Private equity is taking over the startup world, especially in Canada. According to the 2020 Narwhal List—a list that ranks Canada’s top tech companies based on their financial velocity—the key to creating a Narwhal (the Canadian equivalent of a Unicorn startup in the U.S.) lies in two things: staying private longer while keeping financial velocity up.
“The trend … is to keep companies private longer and to have them go public when they’re larger than they were before,” Plant said.
“Financial velocity measures the speed at which a company acquires and consumes capital to fuel its growth. It is [measured in millions and is] defined simply as the amount of capital a company has raised divided by the number of years it has been in existence: financial velocity = capital raised / years in existence . . .”
Through his research, Plant found that U.S. Unicorns had financial velocities between 10 – 33 in 2019. In other words, U.S. companies had to raise a minimum of $10 million per year in order to be considered “on track” to becoming a Unicorn. According to the Plant’s report, there were only 42 private Canadian tech companies that had a financial velocity above 10 in 2019. Still, Plant believes this is a sign that Canada is making progress when it comes to incubating Narwhals.
“Over the last three years, the financial velocity required to make the [Narwhal] list has increased from 4.2 to 8.3. In the same time frame, the average financial velocity of companies on the list has increased from $8.7 million to $15.5 million while the number on track to become Unicorns has grown from 7 to 29 . . .”
The good news is that Canadian companies likely won’t have any shortage of sources to keep their financial velocity up in 2020.
“[Private equity] firms led by Blackstone Group Inc. and Carlyle Group LP have amassed almost $1.5 trillion in unspent capital, the highest year-end total on record, according to data compiled by Preqin. . .”
The bad news is that the massive availability of private equity could further discourage entrepreneurs from accessing Canada’s public markets for capital. This could spell trouble for junior exchanges like the TSX Venture, which have struggled to regain momentum over the past few years. Not only did the TSX Venture see a decade-low number of listings in 2019
, but it has eroded approximately 38.08%
since January 2018.
2020 Narwhal List Shows Top Startups Favouring Private Equity
The 2020 Narwhal List provides valuable insight into the financial health of some of Canada’s leading private tech companies, as well as a benchmark for what it takes to reach Unicorn status in Canada. While Canada’s tech sector certainly appears to be growing, this growth could come at the cost of diversity on the TSX Venture—given the fact that more tech companies may be inclined to stay private in an effort to become Unicorns.