Bloomberg: Real Matters Deal Said to Set Stage for Canada's Next Tech IPO

In case you didn’t see today’s article from Bloomberg News about our Wellington Financial Fund III portfolio co. Real Matters, I thought I’d take the liberty of posting it here. Our firm had the pleasure of backing CEO Jason Smith and his team with two separate rounds of growth capital on this name. First in 2010, with a follow-on six months later in 2011. That’s one of the great things about managing a venture fund with heft; it gives us the capital we need to be able to support entrepreneurs as they grow their companies:

Real Matters Deal Said to Set Stage for Canada’s Next Tech IPO

A little-known company called Real Matters Corp. is poised to be one of Canada’s next technology companies to go public, and it doesn’t have anything to do with social media, e-commerce or selling software through the cloud.

The real estate-data company has signed up most of the top five U.S. banks as customers with the promise of turning the art of valuing homes into a data-driven, high-tech science. With a valuation of more than C$600 million ($448 million), the company is likely to hold an initial public offering this year.

While other Canadian startups, such as Hootsuite Media Inc., BuildDirect and D2L Corp., have garnered more attention as leaders of a renaissance in the country’s technology industry, Real Matters has quietly been growing. The Markham, Ontario-based company pulled off two major acquisitions since 2013 and is seeking to close a deal to buy a property-title business in the U.S. in the coming weeks, according to people familiar with the deal who asked not to be identified discussing private matters.

And while public market investors keep waiting for word of long-speculated IPOs from companies like Hootsuite and Vision Critical Communications Inc., Real Matters is almost certainly set to come to the markets this year because a C$74 million funding round it raised to help pay for the latest acquisition came with a catch — the company has to list on public markets before the end of 2016 or it will have to issue more shares to investors, the people said.

Chief Executive Officer Jason Smith, 41, who founded the company in 2004, declined to comment for this article.

Appraisers Ranked

“He has the energy and focus to make this the billion-dollar company he had in mind more than half a decade ago,” said Mark McQueen, CEO of Toronto-based Wellington Financial LP, who originally invested in Real Matters in 2010 and has known Smith for 15 years.

Real Matters runs an online platform with more than 30,000 property appraisers and insurance inspectors. They report their findings through Real Matters, which measures and ranks each appraiser to help buyers and mortgage companies see which ones are the best, similar to the way Uber riders rate drivers. Its appraisal business serves more than 50 of the top 100 lenders in the U.S., according to its website.

With the acquisitions, Real Matters has expanded into other parts of the real estate data-collection market, giving it a trove of information that can offer insights into pricing trends that other companies don’t have. That opens up new options for selling data to clients beyond mortgage providers, such as contractors looking for neighborhoods where renovations might be in demand and homeowners who are curious about the value of their house.

‘Real Numbers’

The U.S. housing crash put pressure on mortgage providers to have a better understanding of the homes they were financing, said Thomas Caldwell, chairman of Caldwell Securities Ltd., who invested in Real Matters in 2013 through investment firm Urbana Corp.

“Real estate appraisals are a big, big deal since 2007, 2008,” Caldwell said. “You’ve got to start having real numbers.”

Aggregating data from multiple appraisers isn’t a novel business model. About 90 percent of the home appraisals done by U.S. lenders are done through appraisal-management companies, according to Jonathan Miller, president of New York-based appraisal firm Miller Samuel Inc.

Appraisal-management companies like Real Matters can give banks data in a cheap and efficient way, but sometimes the quality of the information suffers because they attract a lower-quality worker, Miller said.

Pays More

Real Matters, which operates its mortgage-appraisal business under the brand name Solidifi in the U.S., has tried to upend that model by paying appraisers more and using software to make the process more efficient, said Griff Straw, chairman of Solidifi’s advisory board. Real Matters acquired Kirchmeyer & Associates in 2013 and Ohio-based Southwest Financial Services Ltd. in 2015.

“From the very beginning we had a very different business model,” said Straw, who was formerly Solidifi’s president and first met Smith 18 years ago when Straw worked at Freddie Mac and collaborated with Smith on technology systems.

“Where our competitors squeezed the appraisers on fees, we went in and said, ‘we will pay the appraiser whatever they want,’ and then add our small marginal fee on top of that,” Straw said. “Our business model was to do it more efficiently through the use of technology and pay the appraisers more. We got the better quality appraisers.”

The company has also mulled expanding into Europe and Australia, Straw said.

In the past six months, Real Matters has won contracts with most of the top five banks, including Bank of America Corp., Wells Fargo & Co. and Citigroup Inc., according to a person familiar with the matter.

Diversification Play

If Real Matters does pull off an IPO in 2016, it will be a welcome addition to Canadian public markets, which are geared toward mining and energy companies that have been feeling the pain from a global rout in commodity prices.

“There are not enough small and mid-cap tech names” on Canada’s public exchange, McQueen said.

It would also be a win for the country’s technology industry. Although more startups are finding financing, no Canadian technology firm has gone public since Shopify Inc. raised $131 million in its IPO in May 2015. The Ottawa-based e-commerce software firm now has a market cap of C$2.8 billion. North American technology companies that enjoyed sky-high private valuations, such as Square Inc., are facing lower valuations once exposed to the public markets, which have been rocked by volatility in recent months.

The lack of venture capital investment relative to the U.S. has often limited Canadian companies from becoming world-beating firms, Caldwell said. “This company does have the chance to do that.”

MRM
(disclosure: our Fund III Institutional LPs own warrants in RM)