Tech Disruptions

I was reviewing a list of Canadian technology IPOs the other day.  Post-bubble (2003), there have been 22 technology IPOs on the TSX.  What struck me with the list was what most of the companies did.  Fully 17 of the 22 companies (77%) would be classified as “communications-related” companies.

Also interesting was the performance of the companies post IPO.  Now technology has had a difficult run over the last decade, and of the 22 companies that went public, only 7 were trading at values above their IPO price (as of a few weeks ago).  But more interesting is that of those, 6 (or 86%) were communications-related.  I guess the easy point to make here is that if you invest in Canadian technology IPOs, you better understand communications.

So why the concentration?  Why were 77% of all IPO companies, and 86% of successful IPO companies communications-related?  Well, it’s about focus.  Canadian regulations and tariffs decades ago made our telecommunications carriers captive buyers of Canadian gear, the main beneficiary of which was Northern Telecom and its research arm Bell-Northern Research (BNR).  Canadians, whether we knew it or not, were subsidizing a very focused communications innovation strategy with every Bell, AGT, BCTel etc bill that we paid.

And you know what?  It worked.  With the introduction of the DMS-100 digital switch in the late 1970s, NT was a global leader right at the time that global deregulation of telecom began and the switch from analog to digital was beginning, resulting in explosive growth for the company.  NT couldn’t hire enough engineers – universities across the country, mostly concentrated in Ontario and Quebec, were churning out engineering talent as fast as they could to meet the demand from NT.  Related companies also popped up, such as Mitel and Newbridge, creating an ecosystem of companies, technical and management talent and most importantly winning ideas that can only come from this type of ecosystem.  Now, decades later, 14 of the top 25 technology companies on the TSX (not including telecom companies like Bell, Telus, etc) are communications-related (fully 85% by market cap).  Even if you take out RIM which obviously skews the result, the number is close to 60%.

So let’s look upstream a little bit.  These were all once private companies, and often venture-backed, but not always (of the 7 positive IPOs discussed earlier, 6 were venture-backed).  It is obvious from the evidence the likelihood of success when building a technology company in Canada is significantly higher when focused in a communications-related area.  The ideas are often leading-edge, the technical talent is strong and management talent is deep.  This ecosystem in Canada is among the leading ecosystems in the world, and importantly at a time when communications-related technologies are in rapid evolution.

Government should be focused on this, Canadian VCs should be focused on it, and Canadians should be too.  Too often I hear of  ’focus on technology’.  I know it’s difficult to narrow and pick a specific sector of technology, but that is exactly what needs to be done.  As pointed out earlier, it is exactly what happened at a massive scale with government policy and Northern Telecom decades ago – we are still now seeing the benefits of that inadvertent focus many decades later.

Government should target this sector because of the benefits to the economy including jobs and the tax base.  Limited partners of venture funds and VCs should be focused on this sector if they are interested in superior returns in Canada.

And Canadians should be focused on this if we are interested in having world-class Canadian companies and ultimately a globally leading standard-of-living.