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Tech IPOs have seen mixed fortunes this year on both sides of the pond.
The London float of Kazakh fintech group Kaspi.kz was recently postponed due to “unfavourable market conditions”, while WeWork finally pulled its New York IPO in September after months of hype.
Uber and Lyft both managed to eventually get their flotations off the ground after getting stuck in traffic. Uber tapped the public market for over $8 billion at a $82 billion IPO valuation, and Uber suggests that it will be back for more capital soon depending on the performance of new areas of growth, such as food and freight – despite losing over US$1 billion a quarter and its share price languishing 27% below its IPO price.
The tech companies floating today are more mature and more refined - yet still loss making - because they are being kept private for longer, funded by patient private capital, as they wait until they dominate their market before looking to list. Growth and market dominance are absolutely key for venture capitalists in the valley.
Not all stock exchanges can provide more than US$10 billion of cash (the combined amount raised by Uber, Lyft and Peloton, the spinning community platform) to loss-making start-ups with big dreams, yet NASDAQ and NYSE have demonstrated repeatedly that they have the investor appetite and depth to raise such staggering sums.
However, in the battle to attract technology companies, Europe is succeeding on one measure, with some 172 tech IPOs carried out since 2015, compared to c.100 in the US. But size matters: the recent tech IPOs of Lyft, Pinterest and Slack raised more than 100x the amount raised in a typical IPO during the internet bubble of the late 90s: billions today vs millions then.
So, where is the best home for tech companies looking to go public?
Why list in the US?
It is a simple fact that the greater the number of active investors on a single exchange, the greater the chance for the company to achieve a fair valuation over time, since liquidity drives a more efficient valuation capability.
One significant challenge in Europe, not seen in the US, is market fragmentation. London’s stock exchanges have an approximate market cap of €4.44 trillion, while Euronext, the pan European exchange, has over €4.78 trillion. Even the combination of these totals only 73% of the market cap of NASDAQ. European consolidation may be an attractive, inorganic way of scaling up, but competition authorities are unlikely to agree to this – and that’s even before you get into the nationalist interests. Brexit further complicates this.
For tech companies, US investors in both public and private markets are attracting tech stars with their capital investment capability and record. This capital comes from returns generated by the FAANGs (Facebook, Amazon, Apple, Netflix and Google, aka Alphabet), dating from the internet boom of the late 90s. US investors are flush with cash and are keen to spin the wheels again. The extraordinary amount of wealth created has gone on to fuel the next wave of tech innovators in the private and then public markets at valuations unrecognisable in other geographies.
My visit to TiEcon 2019 in the heart of Silicon Valley reminded me of a glass elevator that surrounds the Bay area. Innovators like Alphabet’s X and the Hidary Foundation look out into the world to address problems that are seemingly unsolvable with an ease akin to troubleshooting your laptop with a call centre. The rest of us then consider how the solution seemed so obvious. Such conferences are magnets for VCs to provide the capital to these ideas.
Ultimately, the magnet for innovation in the US is talent and money.
Why list in Europe?
Being heard in the US is challenging. Start-ups have to run quite far before they can attract investor interest as competition for airtime is huge. In Europe, the stage may be less congested. Exciting tech companies can attract disproportionate attention, potentially benefitting from being a big fish in a small pond. This appeals to entrepreneurs whose primary efforts need to be focussed on their business rather than their profile.
The US is a significantly more regulated and protected marketplace. Expensive lawyers are ready to file a class action lawsuit against companies and individuals on any whiff of inaccuracy. Managing investor communications while ensuring legal compliance is a big challenge - not to mention prohibitively expensive.
The European approach is much less litigious, even when considering its leadership in regulations such as GDPR. Interestingly, when Adyen – a Dutch fintech titan valued at over €18.5 billion - listed on Euronext Amsterdam, it still managed to attract significant US investor interest, even without the additional protections afforded by US stock exchanges.
Recommending the hooks for UK/Europe stock exchanges was the question debated by a High Level Advisory Group of “Tech Capital Markets” earlier this year (full disclosure, I am a member), which seeks to present its findings to the European Commission at the start of 2020.
Europe needs to play to its strengths and not be afraid to see migration as large, fast-growing global tech champions find themselves unable to trade efficiently without a US base. In fact, with its significant market size (around 747m population), leading research universities, supportive governments and a simpler, easy to navigate regulatory environment, Europe could well be the world’s leading tech incubator. The current trade wars instigated by the US against China and elsewhere may also give Europe a boost.
Assuming we are all focussed on supporting our most exciting tech entrepreneurs and companies to grow and create jobs, intellectual property and value for all stakeholders - wherever their origins - the drive for local ownership should be replaced with global partnership, where all countries share in the global success. If Europe can help incubate entrepreneurs and nascent companies while they refine their business models, then this could well be the natural first step towards global dominance.
Introduction: Nish Kotecha is a tech (serial) entrepreneur, investor, advisor and board member based in London. His is the co-founder of Finboot. Finboot is the dynamic SaaS company behind MARCO, a unique enterprise-grade suite of blockchain applications and middleware solutions for value and supply chains. Established in 2016 with operations in London and Barcelona, Finboot has established itself as a leader in the fast-growing enterprise blockchain industry. MARCO is blockchain-agnostic and can be deployed by a wide range of sectors, including Oil & Gas, Chemicals, Consumer goods, Automotive, Travel & Tourism and Healthcare.
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