Going public also brings closure to much long-term investment activity originating in private capital markets. Venture capital institutions depend on the IPO market as one means of liquidating their equity stakes in new and developing SMEs. Macdonald & Associates has estimated that venture-backed firms absorb, on average, almost $11 million in private equity prior to undertaking an IPO. As seen in Figure 12, such firms may, from year to year, represent a quite significant proportion of total IPOs. And, once in the IPO market, some have subsequently raised close to $17 million.^{Endnote 86}

A less-than-efficient IPO market creates impediments to venture investing and other private placement activity (including some in the middle market) or compels SMEs to rely on takeovers to achieve rapid expansion or other commercial goals. There is conflicting anecdotal and empirical evidence concerning the optimal effectiveness of the Canadian IPO market in facilitating a new generation of publicly-listed and traded enterprises.

On the one hand, the fixed transaction costs of public offering, both direct (e.g., underwriter fees) and indirect (e.g., SME resources expended on legal disclosure requirements) can be substantial. To alleviate costs, Canadian public securities exchanges do not feature the same range of alternative trading mechanisms as exists in the United States, such as an over-the-counter market comparable in proficiency to the National Association of Securities Dealers Automated Quotation System (NASDAQ).

On the other hand, a recent Conference Board of Canada study found that exchanges in this country are more supportive of SMEs, due primarily to less onerous listing strictures (e.g., minimum company size) than those south-of-the-border, including NASDAQ. SME listings are particularly well-expedited on the VSE and ASE.^{Endnote 87}

A good climate for IPOs, like that of recent years, will invariably spawn a fresh batch of small-cap stocks. Those firms that retain a strong growth orientation may quickly initiate a first round of seasoned offerings and follow an upward trajectory through exchanges towards higher-capitalization. The IPO market is a key source of intelligence used by investors and their agents to anticipate new listings that may proceed in this fashion and forecast their potential long-term earnings. Once spotted by investors - particularly small-cap growth and/or value specialists - the progress of some will eventually lead to their becoming blue chip corporations. All of this indicates how the SME growth and financing continuum evident in private capital markets (see Figure 6) can, for all intents and purposes, extend into the public venue.

Perhaps not surprisingly, some of the best performing of recent small-caps (some of which are now large-caps) have been not-so-distant past graduates of the venture capital market, such as COM DEV International, Hummingbird Communications, MOSAID Technologies and Trojan Technologies, or have otherwise been knowledge-based and technology-intensive. Indeed, Macdonald & Associates tracking of venture-backed IPOs since the early 1990s reveals regular out-performance relative to the entire IPO universe and the TSE 300.^{Endnote 88}

If recent trends on the New York Stock Exchange and the American Stock Exchanges provide any clues, such newly-listed, high-growth Canadian business may ultimately change the face of national public securities exchanges at the top. While American publicly-listed high technology firms were virtually unheard of in the early 1980s, in mid-1998 they comprised almost one-fifth of the entire Standard and Poor's 500 Index. This level of representation in the industrial mix of high-capitalization stocks is not yet apparent in Canada where public exchange indices remain comparatively weighted towards securities of traditional manufacturing, resource and service industries, some of which are low-growth or possibly in decline.^{Endnote 89}

High technology stocks, by contrast, make up not much more than 10 percent of the TSE 300 at the present time. In early 1997, assorted hardware and software technology enterprises (e.g., computer products, electronics, information technology) constituted 7.6 percent of the index (see Figure 13), while other technology sectors (e.g., biotechnology and pharmaceuticals, telecommunications) reflect a small portion of such broad TSE 300 categories as consumer products, industrial products and utilities.