it can get to cash-flow positive.” 

InvestX specializes in secondary private equity investments. It buys shares in companies that are still private but are growing and poised to go public. InvestX invested is one of the few North American companies to IPO this year – an American grocery delivery company called Instacart (Nasdaq:CART). 

“We tend to focus at the larger end,” Short said. “So we are looking for companies with a billion-dollar valuation and critical mass on revenues.” 

For Hootsuite, getting back to the stage where an IPO is possible again will depend on its ability to grow, after having scaled back drastically to cut costs. 

“As we got into the post-2021 – the downturn – companies scaled back a lot of their R&D spending, a lot of their sales spending, a lot of their marketing spend, and the big focus was to get to cash-flow positive or break-even,” Short said. 

“A bunch of companies haven’t turned the corner, but the ones that have turned the corner, it’s meant growth rates have slowed. Hootsuite would fall into that category, where they cut spending fairly dramatically. They managed to maintain a positive growth rate in the high single digits, and get to EBITDA positive, but now their valuation’s come down. 

“Unless you can get at least a 20-30 per cent growth rate, it tends to be difficult to find any interest in the IPO market. 

“What Hootsuite has to struggle with now is: can they find a way to re-accelerate growth and attract people’s interest from an IPO perspective? Or if it becomes more of a single-digit growth story, can they start to generate enough margin and cash flow that it becomes interesting as, maybe, a private equity acquisition?” 

With central banks holding the line on interest rate hikes and some improved performance in the growth stock sector, Short said there are some encouraging signs for the tech sector of a recovery. 

“Now it seems a little bit like it’s game on again for some of those growth companies,” he said. “If it continues, it will be positive for all those companies that had been lining up behind Instacart to potentially go public in the fourth quarter.” 

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