By SEAN SILCOFF
Wednesday, June 12, 2019
Toronto accounting software firm Wave Financial Inc. has been purchased by tax services giant H&R Block Inc. for US$405-million ($537million). It's the latest in a string of "exits" - takeovers or initial public offerings - of venture-backed Canadian firms this year that have commanded relatively large valuations by historic standards, a sign that Canada's surging early-stage tech sector is maturing.
The Wave takeover is one of three deals this year to rank among the seven largest exits since the dot-com crash, according to data compiled by the Ontario Municipal Employees Retirement System (OMERS).
"Exits [valuing firms] at $50-million to $100-million were the norm in Canada in the early 2000s and $100-million to $200-million earlier this decade," said Peter Misek, a member of the Wave board. "For the successful companies now in Canada, $500-million-plus is what entrepreneurs and venture capitalists are shooting for." Montreal-based retail software provider Lightspeed POS Inc., went public in March at a valuation exceeding $1-billion, while Intelex Technologies Inc., a seller of environmental, health, quality and safety auditing software, agreed last week to a takeover by Pittsburgh's Industrial Scientific Corp. for US$570-million Wave started out a decade ago offering free, cloud-based accounting and invoicing software for small businesses, amassing users quickly and inexpensively.
The company, led by 44-year-old chief executive Kirk Simpson, originally intended to make money by selling advertising on its platform, "but monetizing was a real challenge," said Devdutt Yellurkar general partner with Boston-based venture capital firm CRV and an early Wave investor.
Around 2014 to 2015, the company began offering financial services for a fee embedded in its platform, such as bank transfers, online loans, invoicing and payroll services. The company also overhauled its software after Mr.Simpson deemed the product second rate.
"We had a moment where we said, 'We have to get the fundamentals right to become the company we want to be,' " Mr. Simpson said. "Free is good, but small businesses need the best software."
Mr. Simpson credits those moves with boosting the company's revenue growth. Wave now has more than 400,000 customers globally, including tens of thousands who pay. While other "freemium" companies typically see 2 per cent to 4 per cent of customers shell out for paid services, Wave's conversion rate is believed to be about two to three times higher and its revenues exceed $50-million annually.
The company had previously raised US$77million in venture financing from North American investors including OMERS, Royal Bank of Canada, Business Development Bank of Canada, CRV, Automatic Data Processing Inc., Silicon Valley billionaire Chamath Palihapitiya's Social Capital Venture fund and Power Corp. of Canada's Portag3 venture arm.
Wave set out last fall to raise another $50million-plus in venture financing, but as the company considered other options, Mr. Simpson was drawn to do "something more strategic ... that gave us the best opportunity to ensure we could truly build this platform for small businesses over the long term," he said.
"The opportunity to bring together our platform with the tax expertise that H&R Block can bring is a really compelling offering to small business owners" with "amazing synergies," Mr. Simpson said.
Mr. Simpson will continue to lead the Wave business, which has 260 employees.
H&R Block CEO Jeff Jones, whose company handled more than 23 million tax returns this year, said in a release: "Wave provides us the opportunity to accelerate our small-business strategy and is a great strategic fit, as both companies can leverage each others' capabilities to bring tax and financial solutions to small business owners, serving more clients in more ways." The deal is expected to close in the next few months.
The deal is also significant for OMERS, the first institutional investor in Canada to make a concerted push into venture investing early this decade at the start of Canada's technology renaissance. Wave was the first company it backed under the strategy, in 2011, and OMERS stands to roughly quintuple its $10-million-plus investment. That would rank Wave as its second best exit by dollars generated, after its 2013 investment in Shopify Inc.
H&R Block announced the deal on the same day it reported slightly better-than-expected fourth quarterly results, posting net income of US$878-million on revenues of US$2.33-billion during the crucial tax-time period of the year, and upped its dividend by 4 per cent, to 26 US cents a share. The company's stock was up by more 4 per cent in midmorning trading.
H&R BLOCK (HRB) CLOSE: US$27.78, UP 84 US CENTS
Wave Financial chief executive and co-founder Kirk Simpson, left, sitting next to co-founder James Lochrie, says the company was initially meant to sell advertising.