Entrepreneurs at the helm of high-growth companies always need more of one thing: capital. To support rapid expansion, enter new markets and grow their customer base, startups need investment, and they typically turn to angel investors and venture capitalists to raise early stage capital. But when it comes to growth and expansion capital, venture investors may not be the ideal option, as entrepreneurs often end up relinquishing considerable equity in return for that capital.

Of course, an IPO is another way to raise expansion capital, but for most growth companies with annual revenues under $50 million, a public listing on Nasdaq or NYSE is not an option. But north of the border in Canada, the Toronto Stock Exchange (TSX) and its microcap market, TSX Venture Exchange, have been providing access to capital for small-cap public companies for over 100 years. And that’s why, as director of business development and strategy at TSX, I see more and more American entrepreneurs turning to the Canadian public markets for their next round of financing.

Despite that over 130 U.S. companies are currently listed on TSX or TSX Venture Exchange, many U.S. entrepreneurs have never considered TSX as a viable financing option. To address this limited awareness, I have been invited to write a series of guest blog entries for Go BIG to help entrepreneurs understand the ins-and-outs of going public on TSX – as well as the advantages, opportunities and challenges a Canadian public listing provides.

In this monthly blog series, I will interview a series of U.S. CEOs who have taken their companies public on TSX, so that they can share first hand what it takes to make it as a public company north of the border. The first interview in the series is with Colin Campbell, CEO of Hostopia.com Inc. When the Internet services firm, based in Fort Lauderdale, Florida, needed to raise expansion capital in 2006, the company considered its financing options, including tapping late-stage venture investors. Among these options, and ultimately the right choice for Hostopia, was to take the company public through an IPO on TSX.

At that time, Hostopia had annual revenues of $22.5 million and had recorded 26 quarters of consecutive revenue growth, but it wasn’t a large enough company to make a splash on Nasdaq. Mr. Campbell looked into listing requirements for several overseas markets, including London’s AIM, but chose TSX for its 100-year history serving small-cap companies, as well as its high average liquidity. Hostopia completed a successful IPO on Toronto Stock Exchange in November 2006 and now has over 200 employees and a market cap of around $70 million.

I caught up with Mr. Campbell last week and he had a lot of great insights to share with entrepreneurs hoping to take advantage of the Canadian public markets.

1. Why did Hostopia decide to go public in Canada instead of the US?

After doing a great deal of research into the process of going public, we decided that Canada had some significant advantages that allowed this process to happen more quickly and easily than in the US.  The market in Canada is open to early-stage technology issuers, which, when coupled with the fact that there were still relatively few well-known technology companies in Canada, meant TSX was a fertile ground for technology companies looking to go public. As well, investors seemed to be more patient and able to tolerate lower liquidity in the short term.  Finally, activity on TSX is high, which means smaller companies like Hostopia garner a great deal of attention in Canada, from the media, analysts and investors alike.

With regards to Hostopia.com’s specific situation, while we were growing, we were still too small to do an offering in the U.S.  Additional costs of $350,000 would have hit our bottom line.  We soon realized TSX was a Tier 1 exchange and would be a great stepping stone and training ground for NASDAQ.  We were able to achieve our objective of raising close to $29 million on TSX, which, in turn, granted us a greater profile.  Several analysts became interested in the Hostopia business model and became vocal about the company’s value. This was another invaluable benefit of listing with the TSX.

2. What benefits did a listing on TSX offer over a listing on another foreign exchange, such as London’s AIM?

We considered options like AIM, but given our North American presence, it didn’t make sense. In addition we felt AIM did not have as good a reputation as TSX and would make it more difficult for us to expand to the Nasdaq market in the future. TSX has a great reputation and a history of benefiting smaller companies such as ours.

3. Tell us a little about how your IPO went.

We were successful at raising almost $29 million with strong backing from both Canadian and U.S. institutions. The fact that TSX is well known by U.S. institutions helped us raise the funds we needed. As I mentioned, the exposure we got afterwards by opening on TSX, and getting on the Toronto Media business shows, was, and continues to be, excellent. We have also been very pleased with the help from TSX Surveillance in making the reporting methods and regulations clear. 

4. What were some of the challenges you encountered going public on TSX?

The most difficult issue was that we still had to file with the SEC. The regulators in Canada were very easy to deal with, but getting our final prospectus approved by the SEC took much longer and cost a lot more than we expected it would.

5. What practical advice would you offer American entrepreneurs considering a listing on TSX?

First and foremost, determine if you really need to go public. We had venture capital rights and capital requirements that made it a priority for us. If I had my choice, I may have waited a couple of more years to develop the business and grow revenues and EBITDA to a point where getting to NASDAQ would have been feasible. .That being said, we believe the additional capital will accelerate our growth and help us consolidate our market. If you do decide to go public with revenue between $25-$50 million, I think TSX makes a lot of sense for young technology companies.