While investors, (myself and my partners included) entrepreneurs, politicians and government officials collectively ballyhoo the coming of age of the London start-up scene and its steady stream of high-caliber entrepreneurs pursuing bold plans, we seem to be glossing over the fact that a key component of the ecosystem is sorely lacking. As the the US continues to churn out high profile IPOs for Zynga, Groupon, Linkedin and Facebook, the London IPO machine is eerily silent.
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. They also allow entrepreneurs and long-standing employees to cash in on some of the value they have accrued in stock options, rewarding their courage in trading off current compensation for a stake in the entrepreneurial dream.
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. And although Facebook hasn't yet gone public, the fact that it has had the possibility to do so has given it huge option value that it is now exercising.
US-based entrepreneurs seem to have successfully overcome their own IPO anxiety, which Bill Gurley diagnosed in a 2010 post that struck a chord with me then that now still resonates in Europe. US tech IPOs raised $4.5 billion last year, compared with $389 million raised in Europe, according to data compiled by Bloomberg. In 2011, according to pwc, technology accounted for 21%-- the largest component-- of the total proceeds raised by US IPOs, while in Europe, IPOs were dominated by basic resources, mining and oil & gas, and technology issuers raised less than 1 percent proceeds. Sadly,the last major tech IPO in Europe was Mail.ru Group’s debut in London in 2010, and in 2011 not one of the 10 largest IPOs was by a european technology or media company. The forward-looking picture is even bleaker; currently in the US there are dozens of tech companies that have filed plans to go public on Nasdaq or the NYSE while none of note have announced plans to float in London.
What is more alarming than the track record is the defeatist attitude of European companies considering IPOs. The common sentiment in the boardrooms of these companies is that while in the US the IPO window is open, the London market is shut tight like a porthole. Bulge bracket investment bankers file through in perfunctory beauty parades lamenting that European institutional investors are not interested in buying IPOs and doling out the same patently impractical advice; "Wait or consider going public in America." Consequently,
It strikes me that this is like saying that there is a bread shortage because there are no buyers of bread. Bakers might stop producing bread if people completely lost the taste for it, but that certainly doesn't seem to be the case: Shoreditch is as vibrant as ever; there is no shortage of interest in Seedcamp and we have certainly never seen better companies being built in London. So why is it that these companies are not tapping local public markets? Perhaps it is that their management teams and boards are dutifully heeding this advice and perpetuating its circular logic.
My sense is that if the right company were presented in the right context and at the right valuation to the right investors, there would be a meeting of minds and the company would be able to sell its shares to the public and complete an IPO in London. I am also convinced that these companies exist, are ready to go public and are simply waiting for their management teams, boards and advisors to have the guts to do pull the trigger. My prediction is that a few days after some of these companies complete their offerings, boards and management teams will be advised that the London IPO market is now miraculously open again.
It is true that for some European-born companies whose center of gravity from a headcount and customer-base perspective has shifted to the US, going public in the US may make more sense than floating locally, but these are few and far between. More often than not, European companies cite a larger and deeper market comprising more investors willing to pay higher valuations as the primary reason for choosing to list in the US.
These attributes, however may prove to be short-lived when bumps in the road cause US investors shift their attention to more familiar, locally-based companies that may have better analyst coverage or offer easier access to management. Over the years, we have seen dozens of European companies listed in the US become orphaned with little or no local coverage and a shareholder base dominated by European institutions, while incurring the significant administrative costs associated with maintaining a US listing. In these situations, the US market promise of greater liquidity and access to deep pockets has become a mirage, and many of these companies would prefer to move their listing back to their home market or even return to being private companies.
We could take the cynical view that the market for venture-backed, fast-growing, technology-driven stocks belongs in the US where investors are more sophisticated and are willing to pay higher valuations because they get the models and want to buy exposure to their long-term prospects. European markets would therefore remain viable only for larger, slower-growing companies in traditional industries like retailing, oil & gas, building materials and pharmaceuticals. But this would be disastrous in my view, and who could blame ambitious, forward-looking, European entrepreneurs for choosing to start their companies in the US if it will ultimately be their home as a public company?
We’ve seen over the past few years how most of the successful exits by European companies in our portfolio have been trade sales (MySQL, Skype, Playfish, Lovefilm, Net-a-Porter, Last.fm, PanGenetics, etc.) while only a few went public (Genmab, Betfair, Asos, Addex). We hope the future will tell a different story however. At the Index Ventures annual meeting last week, we presented some data to our LPs (yes, VCs have investors too) that reminded us of the depth of the value pool in Europe. We counted 20 companies (Criteo, Adconion, Photobox, Moleskine, JustEat, King, to name a few) born in Europe, that are at or fast approaching a point of being IPO-ready. Collectively, these companies generated over to $2 billion in revenues last year, are growing at more than 80% year-on-year and have created over 5,000 jobs-- and this is just from our own portfolio. Recognizing London’s undeniable pull as a second home for European startups seeking a base from which to scale quickly and competitively, and its uncontested preeminence as a global financial center, it would seem nonsensical to have this next crop of great companies take their IPOs elsewhere.
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.
Follow Neil Rimer on Twitter: @narimer