Mythbusting the IPO Market
“A lie can travel halfway around the world before the truth can get its boots on.”
History attributes this quote to Mark Twain, but ironically we don’t know who first made this pithy observation about truth and lies. It is instructive that many now believe this myth, which like so many others, persists through repetition to the point of becoming if not truth, then at the least received wisdom. In this repetition we deceive ourselves.
IPOs and Tech
Tackling the myths around the IPO market is what we do in the Primary Markets team at London Stock Exchange. We work with tech companies and investors to help them understand the IPO process. For lots of businesses, this may seem a long way off, with a multitude of obstacles and options ahead. But many of the young, fast growing tech companies and founders that we meet have ambitions that stretch beyond thoughts of an exit through a trade sale. They want to build a business that lasts and an IPO is the best way to create that longevity.
It’s not an easy process; anyone who has been a part of an IPO will attest to this. Despite that, the combination of benefits a public listing brings is unparalleled: access to funding, legitimacy through transparency, increased public profile, and broadened shareholder base among many others.
Given the importance of an IPO in the life of a company, managers will naturally want to make the best, most informed, decisions. Choice of exchange is one such decision requiring careful consideration, and yet in tech, no part of the process is so suffused with mythology. The prospect of a NASDAQ listing has been part of the business mythology for tech entrepreneurs and their investors since the heady days of the Dotcom Boom. The expected glamour of that moment causes entrepreneurs to develop “sparkling eyes” as one of my colleagues calls it. But beyond that moment, what are the benefits of a US listing?
The ‘Valuations’ Myth
By far the most common reason given is “higher valuations” – an IPO is a fundraising event and naturally a business wants to maximise its valuation. Without doubt during the Dotcom Boom, a US listing did contribute to a higher valuation.
In the last few years things have changed. The myth no longer matches reality. Part of this is cyclical, the US and UK being in different stages of the cycle, but much of the change is down to the great strides made in UK tech. A good tech company is a good tech company whether it lists in the US or the UK.
Overall, there is no persistent evidence that listing in the US delivers higher valuations at IPO or thereafter, in fact there are many examples of the very opposite being true. In tech verticals as diverse as Online Marketplaces, Semiconductors, Payments and Cybersecurity, UK listed companies achieve and maintain superior valuations.
The ‘Analysts’ Myth
Another commonly cited myth is that a more focused, tech specialist analyst pool in the US means that tech companies achieve those higher valuations. Let’s break down this claim. Firstly, the US indeed has a more granular analyst pool than exists in the UK. But does this lead to higher valuations? The false assumption made is that these analysts only look at businesses listed in the US. But tech businesses list everywhere, and institutional investors are not bound by national borders; they invest globally.
Investors will be just as likely to back a company floated on NASDAQ or NYSE as London Stock Exchange. As a result, analysts will follow important tech companies wherever they choose to float and have no problem comparing companies listed on different exchanges. A great example of this was cybersecurity firm Sophos which listed in London in 2015 at a valuation just over £1bn. It chose to list in the UK, but was priced against US-listed competitors and with 25% of its order booked filled by US-based institutional investors. This is no one off, 28 per cent of investment in FTSE350 tech companies is from the US.
How to Bust IPO Myths
These are just two of the myths surrounding tech IPOs and there are many more which can lead businesses to make decisions not in their ultimate best interest. The decision as to where to list should not be an emotional one and we aim to work with companies and investors to provide the facts they need to make this decisions. At London Stock Exchange we believe the best way to dispel myths is to be open and transparent. No blind assertions, no received wisdom, but concise, relevant, actionable information.
Everyday we meet with tech companies and their investors to discuss the future of their businesses. As part of our discussion I share a document that makes the case for a listing in London, this is the document we are now publishing for everyone. The underlying information presented is available via commercial data sources, reflecting market activity over recent years to the present day. The raw data has been contextualised by our team of analysts and business development specialists to provide companies and investors with as accurate and transparent a measure of the world’s leading tech listing venues.
We will update the document because the markets will change, naturally sometimes the data will favour London Stock Exchange, sometimes they won’t. What’s important is that clarity helps our clients prepare. Because after all, the truth may take a bit longer to get off the mark, but wise preparation allows it to run much further.
For more information contact:
Business Development - Tech and Lifesciences