In the first half of this year, the Financial Times says, over £600 million was invested in private technology companies in the UK. In contrast, only three technology companies have braved an IPO in London over the year. The largest, Wandisco, has a total market cap of just £40 million – source FT. No technology company has listed on the main market since 2010. Exits via M&A are viewed by many as the best option but these typically reduce an entrepreneur’s ability to achieve their objectives.
While this is gloomy news, things are changing and we want you to play a part in making that happen.
Why is the lack of UK technology IPOs a problem? Neil Rimer at Index Ventures summarised the challenge in his blog post, ‘Who will open the London IPO window?‘
“The ability for private, fast-growing, venture-backed companies to float their shares in a public offering to tap into a larger pool of capital from institutional investors and create a liquid market in their equity, is an essential phase in the lifecycle of technology companies in the US but is largely lacking in Europe. IPOs have allowed hundreds of US venture-backed companies to finance their more mature stages of growth and become household names in the process.
“By providing liquidity and even financial independence to founders and employees, IPOs often enable them to become angel investors or entrepreneurs themselves, further enriching the talent and experience pool of an ecosystem. More importantly, IPOs allow all of this to happen without requiring the company to be sold outright to a single buyer. Finally IPOs allow millions of shareholders to share in the value created by these companies after they have gone public. If IPOs or their possibility did not exist, it’s safe to say that there would be no Microsoft, Apple, Google or Amazon; they would all be part of some other entities by now and we know how well those movies usually play out.”
In other words, IPOs are good for the technology ecosystem as they allow companies to grow and stay independent and they release cash and expertise back into new businesses.
Is the only option open to an ambitious, UK-based, growth technology company a US listing? While there are more IPOs, there seems to be a similar imbalance between the availability of private and public capital in the US where investment in private technology companies outstrips funds raised in IPOs by a factor of 5x or so.
The reasons people have offered to explain the lack of IPO activity in Europe in my conversations with people over the past few months are numerous:
- US bulge bracket banks will always advise companies to list in the US as their analysts coverage there is much more active.
- US investment banks will always advise companies to list in the US as their fees are much higher in the US – c 6-7% of funds raised vs 2/4% in UK.
- Government regulation is too severe in UK.
- Europe only has about 24 technology companies of market cap above $1 billion and half of them are distressed assets. It isn’t worth analysts time to cover.
- UK entrepreneurs lack ambition.
- M&A offers a much better route to exit – valuations are better and exits more complete.
- There isn’t the pipeline of large, profitable, growth companies in Europe.
“Investors, for starters, need to make sure that their best companies come to market. These companies should fall into the category of “high-growth,” presumably with annual revenues over £20/30 million , annual growth over 20%, proven track record of hitting numbers and a strong executive team.
“European bankers need to study up on how to properly value internet companies, better understand their business models and assess the competitive advantages of their strategies. Since 2009, while the FTSE 100 Index has increased by 39% in value, new high-growth companies like ASOS have increased by 695%, while RightMove has increased by 841% in value.” Robin Klein
Neil Rimer again…
“In the end, the choice of where to list largely depends on how committed we are to building an integrated ecosystem for entrepreneurship in Europe. If we continue to export our IPOs to the US, we will reinforce the argument that there is no market for IPOs over here and ultimately make it wholly uneconomic for analysts, portfolio managers and investment bankers to devote resources to covering tech stocks traded in London. But if we would like to ensure that European entrepreneurs can build large, sustainable companies that can reliably access the public markets to fund their trajectories, we should think again before accepting the closed IPO window as a fait accompli.”
If the IPO candidates are out there, regulation is changing for the better and we don’t lack ambition, what else is holding us up?
“When weighing up a technology company’s initial public offering, there is one thing that venture capitalists, analysts, company directors and investors can agree on: an hour is not enough. But that is all a London investor may be given to evaluate a new technology companyand its business model.
“Unlike in New York – where investment banks and will often spend days, even weeks, educating prospective investors on the products and prospects of companies seeking a listing – investors in London are often forced to make a decision after just an hour or two with bankers and analysts, industry observers say.
“It has been a major factor in the drop-off in tech listings in London since the financial crisis in 2007, the observers argue – and a situation that has to change.” London fog impedes tech IPOs, FT
In other words, public market investors need to be put in front of great companies early and often. Anything that can be done to help put great companies in front of investors in public technology companies to stimulate discussion seems like a good thing to us. One thing that we are doing is focusing our next CEO Tales on bringing these two sides together.
We are bringing some of the key protagonists – entrepreneurs, VC, PE and public market investors – together consider the potential solutions to the challenge. Most importantly, we want public market investors to meet the entrepreneurs and companies they will be investing in the future. Informal drinks networking and a discussion debate informed by views from leading public and VC investors and entrepreneurs. We hope you will take part.