To every cloud there is a silver lining, and several sectors of the economy have been thriving during the pandemic — especially those related to the pandemic.
“The deal volume is very high right now,” says Jamie Firsten of Goodmans LLP in Toronto. “I’m working on a lot of financings right now, and the valuations are only trending upwards. I see no signs of weakness as a result of COVID; if anything, I see the opposite.”
Take AbCellera Biologics Ltd. A biotechnology company founded in Vancouver in 2012, its initial public offering on the NASDAQ stock exchange in December raised a whopping US$555 million, making multibillionaires of its founders, who plan to hire hundreds more employees and expand laboratory facilities.
A robust space
The Canadian Venture Capital Association found 2019 to be a record year for investment and 2020 the second-best year ever, “despite everything,” says Charles Chevrette, national co-chairman, private equity, and co-chairman, technology, for McMillan LLP in Montreal. Junior companies have been doing well, and, although there’s been less activity in the COVID environment, the typical deal value has been higher, he says. “It’s a very robust space right now.”
Chevrette was initially an IP lawyer during the dotcom years, and he says his shift to private equity law reflects the growth in Quebec in this space.
“When you look at Montreal’s economy over the past 50 years, it changes from a manufacturing to a knowledge-based economy,” he says. The seventies and early eighties were “very challenging” in Montreal, he says, but by the mid- to late nineties, the knowledge-based economy had started to grow. Gaming and multimedia are now both big in Montreal, and the city is a hub for artificial intelligence, along with Toronto and Waterloo for fintech and AI development.
“We’re all frustrated to be at home and not getting on with our lives,” but the outlook in tech financing is good, he says. “Vancouver, Toronto and Montreal are the three biggest centres for the tech sector; it’s a sign that the Canadian tech space is maturing.”
Cleantech is another growing sector that has been popular for a couple of years and will only get more so, says Hector MacKay-Dunn of Farris LLP Vancouver, especially as major funders are now required to invest in sustainable businesses.
Sources of capital
The capital pool company system was created and is currently regulated by the TMX Group to help earlier-stage (small- to mid-cap) private companies complete a go-public transaction on the TSX Venture Exchange or Toronto Stock Exchange. The special purpose acquisition corporations — companies with no commercial operations that are created by a SPAC sponsor to raise capital through an IPO for the purpose of acquiring an existing company or companies in a specific industry — fund mid- to large-cap companies, says Perry Dellelce, managing partner of Wildeboer Dellelce LLP in Toronto.
“SPACs are used in all industries, but for sure in the technology world.”
There has been less U.S. venture investment in Canada since the pandemic, Firsten says, because the U.S. venture capitalists can’t travel to meet with founders. Investing in Canadian companies has increased, however, meaning that homegrown Canadian venture capital funds are likely investing more than previously.
Tech IPOs have “all been on fire,” he adds. Although the volume in Canada has been lower than in the U.S., core IPOs in the past couple of years have included: Docebo, a software-as-a-service learning management system; Dye & Durham, a legal technology company that’s up 500 per cent since its IPO in July; and Lightspeed POS Inc. and Nuvei Corp.
Institutional sources of capital include Business Development Bank of Canada Capital and Silicon Valley Bank in Canada. Banks are active, and for startups in Quebec the BDC, Fonds Solidarité and Desjardins Capital are all common funders, says Chevrette. “Most of the investments come from labour-sponsored firms, private equity investors and venture capital.”
Notably, though, Chevrette has seen a resurgence in Canadian technology IPOs. Starting in 2016, he says, with Stingray Digital and later Lightspeed and Nuvei, “the IPO market was opened to Canadian tech companies which haven’t been active in the past 10 years.
“One of the big things in Canada in the last two, three years is really the opening of an IPO market,” he notes. An IPO market will permit more late-stage financing for privately owned companies and tech companies and will give an easier path to funding for small tech companies that are going public sooner than later.
“So, this is a very positive development; [IPOs were] one of the aspects in the Canadian ecosystem of tech financing that was known as sub-optimal in Canada, and that’s in the process of being fixed because of great transactions like this.”
Life sciences tech surging
“The whole vaccine platform has grown,” says MacKay-Dunn. “There’s a number of companies that have been in that space for a long time, but they’re really crystallized [now]. They’re the hot space when it comes to biotech right now,” he adds, citing AbCellera and vaccine makers such as Moderna and Pfizer.
The upswing in vaccine development is due to the fight against the novel coronavirus COVID-19, but the fact there will be other viruses coming down the pipeline means “it’s not a one-hit wonder,” he says. Companies developing technology platforms now will be ahead in quickly developing new vaccines for new contagions. “It’s now seen to be more of a longer-term opportunity with great upside. Biotechnology companies working in the vaccine and antibody space are easily raising money.”
Other life sciences and health-care sectors that have seen increases in investments include telehealth/ telemedicine, mental health, stay-at-home health such as home fitness apps and self-diagnosis, says Dellelce.
“Health management companies in those areas are expanding and finding it easier to attract capital,” Dellelce says. “Anything that lends itself well to staying at home has done well” in the technology capital markets, including online shopping sites and companies such as Peloton, which manufactures high-end stationary bicycles with apps, that enable activities to be performed at home.
Before the worldwide COVID outbreak, there was little interest in patients talking to their doctors online, says Firsten, but “post-COVID, that will be the norm.” In September, Loblaw Companies Ltd. announced that its wholly owned subsidiary Shoppers Drug Mart Inc. would invest $75 million in Maple Corporation, a Canadian virtual care/telemedicine provider, in exchange for a material minority stake in the company. Firsten acted on that deal and sees it as being the future of health-care provision.
“Corporations are going to engage these telehealth companies, and your health benefits are going to go online; you’re not going to go to the doctor anymore.” Telehealth will allow patients to see and talk to doctors online in a FaceTime-like experience and get a prescription without ever visiting a doctor’s office, he says.
“They’ll be aligned with a drugstore; they’ll send you the prescription. That’s where the world is going.
. . . That’s a post-COVID norm, whereas pre-COVID, it wasn’t necessarily socially accepted yet.”
The psychedelics biotechnology sector is also strong, says MacKay-Dunn. Psychedelics are compounds to treat mental illness such as anxiety, post-traumatic stress disorder and depression, using previously illegal substances such as LSD, magic mushrooms and methylenedioxymethamphetamine (MDMA), a psychoactive drug commonly known as ecstasy or molly. Companies such as Mind Medicine (MindMed), backed by television personality Kevin O’Leary and trading on the NEO exchange, Mind Cure Health Inc., a client of MacKay-Dunn’s, and Field Trip Psychedelics have all raised significant funds from investors in the past year.
“The potential of psychedelics is brand new and very hot. There are companies that have raised hundreds of millions of dollars in the last three months that didn’t exist a year ago. That’s the definition of a hot market.”
The risk capital is currently in the psychedelic as well as the vaccine space, MacKay-Dunn adds, although he cautions that everything depends on whether the capital markets’ financing window/public markets window is open or closed, and it can open and close on a moment’s notice.
“A hot cycle can end abruptly,” he cautions, as exemplified most recently by the cannabis industry. “A year and a half ago, cannabis stocks were the talk of the town; now, they’re all under water. So, the window opens and closes quickly; it favours those companies in a hot sector, but those sectors can change abruptly.”
Dellelce began his law practice in 1993, lived through the tech bubble years of the 1990s — and the burst of that bubble — and took BlackBerry and Open Text public. He has confidence that “the companies being financed now are, generally speaking, more established and real than those being financed in the 1990s. This doesn’t feel as much like a bubble as prior eras.”
Most companies being financed now have substantive business plans and operations, Dellelce says, although he does see some valuations as being ahead of corporate performances.