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The Disruption in Equity Financing Continues -- Now Toronto Joins In

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Following the launch of Nasdaq Private Market, Toronto's TSX announces that it, too, will open a platform for IPO-shy companies.

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At a time when start-up veterans and venture capitalists are questioning the value of going public, Toronto's TSX has made a big move. Last week the TMX Group (TSE:X) announced that it will launch TSX Private Markets for potential high-growth start-up companies.

Visionaries like Sean Parker, Napster co-founder, and former president of Facebook (NASDAQ:FB), have publicly questioned the need for companies to issue IPOs. "My preference is to always keep a company private," says Parker. "We now have very efficient secondary markets with SEC-qualified investors, hedge funds, and family offices that are actually willing to buy private securities." The benefits of going public have become "less clear."

In our era, when we understand the future of growth within the global economic ecosystem lies in software and high technology, disruptive solutions need to be explored. Big markets like TSX and Nasdaq (NASDAQ:NDAQ) cannot afford to ignore the growing negative sentiment toward going public that is taking root in the Valley, the global hub of innovative thinking and start-up culture.

If You Can't Beat Them, Join Them

The TMX Group isn't the first to explore the avenue of creating a funding marketplace for private companies. Earlier this month Nasdaq launched Nasdaq Private Market with the goal to develop a platform for private companies to achieve greater liquidity and build relationships with institutional investors.

The benefits for private companies is apparent through liquidity. Those in the start-up community in Canada understand the general risk aversion of Canadian investors. Being listed on a private exchange may nudge an investor in the direction of following through with the check. Additionally, it would allow companies to manage share programs for employees, encouraging a feeling of more direct ownership. And finally, private companies can use this platform to develop a relationship with institutional investors, easing the transition to an IPO.

Easing the Decision to IPO

Creating an easy path for a private company that's planning to IPO is the main reason the exchanges are making this move. What better way to make sure high-growth, innovative companies are listing on your exchange than by pre-listing them during their initial growth phases? With this announcement, TMX Group is moving upstream and into the long tail of the equity market -- it's not dissimilar to what Airbnb has done for hotel bookings.

Clayton M. Christensen, author of The Innovator's Dilemma, convincingly argues that the reason large companies fail is because disruptive players entering at the lower end of the market slowly eat away market share. A disruptive solution servicing a wider customer base has real potential to re-shape a market's definition of success. When this happens the incumbent companies lose their footing. Airbnb has re-defined the hotel experience so successfully that it now has massive hotel chains worried. The big hotel companies are now relying on regulation and lobbyists to "even the playing field."

One cannot go so far as to say TMX Group has found its "Airbnb" of the equity markets. After all, this announcement comes three weeks behind Nasdaq Private Market's actual launch. But this move definitely has promise. The success of TSX Private Markets, and the future success of TMX Group at large, will depend on whether or not it facilitates and creates a replicable process around its listed private companies' success. Until it does this, we can applaud its efforts to support start-up and private companies and its anticipation of a shifting marketplace.

This commentary by Ahmad Iqbal, co-founder and CEO of Atendy, first appeared on MarketIQ.

An integrated solution to help you understand your investment's strengths and weaknesses quickly and effectively, the Market IQ Terminal offers investment analysis and portfolio optimization based on proprietary fundamentals, market sentiment, analyst sentiment, and technical parameters.
No positions in stocks mentioned.
This commentary is for informational purposes only and does not constitute investment advice. The opinions offered herein are not recommendations to buy, sell or hold securities. Market IQ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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